When you make a purchase with a credit card, what happens is that the card issuer pays for your purchase, and you agree to pay them back for extending you credit. You indicate your consent to pay back the credit card issuer when you sign a receipt for the purchase. What happens to your credit card transaction after that? Let’s follow your credit card transaction through the associated steps.
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First, your credit card transaction is authorized by the credit card company. The merchant submits your transaction to the bank, usually through an electronic verification system, and the bank generates an approval code which lets the merchant know that your credit is good, and the purchase is approved.
The next stage is called batching. Generally, merchants submit their authorized credit card transactions to their own bank at the end of the business day, in batches. Some transactions in which the card holder owes the merchant an outstanding amount of money – for instance, in the case of a hotel stay, or a car rental – there may be a hold issued on the card, based on the authorization, which will stay valid for a period determined by the card issuer.
At this stage, the credit card association acquires the debt for clearing and settlement. The association debits your account and pays the merchant’s bank for the transaction. At thus point, the merchant’s bank pays the merchant for the transaction, less the “discount rate” the merchant’s bank charges the merchant for processing the credit card transactions.
In the event of a dispute over the credit card transaction, the cardholder can initiate what is called a chargeback. In this case, money is typically held in the merchant account until the dispute is resolved, and the merchant must either accept or contest the chargeback.