How Credit Card Processing Works

Before your business hired a merchant account to process transactions, merchants would have to call issuing banks and verify the credit card information themselves. Merchant accounts can make the process less time consuming and efficient.


Most brick and mortar stores will use magnetic card readers that are connected directly to their POS systems to process transactions. These transactions will be less expensive in the long run than non-magnetic transactions because they help to prevent cases of fraud since the physical card is used for payment. These transactions allow the merchant account to immediately process the charge, verify the information with the issuing bank, and then collect and send the funds to your business.


Non-magnetic transactions are at higher risk for fraud because of a lack of a physical card being swiped. Without a physical card, the only details needed to process the transaction are the card information and the customer’s details. Aside from this, however, the transaction process is the same as magnetic swipes, where the merchant account takes care of most of the information.


Due to the higher risk of fraud, however, non-magnetic transactions can be more expensive, and may be more beneficial for online transactions and E-commerce websites. At the end of the business day, the charges are still processed as a “batch” and a record is kept in sales and returns information.


While most businesses will use the third party processors referred to them by their own banks or credit companies, there are several different merchant account options on the market. There are even merchant accounts that offer their services from overseas. Aside from standard third party merchant accounts, some credit card companies like American Express and Discover will actually process the transaction themselves. Visa and MasterCard companies require merchant accounts, though, so it can be beneficial for your business to evaluate what types of credit cards you process when you are searching for a merchant account.


Before you decide on a credit card processing account, remember that third party processors also have their own requirements before accepting businesses as merchant account holders. Many have their own credit checks and application processes, so be prepared to answer some questions about your business as well.

David Liu is a writer and comedian based in San Diego, California. He writes extensively for Resource Nation, an online resource that provides expert advice on purchasing and outsourcing decisions for small business owners and entrepreneurs.

Resource Nation provides free tools, tips, and purchasing advice for business owners and entrepreneurs in over 100 business categories ranging from phone systems to credit card processing. Whether it's connecting businesses with local and national pre-screened vendors, or offering easy service comparisons on a VoIP service, Resource Nation empowers business decision makers by providing the information they need to make smart choices.