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Merchant Services Basics

You’ve probably wondered what happens from the time you accept your customer's credit card to the time you receive payment. There are three main processes you should understand that we’ll discuss here:

  • Authorization
  • Settlement
  • Funding

Payment Processing, Part 1: Authorization

Authorization is critical to your business — without it, you won’t be able to accept credit cards and that could mean lost sales.

Authorization confirms that the card number is a valid account number and that it has an available credit balance sufficient for the transaction. However, it does not mean that the transaction is valid or that it is being entered into by the actual cardholder or that it will not be disputed. There could be a chargeback even though an authorization was obtained.

You can obtain authorizations in several ways: through a point-of-sale terminal, ecommerce Web site or by phone.

Generally, the authorization process occurs within a matter of seconds and follows these steps:


  1. Your customer is ready to buy, so presents his or her credit card information to you. This can happen in person, by phone or via your ecommerce site.
  2. Next, you transmit this information to us — for example, by swiping the card and entering the dollar amount.
  3. We forward your request to the card payment brand (such as Visa®, MasterCard®, or Discover®).
  4. Next, the payment brand sends this request to the card issuer (the card issuer is the bank that issued the card to your customer).
  5. The issuer then approves or declines the transaction. This response is sent to the payment brand.
  6. The payment brand sends the response to us.
  7. We forward the response to you (either via your point-of-sale device, ecommerce site or verbally, by phone), so you can complete the transaction.
  8. Next, one of two things will happen: either the card will be approved and you will receive an authorization number, or it will be declined or referred. See below to learn about approvals, declines and referrals.

Note: If you are a merchant with very large daily sales volumes, you may be able to send multiple authorization requests grouped in a batch once to several times daily, or over the phone.

Approval, Decline and Referral

Approval: The dollar amount you indicated will be reserved from your customer’s available credit limit for future settlement.

Decline: When your customer's card cannot be used to complete the purchase.

Because it is not your responsibility to explain to your customer why his or her card was declined, you don’t receive the reason for the decline. If a customer insists on knowing why he or she was denied, that person should use the customer service contact information on the back of his or her credit card to get more information.

There are many reasons why a card might be declined — for instance, a temporary situation such as a customer going over the credit limit, or another issue, such as when a card is stolen or lost.

Referral: A request for further information (either from the merchant or the cardholder) before issuing an authorization.

As a security measure, an issuer may send us a referral response. If we receive one, we will contact the issuer and request an authorization for you. At this point, the issuer may ask to speak to you or your customer over the phone to confirm the legitimacy of the transaction before authorizing. An example of when this might occur is if the cardholder is trying to use the card in a foreign country, is using his or her card more than usual in a short time period, or has reached the credit limit.

Payment Processing, Part 2: Settlement

At this point in the process, your customer has either left your store, logged off your Web site or hung up the phone and considers the sale complete. For you, however, the transaction is still in process, and must be settled.

Settlement is the process of managing your electronic payment transactions so they clear and are funded. To begin the settlement process, you, as the merchant, must present approved card transactions to us. We then submit your approved transactions to the payment brands (such as Visa, MasterCard or Discover) for clearing through interchange. These transactions are sometimes called "deposit" transactions.

Here are the steps in the settlement process:

  1. You submit your transaction data to us. For example, you might use your point-of-sale device to trigger, or “batch,” a settlement.
  2. We forward your settlement request to Visa, MasterCard, Discover, or another payment brand for confirmation with the cardholder's issuing bank.
  3. The payment brand receives the settlement request and does the following:
    • Issues a credit to us so we can reimburse you for the transaction amount. The issuer then pays us for the transaction.
    • Issues a debit to the issuer to charge them for the transaction.
  4. Next, the issuer posts the transaction to the customer’s account. At the end of the billing period, the issuer sends your customer his or her monthly statement.
  5. The customer receives his or her credit card statement and pays the bill (to the card issuer).

Payment Processing, Part 3: Funding

When we deposit money into your bank account to compensate you for transactions processed, it is known as funding. This process is in fact an extension of settlement, and sometimes you’ll hear the terms "settlement" and "funding" used interchangeably.

In order for us to fund your designated account quickly, be aware of holidays and deadlines that impact the funding process. Learn more about funding today.