Picture of a Credit Card Transaction

The following is the simplest infographic I could find of how a credit card transaction works from UniBul’s Money Blog. If  you go to the page their are actually a couple of other infographics on credit card transactions.


Here is the prose version:

Betty swipes her card and her account number, the expiration date, the billing address’s zip code, and the CVV code is sent to something called a front-end processor (in the above example Authorization Step 2 it is shown as Master Card but this is most often farmed out to a private company). The front-end processor’s job is to quickly check that Betty’s card has enough funds to cover the payment. It forwards the information contained on her card to a network of the relevant card association (MasterCard, Visa, American Express, etc.) that figures out the issuing bank the card came from. Her transaction now moves to a separate payment processor representing the issuing bank, the one whose name is on Betty’s card and manages her account. Once her bank has verified the validity of the information and checked for sufficient credit, a signal goes back the other way. The bank tells its processor to give the all clear to the association, that conveys it back to the front-end processor so that Farmer John and the acquiring bank can be satisfied that Betty has enough funds to cover the oranges. Within seconds Farmer John is notified of the approval.

Betty is walking away with her oranges. However, the payment system is not done. Farmer John has not been paid for delivering the oranges. For that to occur Farmer John must send a follow-up request to his acquiring bank, usually in a batch of receipts at day’s end. The acquiring bank will pay Farmer John for those receipts, but it will need to place a request for reimbursement from the issuing bank, using an automatic clearinghouse (ACH) network managed by either the regional Federal Reserve banks or the Electronic Payments Network of the Clearing House Payments Company, a company owned by eighteen of the world’s biggest commercial banks. Still, Betty’s bank won’t release the funds if it’s not convinced that it was really she who bought the oranges. So before it even gets the request for payment, its antifraud team has been hard at work analyzing the initial transaction, looking for red flags and patterns of behavior outside her ordinary activity. If the team is not sure about who was swiping the card, it will call Betty’s cell and home phone numbers, text her, and e-mail her, trying to get her to confirm that it really was her at the Farmers Market. Once her bank is satisfied that all is aboveboard, it will release the ACH settlement payment and register a debit on her credit card account. The money then flows to Farmer John’s acquiring bank, which credits Farmer John’s account. This process typically takes up to three business days to complete.

All this processing is not done for free. Each entity in bold red letters takes a cut of Betty’s transaction which usually totals between 1 and 3 percent of the sale. This may not seem like a lot but when you take into account all sales world wide…