How credit card payment processing works
By Mariana Almeida Marques
Debit and credit cards serve the same purpose for customers: enabling them to purchase items or services. However, there are substantial differences between the two. In this article, we will dive into the usages of credit cards and how their payment processing works.
What is a credit card?
A credit card is a physical card issued by a bank that allows you to purchase items, withdraw or transfer money. The deposit you have on your credit card is, however, borrowed money and not your own. Your bank lends you a certain amount of money (credit), which you can use at your own discretion, and have to pay in full at a later time. Banks allow you to make one-off payments whenever your bill is due, pay a minimum amount each month or set up a monthly direct debit so whatever you have spent on a certain month will be paid on the day you chose. This way, you avoid the risk of forgetting to pay your bill on time.
Delays in paying your credit card bill results in accumulated interest and, potentially, late payment fees. Interest is often charged daily, so the longer you take to pay your credit card bill in full, the more money you will have to pay in the end. Your monthly credit card purchases can end up costing you double or triple than what you paid for them initially.
What is a line of credit or credit limit?
Credit limit is an important term that you will see everywhere when searching for credit cards. This term is used to designate the amount of money that your bank agreed to lend you every month. Each bank has a different credit limit, and oftentimes this limit is also defined by your own financial situation, which your bank will analyse before making a decision. For example, you may be able to borrow £500 or £5000 a month and this will be your credit limit- the maximum amount of money you can spend on your credit card (assuming that you only have one).
Types of credit cards
There are different types of credit cards to choose from depending on your financial situation and goals. If your credit score is low and you want to improve it, for instance, there are specific credit cards that you can use to improve credit (provided that you pay your balance in full and on time).
These are often easier to get than rewards or cashback credit cards, which give you points or cash back for your purchases, or premium cards, which can give you access to various perks, such as access to airport lounges or special events. Some high-end credit cards also offer travel insurance. Note that some credit cards have an annual card fee, which can vary greatly. Usually, the more perks you have with your credit cards, the higher the annual fee.
Debit card vs credit card
The fundamental difference between debit and credit cards is that the money you have on your debit card is actually yours- you have to deposit money in your card if you want to use it for purchases. With credit cards, the money you have available is borrowed, and you have to pay it in full at some point.
Credit cards usually give more protection against fraud than debit cards, because credit card providers are equally liable/responsible for your purchases. In the UK, under section 75 of the Consumer Credit Act 1974, cardholders can get a full refund from their issuing bank on items priced between £100 and £30.000. If you need a refund on an item, your bank should be able to liaise with the company you purchased the item from and get the money back.
Debit cards don’t offer this kind of protection. However, with your debit card, you don’t suffer the risk of having to pay interest on purchases or late payment fees. Though normally debit cards are free, some premium accounts may come with monthly or annual fees. Equally, some banks offer overdrafts to their customers- which essentially is a form of credit that customers will have to pay back.
How does credit card processing work?
Credit card processing works very much in the same way as debit. There are three main stages of payment processing: the verification, authorisation and settlement. When a customer pays with their credit card in person or online, the merchant’s bank sends a request for funds to the issuing bank. The issuing bank and processor are responsible for verifying the identity of the cardholder, ensuring both that the cardholder is legitimate and all the details are correct, and that they have enough credit to purchase the item.
After the payment is verified and if all information is correct, the cardholder receives a notification stating that the payment was authorised. From here, the payment processor and card network work together to transfer the funds from the issuing bank to the acquiring bank, who settles the transaction and ensures that the funds are deposited in the merchant’s account. Note that because it is a credit payment, the issuing bank is paying the acquiring bank with its own money. Customers can check the amount that they owe their bank through their online banking app, and have to pay their issuing bank in full whenever the bill is due. Have a look at our blog post if you are interested in learning more about payment processing fees and how they work.
Imburse connects companies to the global payments ecosystem. By connecting to us, companies can integrate any payment provider or technology available worldwide for collection or pay-out. Moreover, they can do so in a matter of weeks, saving money, time and resources. Whether you would like to offer credit card payments to your customers or any other type of payment method, you can do so through Imburse at a touch of a button. If you would like more information about Imburse or access to a free demo, contact us below.