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From Credit Card to Your Bank

Find out exactly how those funds reach you when you accept credit cards.

Opinions expressed by Entrepreneur contributors are their own.

Q: Once I accept a credit card and process the transaction, how do I get my money, and how does it get funded to my bank?

A: That's an excellent question, and it's not really that complicated. There are four steps to getting your money-initiating, authorizing, completing the transaction and receiving your funds.

The first step is to initiate the transaction, which verifies that your customer's credit card is active and the amount of the purchase is within his or her approved spending limit. This happens in a number of ways, depending on what kind of business you operate:

  • In brick-and-mortar, retail or restaurant environments, the card is physically present. To initiate the transaction, you swipe the card or key in the number through a point-of-sale terminal.
  • In mail- and telephone-order environments, the card is not present. To initiate the transaction, you enter the card identifiers the customer has provided to you by mail, telephone or fax-these include the credit card number, expiration date and card verification or validation codes (the three-digit numbers on the back of the card).
  • Address Verification Service (AVS) helps verify street numbers within the United States before the merchandise is shipped. Be sure to input all your customer's numerical address and ZIP code information. If you don't have AVS, contact your credit card processor to add this service to your arsenal of fraud-prevention weapons.
  • In an Internet environment, the card is also not present. To initiate the transaction, your customer provides your Web site with the same card identifiers as a mail- or telephone-order transaction.

The second step to ensuring you get your money is through a real-time authorization, which reduces chargebacks and catches card-entry errors. This happens as follows:

  • Your customer's credit card number is entered in the physical or virtual point-of-sale terminal.
  • The terminal or software then transmits the credit card number and expiration date and sales total to your credit card processor.
  • Your credit card processor transmits this data to your customer's credit card-issuing bank.
  • Your customer's issuing bank approves or declines the transaction.

Next, you will complete your transaction, which happens as follows:

  • As a merchant, your terminal or software transmits the transaction details to your credit card processor, usually in a batch at close of the business day. Keep in mind that a "batch close" can be either automatic or manual. If your batch close is manual, there are many benefits to settling every day rather than holding transactions for several days-the exception is if you are holding the transaction because you have not yet provided your customer with the merchandise.
  • Your credit card processor then forwards transactions to each credit card company (e.g., MasterCard, Visa, etc.), which redirects the transactions to the appropriate card-issuing banks.
  • The bank debits the customer's-the credit card holder's-account and credits the credit card processor.

The final step is to receive your funds:

  • Once all the previous steps are complete, your credit card processor credits your merchant account, usually within two to four business days.
Next Step
Need to establish yourself as a credit card merchant? How to Achieve Credit Card Merchant Status by Paul J. Madjenovic can help.

It is also important to realize that during this process, your credit card processor can and should protect your money. For example, Cardservice International is equipped to address the key protection issues of both traditional and Internet merchants, including fraud, loss prevention and chargebacks. If you are an Internet merchant, you will want to be sure that your credit card processor offers such protection.

Your credit card processor may contact you to further clarify a sale in question, which also helps protect your business. An authorization and subsequent deposit or settlement does not mean your payment is guaranteed-it means it has been approved at the time of the transaction. Occasionally, issues arise after the transaction that can put the sale into dispute.

How the funds actually move from your customer's card-issuing bank through your credit card processor, then back to you, is also very important. Electronic payments of all kinds are used frequently by people, companies and government agencies as a safe, reliable and convenient way to conduct business. This happens through the automated clearing house (ACH) network, a highly reliable nationwide batch-oriented electronic funds transfer system governed by the National Automated Clearing House Association's (NACHA) operating rules. In 2000, there were almost 6.9 billion ACH payments made, which represented more than $20.3 trillion in transaction processing.

Tim Miller is COO of Cardservice International and has more than 15 years of experience in the credit card processing industry.

The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.