Lies, Damn Lies and Credit Card Banks - Part 2

A Credit Article Contributed by Mark Mcclelland

So How Does the Merchant's Bank Get Your Money When You Use Your Credit Card?

While the process of getting money to flow from the bank that issued you your credit card to the merchant's bank is actually fairly straight forward, it can get convoluted depending on who does processing for whom. It also helps to understand a few of the basics first.

First is that the merchant where you're shopping has a relationship with a bank, called the acquiring bank, and that back in a member of, for the sake of this example, the Visa association, since the merchant accepts Visa cards. And second, is that you - the customer - have a relationship with the bank that issued you your Visa credit card, and of course it's also a member of the Visa association. Once you understand that both banks are associated with Visa, it's simple to understand the process, since there's a point of financial commonality between you and the merchant, Visa.

Your Credit Card, Their Bank, and the Purchase

1) When you make a purchase at the merchant, the merchant swipes you card through the little card reader (getting your Visa account number and some other information), and sends that information - along with the purchase price and the merchants account number (along with some other information) to the acquiring bank (the merchant's bank).

2) The merchant's bank sends your purchase information to Visa

3) Visa sends a request to your bank to see if you have sufficient credit to make the purchase

4) Visa get the response back from your bank, and sends the response back to the acquiring bank.

5) The acquiring bank sends the response back to the merchant as an "acceptance" or "denial" of the transaction.... And, in but a matter of seconds, you either walk out the door with your brand new gizmo, or you don't, based on that response received by the merchant.

Now, since the bank that issued you your credit card allowed your purchase request, the little credit card reading machine at the merchant will print a receipt, which you sign and, from your standpoint, that transaction is done.

Your Credit Card, Your Bank, and Their Money

But in reality, no money has actually changed hands yet. So, as you're walking away from the checkout stand, none the wiser...

1) The merchant's credit card reading machine sends a request to its bank requesting payment in the amount of the purchase from your bank.

2) The acquiring bank forwards that request to Visa, which in turn forwards it on to your bank; but the Visa computer remembers this request for later use.

3) Once your bank receives this request, it gives you a new loan for the amount of the purchase and adds it to the "balance due" of your Visa credit card, and from your banks standpoint, it's done.

4) The Visa computers accumulate all transactions that occurred during the day and, at the end of the day, settles all accounts between member banks. As a part of this settlement process the acquiring bank credits the merchant's account for the purchase you made. At this point Visa is done and the merchants bank is done.... And everybody's happy.