Your Credit Card: What happens behind the scenes?
Back in the dark ages of credit card purchasing, merchants taking your card had to worry. Would the charge be approved, or would it be rejected?
If the person taking your card was an employee at a store and your charge was rejected and charged back to the store, would the employee be fired? They could be, if they had failed to follow procedure. Back then, merchants received a little booklet, printed on flimsy paper, that listed the account numbers of cards that they would not honor. Clerks were supposed to check to make sure your account number wasn’t listed in that book before they let you walk out the door with a purchase.
If your purchase was over a set amount – as I recall it was $50 – they were supposed to call in for approval.
Talk about a cumbersome process – and a frustrating one if other customers happened to be waiting in line behind you. Sometimes they didn’t bother, and sometimes it cost them money. Oh, they could try to collect from you, but if the amount was small it wouldn’t be worth the legal fees and hassle, and if you’d left town… The worst they could do to you was destroy your credit, which didn’t get their money back.
Next came the little “swipe” machine that took your number, checked it, and either approved or disapproved. It took a few minutes, but was easier than looking up numbers and making phone calls.
But now – all that happens in a matter of seconds.
When you hand your card to a clerk to swipe, or swipe it yourself at the check-out counter, the machine instantly sends a message to the merchant’s bank. That bank then instantly sends a request to MasterCard or Visa – who instantly sends a request to your individual card issuer. Assuming the charge is approved, those instant messages go back through the same route, you sign the charge slip, and go on your way with your purchase.
This all happens so quickly that you don’t even notice a delay, and no one behind you is left twiddling their thumbs.
When you order over the phone, the process takes a second or two more, because a human has to key in the information that you provide.
But convenience isn’t free. Your merchant pays a monthly fee for the privilege – even if no customers use a charge card in a given month. That’s why it’s more cost-effective for many small businesses to use a service like Pay Pal – they take a higher percentage of each transaction, but there’s no monthly fee.
Merchants also pay a percentage of each transaction. For most mid-size merchants, the fee is about 2%. It can be higher for small businesses that use the service less frequently.
So, while you’re standing there waiting to sign your receipt, three different banks are “talking about you behind your back.” It’s nice when they’re only saying good things!
