How does a credit card transaction flow?

A credit card makes a very large journey in a very short amount of time. While many merchants believe that the transaction gets sent from them, to the processor, then back to them, this is false. The transaction leaves the merchant, usually passes through a gateway, goes to the processor, gets sent to the card association, then gets to the customers bank.

The bank then either approves or declines the transaction, sends their response back to the card association, the card association sends it back to the processor, the processor sends it back to the gateway, then the gateway sends it back to the merchant. That's probably a lot more than you were expecting! Here's an image to help make sense of it.


What is a credit card gateway?

A credit card gateway, often referred to simply as a gateway, is a way for a transaction to get from your store to your processor. The term "gateway" is most often used in reference to TCP/IP, or internet, gateways. In a broader sense a telephone line on dial machines can be thought of as the gateway, but the typical gateway has added features like authentication (User name and passwords or IP Authentication).


What is a chargeback?

A chargeback is a dispute that a cardholder files with their bank. Basically it means that they do not recognize the charge as being valid and they want it taken off of their card.

What does this mean for you?
When you receive a chargeback it means that you need to provide evidence to your processor that the charge is valid. Evidence includes a signed receipt or contract. Proof that the card was present is also a good thing to have. This can generally only be proven if the card was swiped though. If you speak with your processor, then they should be able to verify and provide proof that the card was present.

What does it mean if you lose in a chargeback dispute?
If you lose you are typically assessed a fee of about $15.00 - $25.00 and if you get too many chargebacks then you can lose the privilege of accepting credit cards. This is especially bad because you can end up on a blacklist that processors check when you try to sign up. You can literally be blacklisted from ever accepting credit cards again (this tends to only occur if you are willfully participating in fraud.).

What does it mean if you win in a chargeback dispute?
You don't have to pay the fee and your record stays pristine! It doesn't sound like much of a reward, but unfortunately that's all that happens.


What are general credit card processing fees?

While it is hard to say because many processors keep it a secret up until you are about to sign the contract, the fees can vary greatly. What we will do is provide you with general ranges and then give you a worst case scenario so you can calculate for your business.

Generally credit card processors charge the following fees:

  • A monthly minimum, monthly fee, or flat fee
  • An authorization fee
  • An address verification fee
  • A statement fee
  • A settlement fee
  • An interchange rate (AKA discount rate) (%)
  • and a few other miscellaneous fees that will vary

Monthly Minimum
The monthly minimum is a certain amount that you must be able to process in a month. This is classified as a flat fee by us because you are basically required to process enough transactions to pay this amount in fees or else you get charged the flat fee.
Fee Range: Generally from $10.00 - $30.00

Example: Let's say you have a $25.00 monthly minimum. This means that you need to process enough transactions that the fees you pay for the month amount to $25.00 or you will have to pay that fee. Let's say you only process enough transactions to amount to $13.00 in fees, this means that you will be charged an additional $12.00 that month to meet that $25.00 fee.

Authorization Fee:
An authorization fee is a fee that you pay each time you authorize a card. This is usually fixed and tends to be higher if you are processing internet transactions over retail transactions.
Fee Range: Generally from $0.10 - $0.35 per transaction

Address Verification Fee:
This is basically a fee that you pay when the address on a credit card is verified. Some processors don't charge this fee.
Fee Range: Generally from $0.00 - $0.15 per transaction

Statement Fee:
This is a fee that nearly all processors charge. It is usually regarded as an accounting fee for your merchant account.
Fee Range: Generally $5.00 - $15.00

Settlement Fee:
This is the fee you pay each time you settle your batch. Some processors don't charge this fee.
Fee Range: Generally $0.15 - $0.75 per batch.

Interchange / Discount Rate:
This is a percentage of each transaction that is paid per transaction. Meaning a charge of $10.00 with a 2% interchange rate would have a discount fee of $0.20. This fee tends to be higher for internet transactions and lower for retail transactions due to fraud risks.
Fee Range: Generally from 1.25% - 3.5%

Worst Case Scenario:

If you are trying to calculate fees for your business for a business plan, or some other types of calculations, it is best to use a worst case scenario so that you know for a fact that you are overestimating. Here are some good "worst case scenario" numbers to work with.

Please note, these numbers basically mean you signed up with a horrible company that is ripping you off, which can happen. Always read your contract fully, and we mean every single page! If there is a question that you don't know the answer to about your processor, then you don't know enough about them or your contract!

Monthly Fee: $55.00 / Month
Authorization Fee: $0.50 / Per Transaction
Interchange Rate: 3.5% of each transaction

Those are bad numbers that should help overestimate the cost of you processing credit cards. The high monthly fee is meant to include not only a high monthly fee but some of the other fees like the settlement fee and any of those miscellaneous fees that a processor might throw at you.


What is the difference between a credit card and a debit card?

The fundamental difference between a credit card and a debit is simple: A credit card is tied to a line of credit (LOC) and a debit card is tied to an account that you maintain funds in. What this means is that when you use a credit card, you are borrowing money, and when you use a debit card you are using your own money.

It is possible to get a debit card that is tied to a LOC in the event you overdraft, but that is about as convoluted as the difference can get.


How does a credit card transaction work?

This will be a more general tutorial and will not delve deeply into specifics. Please note that this information is meant only for credit card transactions and that this information does not apply entirely to a debit card transaction which is completely different.

Here is a basic run down of a credit card transaction run on a terminal capture software:
Customer wants to purchase something.

  1. Your customer swipes their card.
  2. The card information gets sent from your computer, or terminal to your processor.
  3. Your processor then sends the transaction to your customer's bank (aka issuing bank).
  4. Your customer's bank either approves the transaction or declines it.
  5. If approved the bank will place a "hold" on the funds you have claimed. This will appear as a "pending" transaction on your customer's online banking.
  6. The bank sends the response (Approval or Decline) to your processor.
  7. Your processor sends your software the response.
  8. If approved the transaction is stored in your software in a thing called a "batch."
  9. All subsequent transactions will aggregate into the same batch.
  10. At the end of the day your batch will be finalized or "settled" which means you are done for the day and then your software will send the whole batch (all of the transactions) to your processor. Your processor will then bill all of your customers (this is when your customers see the transaction "post" to their account) and then your processor will deposit the money into your bank account.

This is a basic credit card transaction in a nut shell. There are many more things that occur behind the scenes but they are not pertinent in generally understanding how a credit card transaction works.


What is the difference between a void and a credit, return, or refund?

Many people are confused by what the difference is between a void and a return (returns are known by many names including: credit, refund, and sometimes erroneously as reversals.), but the difference is quite big and not hard to understand. Before you understand the difference, it is good to educate yourself by reading our article on how a credit card transaction actually works. After reading that article the below explanations will make a lot of sense!

Void: A void makes an authorized transaction that hasn't settled void. This prevents the transaction from posting to your customers card. This will, often times, still leave a "hold" or "pending authorization" on the card, but the charge will not post. This "hold" usually falls off after about 7 days. Some processors and banks support "reversing" the authorization. This means that the charge will not post and the card issuing bank (your customers bank) will release the "held" funds.

Return / Refund /Credit: A refund is performed when a charge has been completed and "batched out." Meaning you have finalized the transaction and you will be getting funded for it. A refund should be run if a transaction has already settled.