How a Credit Card is ‘Processed’

What happens after a credit card is swiped or keyed? There are two main ‘processes’: Authorization and Settlement. Each function requires a series of communications between the Acquiring Bank and the Issuing Bank, (i.e., the bank that issued the customer’s credit card). This communication transmits via the card associations ‘Interchange Network’ and is facilitated by a payment processor, (e.g. CMS).

Authorization Process (This entire process takes approximately 5–7 seconds).



  1. Customer presents method of payment to merchant.
  2. Merchant transmits information to CMS/ Acquiring Bank via their processing equipment, (e.g., credit card machine, software program or via a virtual terminal/ gateway).
  3. CMS transmits information to the customer’s card Issuing Bank via credit card Interchange Network.
  4. The Issuing Bank either approves or declines the authorization based on whether or not it’s a valid card number and whether sufficient funds are available.
  5. CMS/ Acquiring Bank will then forward the response, (i.e. authorization approval number or decline code) back to the merchant’s processing equipment.
  6. Receipt is printed and signed by customer or transmitted electronically to customer.

Settlement/ Funding Process

  1. To this point only data has been exchanged. The merchant must settle the transaction in order to receive the funds from the customer’s credit card Issuing Bank. Merchant’s typically settle all of their transactions once per day in a function called ‘batching out’.
  2. The merchant selects the ‘batch out’ function on his/her processing equipment which automates a settlement request to CMS. CMS/ Acquiring Bank will then convey the request to each Issuing Bank that generated a customer’s credit card authorization approval code within the batch.
  3. Each Issuing Bank sends a confirmation of the funds that are being transferred from each cardholder’s account to CMS/ Acquiring Banks master settlement account.
  4. CMS/ Acquiring Banks will then deposit the funds to the merchant’s bank account through the Federal Reserve’s Automated Clearing House (ACH), which is an electronic funds transfer system.
  5. Issuing Bank simultaneously posts the charge to the cardholder’s account which will show up on cardholder’s credit card statement.