On the surface, credit and debit card transactions seem simple enough: A customer's card is inserted or swiped at a restaurant or business’s card reader, the card is either approved or declined, and the sale is carried out as long as the card is approved for payment.
But what most people (customers and restaurateurs alike) don’t realize is that each credit and debit card transaction consists of many underlying steps involving numerous banks and regulating entities. When you list out all the steps involved, a seemingly simple transaction can actually be pretty confusing.
This article seeks to eliminate some of that confusion, explaining what exactly happens when a restaurant carries out a credit or debit transaction.
Credit/Debit Card Transactions: Key Terms and Entities
Let’s start by defining some of the key terms and entities that are involved with every credit/debit transaction.
Cardholder: This is an easy one. The Cardholder refers to the guest making a purchase with a debit or credit card.
Merchant: Another easy one. The Merchant is the business selling goods and/or services to the Cardholder and is the one accepting credit/debit cards as payment (like your restaurant). Merchants aren’t required to accept credit/debit cards, but a vast majority do. According to a 2018 report by Worldpay, credit debit card payments represent almost 75% of point of sale spend.
Processor: A Processor provides Merchants with the devices and technology necessary to be able to accept credit/debit cards, which are often called Terminals (like Toast). A Processor can be a third party, an independent organization, or an extension of a Merchant’s Acquiring Bank.
Acquiring Bank: An Acquiring Bank (also known as a Merchant Bank) is a bank or financial institution that processes credit/debit card transactions on behalf of the Merchant. Depending on the set-up, a Merchant’s Acquiring Bank can also be a Merchant’s Processor.
Card Networks: Card Networks are the organizations that own and operate the networks that process credit/debit card transactions and set interchange fees. Card Networks provide the “rails” that facilitate credit / debit card transactions — think of them like pathways or plumbing. The most common Card Networks in the U.S. are Visa, Mastercard, Discover, and American Express.
Issuing Bank: An Issuing Bank (also known as a Credit Card Issuer) is a bank or financial institution that issued the credit/debit card involved with a transaction to the Cardholder. Issuing Banks are the entities that ultimately approve or decline transactions.
The Credit/Debit Card Transaction Process
How the Process Works
There are three key areas in the credit and debit card transaction process: authorization, authentication, and settlement. Let’s break each of these areas down into clearer steps and how the various parties come into play.
Authorization (steps 1-4)
1. The Cardholder presents a credit or debit card to the Merchant to be used as payment. The card is swiped, dipped, or tapped at the Terminal, which has been provided by the Processor.
2. The Terminal instantly and electronically sends the Cardholder’s card details to the Acquiring Bank.
3. The Acquiring Bank receives the Cardholder’s card details from the Terminal and sends these details to the corresponding Card Network.
4. The Card Network inspects the card details and requests authorization from the Issuing Bank. Authorization requests include the following card details: card number, expiration date, and security code; cardholder billing address; transaction amount.
Authentication (steps 5-6)
5. After the Issuing Bank receives the authorization request, it validates the information and checks to see if the Cardholder has the requisite amount of available funds. The Issuing Bank then either approves or declines the transaction and sends the result of the authorization request back to the Merchant through all of the same channels.
6. After receiving the result of the authorization request, the Merchant creates a receipt and provides it to the Cardholder, signifying the end of the transaction process for the Cardholder. Every day, the Merchant aggregates all approved authorizations for that day into a “batch” that’s sent to the Acquiring Bank.
Settlement (step 7)
7. Once the Acquiring Bank receives the daily batch of approved authorizations from the Merchant, the different entities involved in the transaction process take their respective fees for providing their services. Finally, the Acquiring Bank deposits the Merchant’s hard-earned money (minus any processing or service fees) into the Merchant’s bank account.
And that’s the end of the transaction process. Not too complicated, right?
Making Sense of Debit and Credit Card Transactions
As we outlined above, the debit and credit card transactions happening in your restaurant every day involve many steps and many different players associated with them. If you have any additional questions regarding debit/credit card transactions, check out some of our other resources on the topic, and don’t hesitate to reach out to us to chat with an expert.