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Understanding who's who in credit card processing

It takes just seconds to complete a credit or debit card transaction, but the speed with which purchases are authorized belies the complex, multi-step process taking place behind the scenes.

Let’s break down the parties involved and the role each one plays in processing card payments.

The cardholder – This is your customer, the person who owns the credit or debit card used for the purchase. When their card is read by a card reader in your store or entered on an E-commerce site, the transaction information is sent to their bank.

The merchant – This, of course, is you – the business owner who is accepting the card for payment. Merchants can accept card-present transactions in retail locations or through online, card-not-present transactions.

The cardholder’s bank – Also known as the issuing bank, this is the bank that issued the credit card to your customer. Commerce Bank, for example, is an issuing bank for customers that use our Visa® card products. The issuing bank is responsible for determining whether the cardholder has the funds or credit needed to complete a transaction. Before releasing funds for a purchase to your bank, it may also complete additional security measures to verify that the transaction is not fraudulent. Once the cardholder bank approves or denies the transaction, the flow of information is reversed back to you, the merchant, letting you know whether the payment is authorized.

The merchant bank – Also known as the acquiring bank, this is YOUR bank, the institution where you keep your funds. After a purchase has been authorized, a merchant bank accepts the funds from the issuing bank and deposits them into your account. Commerce Bank serves as a merchant bank for thousands of businesses.

After a transaction is cleared, you are expected to provide your customer the goods or services promised in return for payment. The transaction, however, will not be completely settled until the funds are released, a process that can take several days to complete. The process of releasing funds from the cardholder bank to the merchant bank involves the same players and a similar flow of communication as the authorization.

The card processor – The processor is the middleman that routes data and manages communication between the merchant and the issuing bank. Its primary role is to send payment information to the card network. It is also responsible for seeing that transactions follow data security protocols and that payment data is kept secure. Merchants pay card processors a fee for this service. While banks like Commerce often serve as card processors, some smaller businesses choose third-party nonbank processors.

Card networks or associations - Visa, MasterCard®, American Express® and Discover® are the most common U.S. card networks. Card networks aren’t banks. Their primary job is to collect payment information from card processors and then pass it on to the cardholder’s bank. Networks also serve as governing bodies that set interchange fees, arbitrate disputes between merchant and issuing banks, and manage their networks.

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