How Credit Card Transactions Work

Hostway Marketing - January 07, 2010

By Winmark Business Solutions

The typical credit card transaction begins when your customer hands you the credit card. What you do with the credit card depends upon the system you have in place. You will either manually imprint the card onto your paper draft, if you still use the older technology, or you’ll swipe the card through an electronic terminal, if you use the newer technology.

If the transaction is handled over the telephone or through the mails, it begins when the customer gives you the credit card number. In that case, you’ll either fill out a paper draft or key in the number at your terminal.

The next step in the typical transaction is for you to obtain permission from the credit card company to process the sale with the credit card. If you’re using the older technology, you’ll have to call a special number to obtain an authorization code (typically, this is only required with sales over a certain amount, such as $50). If you’re using the newer technology, the authorization code will be obtained automatically. Once you have the authority, the only step left to take with the customer is to obtain the signature on the receipt (phone sales, obviously, don’t require a signature).

Then, you’ll send the credit card sales receipts to the bank so that you can get paid. If you use the older technology, you’ll have to take the receipts to your bank. If you use the newer technology, you can send the receipts electronically. This process is usually done at the end of the day and is referred to as “settling” your accounts.

Your bank will authorize the charge and notify the credit card company (or some company acting on its behalf) of the charge. The credit card company (or the company acting on its behalf) will collect the money from the bank that issued the card, send it to your bank, and bill your customer. Once your bank has the money, it will put it in your account, minus a processing fee, called the discount rate, which is split between your bank and your credit card company.

When your customer pays the bill, the credit card company sends the money to the bank that issued the card, minus a processing fee…and everyone lives happily ever after.

About the Author

Winmark Business Solutions (WBS) is a free Web site for small businesses and entrepreneurs containing over 6,000 pages of business-critical information and downloadable tools at www.WBSonline.com. WBS is a division of Winmark Corporation, a multi-brand franchisor with nearly 900 franchise locations in North America. With over 25 years working with small businesses, WBS draws upon years of experience to bring important small business articles, information, tools, forms, checklists, calculators and downloadable forms to the small business owner to help their business grow. WBS contains over 6000 pages of business-critical information all available at www.WBSonline.com.