How does a little piece of plastic tell the salesperson that you can
afford to buy that TV?
First, a consumer presents their credit card information to the merchant. The
merchant transmits this data, along with their merchant ID code, to a
clearinghouse (also referred to as a processor or acquirer). The
clearinghouse might be the bank that has issued the merchant their
credit card account, but it is more likely a firm that has contracted
with the merchant's bank to clear charges in exchange for a flat fee and
a percentage of every charge processed.
The data is transmitted by reading the card and merchant numbers over
the phone, by using a credit card POS terminal, or by using
CCVS or some other piece of software to
transmit the information from a computer.
The clearinghouse contacts the bank that issued the consumer's credit
card and verifies that the charge is acceptable. If it is accepted, the
clearinghouse then sends a confirmation message to the merchant. At the
same time, the available credit from the customer's credit card is
frozen by the amount of the transaction.
At the end of a business day, the merchant (actually, the merchant's
computer or credit card terminal) calls the clearinghouse and verifies
all transactions for that day to ensure that the merchant's system and
the clearinghouse agree on the transactions that have occurred during
that day. Once the merchant and the clearinghouse agree on the day's
transactions, the clearinghouse starts the process of transferring the
money from the credit card bank to the merchant's bank account.
