Whenever a credit card is swiped, inserted, or inputted into a website, it goes through a transaction process in order to complete the purchase being made. This transaction process involves multiple parties and is a multiple-step process.

The parties involved in a credit card transaction are the cardholder, the merchant or business, the acquiring bank (also known as the business or merchant’s bank), the payment processor, the credit card network or association member (such as Visa or MasterCard), and the issuing bank (or the cardholder’s bank).

The first step in the transaction process is authorization, which is when the merchant gets approval to charge the card from the cardholder’s bank. This is done when the cardholder or customer provides their credit card to the business, who passes it onto their bank, which passes it on to the credit card network. The network contacts the issuing bank for authorization to make a charge to the credit card.

The second step of the transaction is authentication. This is when security measures are applied to ensure that the transaction is a valid and legitimate one. Once the issuing bank is contacted by the credit card network they confirm the cardholder’s credit card number and then makes sure that the card data is correct as well as checking that there are enough funds on the card to make the purchase. After approving or declining the transaction, the issuing bank contacts the merchant with their decision, and if the transaction is approved, a hold is placed on the cardholder’s account by their bank in the amount of the purchase. This is when a receipt is given to the customer.

The third and final step is clearing or settlement. This is when the transaction is shown on the cardholder and merchants’ statements at the same time. The cardholder pays the bill, and the merchant provides all of its approved transactions to its bank (the acquiring bank). The bank passes this total onto the credit card network, which passes it onto the issuing bank (or the cardholder’s bank). The issuing bank then passes the funds onto the acquiring bank, which is how it is given to the merchant.

As a credit cared transaction goes through the process, it incurs various fees and charges. Merchants have to pay the payment processor and credit card network a fee for accepting credit cards as a form of payment, the acquiring bank and processor pay an interchange fee to the issuing bank, and if a customer decides to dispute a charge on their credit card upon receiving their billing statement, the issuing bank can charge the merchant a fee of up to $50 as they investigate the complaint. The regular fees, however, are typically about 2-8 percent total of the purchase amount, dependent upon various factors of the merchant or business, such as whether or not they are an in-person or online business, and this is deducted before the merchant receives the final amount from the transaction.