Payments Explained

How a Credit Card is ‘Processed’

What happens after a credit card is swiped or keyed? There are two main ‘processes’: Authorization and Settlement. Each function requires a series of communications between the Acquiring Bank and the Issuing Bank, (i.e., the bank that issued the customer’s credit card). This communication transmits via the card association’s‘ Interchange Network’ and is facilitated by a payment processor, (e.g. CMS).


  1. Customer presents method of payment to merchant.
  2. Merchant transmits information to CMS/ Acquiring Bank via their processing equipment, (e.g., credit card machine, software program or via a virtual terminal/ gateway).
  3. CMS transmits information to the customer’s card Issuing Bank via credit card Interchange Network.
  4. The Issuing Bank either approves or declines the authorization based on whether or not it’s a valid card number and whether sufficient funds are available.
  5. CMS/ Acquiring Bank will then forward the response, (i.e. authorization approval number or decline code) back to the merchant’s processing equipment.
  6. Receipt is printed and signed by customer or transmitted electronically to customer.

Settlement/ Funding Process

  1. To this point only data has been exchanged. The merchant must settle the transaction in order to receive the funds from the customer’s credit card Issuing Bank. Merchant’s typically settle all of their transactions once per day in a function called ‘batching out’.
  2. The merchant selects the ‘batch out’ function on his/her processing equipment which automates a settlement request to CMS. CMS/ Acquiring Bank will then convey the request to each Issuing Bank that generated a customer’s credit card authorization approval code within the batch.
  3. Each Issuing Bank sends a confirmation of the funds that are being transferred from each cardholder’s account to CMS/ Acquiring Banks master settlement account.
  4. CMS/ Acquiring Banks will then deposit the funds to the merchant’s bank account through the Federal Reserve’s Automated Clearing House (ACH), which is an electronic funds transfer system.
  5. Issuing Bank simultaneously posts the charge to the cardholder’s account which will show up on cardholder’s credit card statement.

Tips to Reduce Interchange Expense

  • Swipe cards instead of manually entering the card number during a face-to-face environment.
  • Utilize the Address Verification Service (AVS). By confirming the zip code; you reduce your fees, and this adds a layer of protection against accepting a stolen credit card.
  • Settle or close your transaction batch the same day the authorizations occur.

What is Downgrading?

Transactions are downgraded when they don’t meet interchange requirements, such as not capturing the correct card information at the point of sale, settling the transaction after a deadline has lapsed (typically 24 – 48 hours after the authorization) or manually entering rather than swiping a card. A downgraded transaction results in a higher cost for the merchant.

Chargeback Overview

A chargeback is a dispute between a merchant and its customer (who paid by credit card). The customer or cardholder tries to claim that their purchase wasn’t fulfilled by the merchant, etc. and the merchant tries to prove that they did adequately render service by providing a receipt, signed agreement, recorded conversation, etc. The cardholder typically has anywhere from 45 to 180 days to submit a chargeback after the date of purchase or service rendered.

The chargeback process of who wins and who loses is essentially a mediation between the cardholder’s bank and the acquiring bank (as a processor, we partner with acquiring banks). When a chargeback is received by an issuing bank from one of their disgruntled cardholders, the funds are immediately debited from the merchant’s account by the acquiring bank and placed in the consumer’s respective account while the dispute is decided. This mediation process is governed by Visa/ MasterCard chargeback rules and regulations. If the Issuing Bank and Acquiring Bank can’t come to an agreement, the chargeback will go to arbitration where a Visa or MasterCard rep (depending on the card) will ultimately decide who wins. If the chargeback is deemed valid, the consumer retains the funds. If the chargeback is deemed as invalid, the funds are again debited from the consumer and re-deposited to the merchant’s account.