How a Basic Credit Card Transaction Works For years electronic credit card transactions have played a vital role in our economy. Every time a credit, debit or check card is used to make a purchase, a host of industry partners work together to ensure the transaction is a success. Last year more than $1.34 trillion in credit and debit card purchases were processed in the U.S. alone, and more than 1.2 billion cards were in circulation worldwide (Source: The Nilson Report).

You may be surprised by everything that happens behind the scenes when a card is used, all in a matter of seconds. Here is a brief summary of the key players and their role in the process.

Cardholder A transaction begins when a customer presents a bankcard to pay for a purchase. Bankcards come in several varieties, from a Visa®-branded credit card issued by a national bank to a local bank's MasterCard®-branded debit card. The magnetic strip on the back of the card stores the information that uniquely identifies the cardholder - account number, cardholder name, and expiration date.

Business In a traditional brick and mortar business, the cardholder's bankcard is swiped through the point-of- sale processing terminal and the transaction amount is entered. The terminal electronically reads the cardholder's account information from the magnetic strip on the card. Through the phone line connected to the back of the machine, the terminal automatically dials out to the processing network for authorization to complete the transaction.

Network The processing network is responsible for translating and delivering the electronic information sent from the point-of-sale terminal. The transaction data is first routed to the issuing bank for authorization of the cardholder's account, with the appropriate data then sent to the processing bank as well as back to the terminal. The network serves as a two-way communication channel for the electronic funds and data transfer process.

Issuing Bank The network sends the transaction data to the issuing bank - the bank that issued the bankcard to the cardholder - for authorization. The issuing bank verifies that the account is valid and the sale is within the cardholder's available credit limit. This triggers the network to send an approval code back to the business' terminal so the transaction can be completed. Transaction details appear on the cardholder's next account statement.

Processing Bank The completed transaction is saved in the point-of-sale terminal until the business closes out the current batch of stored transactions. This simple process, called "batching out", generally occurs automatically at the end of each day when the terminal transmits all transaction data through the network to the processing bank. The processing bank can then transfer funds for the transaction to the business' bank account.

While this is a very simplified version, it illustrates the power of modern technology that so much data and money could change hands all with the swipe of a plastic card.