GLOSSARY TERMS

When it comes to accepting credit and debit cards, the process may be more involved than you might think. Rather than having the customer swipe the card and the money landing in your bank account, there is an entire process. It only takes seconds for most of it, but there are still different things that happen every step of the way.

1. You receive the customer's card. This can be done with a physical swipe process (or by entering the number manually at the credit card terminal), or it can be entered as a card number through your online payment software.

2. Electronic request goes to network. There is a processing network set up to handle these requests. This networks handles the business of "requesting" funds from the customers bank or credit card company and then letting the merchant know that it is approved. The merchant's account number (usually expressed as a credit card) is used for authorization.

3. Credit card company or debit card bank receives request. The request from the merchant account is directed, electronically, to the proper place. This can be a credit card company or even a specific bank. If you have a debit card that is issued through a credit card company (such as MasterCard or Visa), the request goes there first. Then the request is forwarded from the credit card company to the bank from which the card was issued. Electronically, the bank will check to see if the card is valid and if the account has the money available to fund the purchase.

4. The bank issues its decision about the funds. If everything checks out from the bank's end, it sends approval through the network. An authorization code is electronically issued and passed through the network until it reaches your computer or the credit card terminal. If there is something wrong, you will be notified that the transaction has been declined. Amazingly, this whole process, thought it seems long, only takes a few seconds.

5. Customer receipt. If the funds have been approved, your terminal will print the receipt, or an electronic receipt will appear online for the customer to print out him or herself, if the transaction is completed via the Internet. This means that as far as the customer is concerned, the business has been completed. But for you to actually get the money, there is still more to do.

6. Batch of transactions for the day is settled. Each transaction – and its authorization code – is saved in what is called a batch. At the end of the day, the batch is settled. This is something else that requires a request made electronically over the processing network. All the authorization codes are checked against the purchases and other transactions. Then the transactions are sent to the credit card companies and to the banks for final settlement before the cardholders' accounts are officially debited (although many banks now show this information in real time).

7. Batch funds are deposited into your account. After the settlement, the funds will be directed to your account. However, this is a process that takes two or three days. And the credit card merchant account provider will deduct the transaction fees and the discount rate from your deposit before it is made.

Even though it seems a little involved, the fact of the matter is that accepting cards is more convenient for most customers, and you need to have these accounts. Just make sure that you account for the process when you are making decisions based on cash flow.