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 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.