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A Simplified View on Credit Payments

Understanding how Credit Payments work

Ever wondered why it only takes a few seconds for your credit card or Paypal payment to be completed? The entire payment process may seem simple, but what happens in this short time may amaze you. Here is an overview of how your credit payment is processed 5 seconds after swiping your credit card at a checkout counter or confirming your Paypal payment on Lazada.


Definition of Key Terms

  1. Merchant Shop – A commerce shop that is offering and selling products to customers
  2. Merchant Acquirer – Acquiring Bank that processes credit card transactions and transfers all transactions to the Card Issuing Banks
  3. Card Networks – Acts as an intermediary between Merchant Acquirer and Card Issuing bank to authorize credit card transactions (e.g. Visa, MasterCard, UnionPay)
  4. Card Issuing Bank – Bank that issues credit cards to customers on behalf of Card Networks


a) Paying for your item

When a customer like Ben wants to pay for a shirt that costs $100, he swipes his credit card in an Electronic Draft Capture (EDC) machine at the Merchant Shop counter and all the transaction information linked to the credit card is captured. While shopping online on Lazada, Ben can pay for the same shirt using a payment gateway like PayPal that similarly captures the transaction information online.



b) Processing your payment

At the Merchant Shop, the checkout machine sends Ben’s transaction information to the Merchant Acquirer. For an online shop, the payment gateway Paypal encrypts Ben’s transaction information, such as his credit card number, into a randomly generated 40 character alphanumeric token and sends this encrypted information to the payment processor used by the Merchant Acquirer.



c) Approving your payment

After checking that your bank account is valid, the Merchant Acquirer forwards the transaction information to the Card Networks (e.g. MasterCard) and then to Ben’s Card Issuing bank to authorize the transaction. The Card Issuing Bank approves the transaction and sends an authorization code to the Merchant Acquirer, who then gives the approval to the Merchant Shop to sell the item to Ben. For an online shop, the payment processor used by the Merchant Acquirer forwards an authorization code to the payment gateway, who then transmits the authorization to the website to process the payment for Ben online.


d) Closing time at the end of the day

The Merchant Shop sends all authorized transactions for that day in a batch to the Merchant Acquirer, in a process known as Batching. The Merchant Acquirer then sends this batch of authorized transactions through the Card Network, to request payment from the Card Issuing Bank, in a process known as Clearing. The Card Issuing bank and Card Network subtract their own share of the Credit interchange fee and transfer the remaining amount of money paid by Ben from his bank account to the merchant acquirer. Lastly, the Merchant Acquirer subtracts its own processing fee that covers the cost of processing credit cards for the Merchant shop and pays back the remaining amount subtracted from Ben’s bank account to the Merchant Shop.



e) You get billed

Ben is subsequently billed $100 by the Card Issuing bank.


Great! So this is the entire payment process in a nutshell and it takes up to 5 seconds on average.

Now that you know how much happens when you perform that simple swipe, it’s time to remember to pay your bills on time!



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