Woman using credit card online


10th July, 2018

Inside a card transaction

Before your business makes the decision on accepting credit cards and direct debit payments from your customers, it’s helpful to learn how the credit card transaction processing works in practice.

To kick things off, here are a few terms which get thrown around when discussing payment processing and what they actually mean.


The cardholder is your customer, the payer making the payment in return for the goods and services you offer.


The merchant is the business selling the goods and services to the cardholder, essentially this is you. As the business, you, the merchant, accept credit card payments from cardholders by sending cardholder information and requesting payment authorization.

Acquiring bank

This is the merchant’s bank, aka, your bank. Your bank is the key player responsible for requesting and receiving payment from the cardholder’s bank through the appropriate channels.

Payment Processor

Payment processor is a third-party entity, like MYOB PayBy that enables merchants:

  • Accept credit cards and debit cards
  • Messages the schemes or credit card network of the transactions made
  • Messages the acquiring bank for payment authorisation
  • Settlement of fund if merchants hold a merchant service facility

Scheme or Credit Card Network

The largest schemes such as Visa, Mastercard and American Express operate the credit card payment processing networks globally. They govern interchange fees and are a major player in the transaction process.

Issuing bank

Issuing banks issue cardholders with credit cards. This is your customers bank and they receive payment authorisation requests and then approves or declines the transactions.

The payment facilitation model

Even though the process can happen in a matter of seconds, it’s still important to know what’s taking place during those few seconds of a payment transaction.

There are three stages in the transaction process.

1. Authorisation

First, your customer submits a credit card for payment. This can be done by swiping the card at a point of sale (POS) terminal, which we call cardholder present (CHP), or by entering the card information on your website or payment portal, which we call cardholder not present (CNP).

The credit card information is then sent to the acquiring bank, usually through an acquiring processor, via an internet connection.

The credit card information is forwarded to the credit card network.

For example, if the credit or debit card shows the Visa symbol, the card information is forwarded to the Visa network. The credit card network uses this information to clear payment and request payment authorisation from the cardholder’s issuing bank. The information includes the credit card:

  • Credit card number
  • Expiration date
  • Billing address
  • Security code
  • Payment amount

2. Authentication

The payment authorisation request is then sent from the credit card network to the issuing bank to verify the validity of the credit card. The issuing bank has the responsibility to validate the:

  • Credit card number
  • Amount of available funds
  • Billing address as a match to the address on file
  • Security code

The issuing bank then approves or declines the transaction. The response is routed through the credit card network to the processor and finally back to the acquiring bank.

Upon receiving the authorisation, the issuing bank places a hold on the cardholder’s account for the amount in the payment authorisation request. The POS terminal or website payment service then collects the authorization which will be processed in the “batch,” usually at the end of the business day.

You, as the merchant, produce a receipt for your customer. This can be a POS terminal print-out or an email confirmation.

3. Settlement

When the payment is settled, it’s posted to the merchant’s acquiring bank and the cardholder’s bank statements. This is the part of the transaction process that simply takes seconds.

Accepting payments isn’t as difficult as it sounds, but it does include a series of processes. To tailor a payment solution that best fits your business, contact MYOB PayBy.