Credit cards — love them or hate them, they’ve made our life as a consumer so much better.
The benefits are obvious, they allow for easy payments anywhere and lets us borrow money with little effort. Their obvious con is simple, we all spend way too much money on things we really don’t need!
But as a business owner, have you ever wondered how credit cards work? Especially when your customers use them to pay you online when they shop with you?
There’s really no complicated science behind it, when it comes to making an online credit card payment you don’t need to be an expert in finance or software. Instead, knowing a few key terms and processes puts you ahead of a majority of your peers. Learning the difference between one-time payments and automatic recurring payments helps both small businesses and credit card owners stay safe and secure.
It’s important to remember that this isn’t an in-depth coverage into the world of online payments and credit management. This guide will highlight the basics and give you more knowledge on how online credit card payments work. You’ll learn more about one-time payments, recurring payments, and the requirements the involved organizations are required to meet.
How one-time card payments work
A one-time card payment is when you make a single purchase, like ordering food delivery, shopping for clothes, or scheduling a plane ticket. There are three main steps to a one-time online credit card payment: Card data encryption, authorization, and settlement.
For example, if you’re buying a shirt to be delivered, the merchant will use a Payment Service Provider (PSP) to easily collect your payment. When you enter your information into the checkout form, the PSP encrypts your data to conceal your identity and information.
Your information is then sent over to a Card Association like Visa or MasterCard, depending on your card company. The Card Association forwards the data to your bank for authorization. Your bank is an “issuing bank” which gives out payment cards to users. To authorize a transaction, the issuing bank checks for whether you have the necessary funds and if you have debit restrictions. Once these two conditions are met, your bank deducts the cost of the order.
Once your transaction is authorized, your order can be delivered! But the process isn’t over yet — now the settlement begins. The settlement process is where the funds are moved from the issuing bank (your bank) to the acquiring bank (the merchant’s or PSP’s). In this case, because the merchant is using a PSP, the funds will go to the PSP’s acquiring bank.
This process takes about 24 hours for the money to be settled into the acquiring bank from your bank. Once the settlement is complete, the PSP transfers the money to the merchant’s bank account.
The one-time card payment is now complete! After the checkout software encrypts your data, your bank authorizes the transaction and the two banks complete the settlement process. Because this is a one-time online credit card payment, your card isn’t regularly charged and your data isn’t automatically stored.
How automated recurring card payments work
On the other hand, there are automated recurring card payments. If you sign up for a membership or streaming service, you’ll be charged a subscription fee. This allows you to regularly access the product or service. Because your money is scheduled to be automatically deducted, the process looks different from a one-time payment.
Let’s say you sign up for a music streaming app called MusicDemands. MusicDemands may integrate with a Payment Service Provider (PSP) to manage regular billing for their clients. This PSP is responsible for charging your bank monthly on the service’s behalf through tokenization.
Tokenisation replaces your card information with tokens, which are mathematically irreversible, randomly generated numbers called tokens. This in turn protects your data, as the tokens have no meaning and therefore no use to anyone that may intercept them.
When you sign up for a subscription and enter your card details, the checkout software encrypts the data and tokenizes it, sending it to the MusicDemands system. The PSP will then process the card to be charged for the monthly gym subscription, which works like a one-time card payment. When you’re charged, the data is encrypted as it’s sent to your bank, who then authorizes the purchase and sends the money to the acquiring bank.
The MusicDemands system will send their PSP software the token number each month and request payment from the card associated with it. When the token number associated with your card is received by the PSP, this is when the one-time card payment process happens. The cycle then repeats to provide you with an active subscription.
The primary difference between the two processes is that the system holds onto your information in an automated recurring card payment.
The People Involved
With this general understanding of one-time payments and recurring payments, you should now have a basic understanding of online credit card payment processes! To recap, these are the organizations and people involved in the processes.
- The customer: the person or organization making the online credit card payment
- The issuing bank: the customer’s bank who issued the card
- The merchant: the business or person being paid
- The Payment Service Provider (PSP): the platform a merchant uses to easily collect online payments
- The Card Association/Third Party Payment Processes: an organization that facilitates authorisations and settlements
- The PSP’s acquiring bank: the temporary holding bank before the transaction is sent to the merchant’s bank
- The merchant’s acquiring bank: where the payment is ultimately settled after the transaction is complete
To summarise
When it comes to making online credit card payments, it’s important to be familiar with the process behind your transactions. One-time card payments can be broken down into three simple steps: encryption, authorization, and settlement. Recurring card payments are handled through tokenization and a regularly scheduled process similar to one-time card payments.
It’s the job of a small business owner to make sure the programs you use protect customer data. Remember, you don’t need to be a financial or software development genius to understand online credit card payments. Knowing the basics and a few key terms puts you ahead of many of your peers. While there are more complex and intricate steps involved under the surface, an online credit card payment is typically a straightforward process for each individual involved.
