3 Stages of a Credit Card Transaction Cycle

A credit card transaction goes through many stages before it hits your merchant bank account. The life cycle of a transaction is complex, so we would like to shed some light on what happens once your customer taps or inserts their card into the terminal, and explain how authorizations become funds in your bank account. It is fascinating how much is going on behind the scenes within those split seconds while a transaction is being processed.

Authorization Stage

Your customer (cardholder) asks for a purchase from your business by presenting their credit card to you. Once they insert the card into the terminal and enter their PIN number, your POS terminal sends an authorization request to the acquirer.

Let’s pause here for a second to understand what the acquirer is.

An acquirer is a financial institution or merchant bank that processes credit or debit card payments on behalf of a merchant. The merchant bank is contacted to authorize a credit card purchase amount that will be either approved or declined at this point.

  • Once the acquirer receives an authorization request, they submit the request to the issuer (the bank that issued the card) to authorize the transaction.
  • The card issuer issues an authorization code if the funds on the credit card are available and sends the code back to the acquirer who sends it to the merchant.
  • If the funds are available, the merchant sees an “Approved” message on the screen and the customer walks away with a purchase.

Batching and Clearing Stage

As your day goes by and clients pay with their credit cards at your store, your terminal stores approved authorization codes. At the end of the day, you close the batch, in other words – cash out. Here’s what happens after you print the settlement report.

  • Your POS terminal sends all stored authorized sales in a batch to the acquirer.
  • Next, the acquirer submits a request to get payment from the multiple card issuers (banks that issued your clients’ cards) for each authorization in a batch.
  • The card issuers deduct the interchange fees and send the remaining amount to the acquirer.

Funding Stage

This final stage of the cycle is the shortest and the simplest. Once the acquirer receives a payment from the issuer via a card network (Visa, MasterCard), they (usually) pay the full amount to the merchant and the deposit is done. We say usually, because in the majority of cases the acquirer bills the merchant for the transactions on a monthly basis. Merchants that prefer daily billing would receive the full sale amount, less the fees charged by the acquirer.


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