How A Payment Transaction Is Processed | Insights | Worldpay (2024)

Have you ever wondered what happens when a customer swipes or dips their credit card to pay for a purchase? The entire payment transaction process occurs seamlessly in just a few seconds, but a lot is happening behind the scenes.

Read on for a quick overview of who's involved and what happens during payment transaction processing.

Who's involved?

There are several parties involved in the payment processing transaction:

Cardholder: The person or entity that receives an account from a card company or issuer, and is in possession of a credit card.

Merchant: A commercial entity or person authorized to accept cards and receive payments from its customers pursuant to agreement with the card brands.

Merchant (or acquiring) bank: The financial institution that has an agreement with a merchant to accept (acquire) deposits generated by card transactions.

Credit card network: The entity that facilitates transactions between merchants and credit card issuers. There are four major credit card networks, represented by the card brands Visa, Mastercard, Discover, American Express.

Credit card issuer: A financial institution, bank, credit union, or company that issues or helps issue cards to cardholders.

Payment processor: The company appointed by the merchant to handle credit card transactions for their acquiring bank.

How does the payment get processed?

A credit card transaction is initiated when a cardholder swipes or dips their card for payment at a merchant location. Once the card is swiped or dipped, the merchant’s POS system sends the transaction request to the merchant’s payment processor. The processor sends the transaction request to the corresponding credit card network. The card network then sends the request to the card issuer, which either approves or declines the transaction based on availability of funds.

This process of verifying the validity of a credit card and the balance allowable on the purchaser’s credit line is called authorization. If an authorization is approved, the transaction goes through; it if is declined, the transaction does not go through, and the customer must present a different form of payment.

There are several reasons a transaction may be declined, including: lost or stolen card, account not in good standing, and insufficient funds. If a “referral or call” message comes back, the merchant must call the issuing bank to process the transaction.

Additional decline messages include “hold-call” and “pick up card,” which is usually in response to a lost or stolen card report. In these cases, the issuing bank wants the merchant to take the card from the cardholder. Other messages include “invalid account number” and “expired card.” An “unable to connect, error” message indicates there is a problem with the network or payment processing equipment.

After a payment is authorized, a hold is placed on the cardholder’s money and the card issuer sends approval to the card network, which sends approval to the merchant’s processor, which sends approval to the merchant. The process of collecting and organizing credit is called capture.

Finally, clearing and settlement occur. Clearing is the process through which a card issuing bank exchanges payment transaction processing information with the merchant acquiring bank for the authorized funds. Settlement is the buying and selling of transactions among merchants, processors, acquirers, and card-issuing entities and begins when the merchant submits a transaction to their processor and ends with the transfer of related funds to a depository or liability account.

How A Payment Transaction Is Processed | Insights | Worldpay (2024)

FAQs

How a payment is processed? ›

The payment processor receives the transaction data from the payment gateway and validates the information. It then forwards the transaction details to the acquiring bank, which sends the information to the card network for validation and authorization.

How a transaction is processed? ›

The issuing bank transfers the funds to the credit card association. The credit card association passes the funds on to the acquiring bank. The acquiring bank deposits the funds in the seller's account. The issuing bank deducts the funds from the customer's account and closes the transaction.

What is the payment method processing? ›

It starts when a customer makes a payment and ends with the funds deposited into the business's account. This process, crucial for both physical and online transactions, includes multiple parties like banks, payment processors and card networks. Each combines to ensure a secure and efficient transfer of funds.

What does it mean when your payment is in process? ›

Defining 'Payment in Process' Before we delve into the intricacies of payment processing, it's essential to understand what exactly "payment in process" means. This term refers to the stage in which a payment is being authorized, cleared, and settled.

What are the 5 steps of transaction processing? ›

Transaction processing systems generally go through a five-stage cycle of 1) Data entry activities 2) Transaction processing activities 3) File and database processing 4) Document and report generation 5) Inquiry processing activities.

What is an example of a transaction process? ›

Different examples of transaction processing include automated teller machines, credit card authorizations, online bill payments, self-checkout stations at grocery stores, the trading of stocks over the Internet, and various other forms of electronic commerce.

What are the four steps of processing a transaction? ›

The first four steps in the accounting cycle are (1) identify and analyze transactions, (2) record transactions to a journal, (3) post journal information to a ledger, and (4) prepare an unadjusted trial balance. We begin by introducing the steps and their related documentation.

How does online Payment processing work? ›

Using secure communication methods and tokenization, payment gateways communicate between your online store/website and your bank. Customer data is collected, validated, approved, and then the payment is accepted, debiting your customer's account.

How long does a processing transaction take? ›

Card transactions usually process instantly but may take 1-3 business days for funds to clear. ACH or Direct Debit payments typically process within 1-3 business days.

What is the payment status completed? ›

If your payment status is complete, it means that your payment was successful.

How do pending transactions work? ›

What does pending transaction mean? A pending credit card transaction is a purchase or charge that hasn't been fully processed. This happens when the credit card issuer has confirmed that you have the available balance to pay for the purchase but has not fully processed it yet.

How long does it take for payment to be processed? ›

Credit and debit card transactions are often processed instantly, but funds can take a few days to clear. ACH or Direct Debit transactions typically take 1-3 business days, while wire transfers are usually processed the same day.

How long does it take once payment is processed? ›

Again, that can be instant or take up to three business days, depending on where the money is coming from for the payment. You'll know the processing is complete when you see the funds removed from your bank account and when your available credit limit changes to reflect the payment.

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