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A Credit Or Debit Card Transaction Work – With new developments coming forward, debit cards and credit cards are being used more than cash. In this modern era, digital currency or plastic money is given preference, and one should have an idea about these resources and how they work.

How does a credit card or debit card transaction work?

First of all, let us talk a little about the essential functions of the credit card and relate them to the transaction process. Credit card also known as plastic cards are the cards which allow you to make purchases. It is a 16 digit encoded card with a secured PIN. The money on a credit card is the money you have borrowed from the bank that issued the card. You can say it is a form of loan provided by the bank, and you have to return it within the time limit; otherwise, some extra charges are applied, and interest is also charged per day if you are late with your payment.

Credit cards are super convenient to manage your finances, but it is only beneficial to use them with discipline. And return the payment within the time limit. If you don’t pay, your credit score is significantly affected, and even your credit limit is reduced. The credit card also offers a good amount of points and rewards, which you can save up to enjoy.

The whole transaction seems to be between the customer and the seller. Behind the simple-looking transaction is a whole complicated process that requires all of the parties mentioned above. It is not an easy process, it is a complex process, and one needs to understand all the terms mentioned in the process.

A debit card is also a form of plastic money.

A debit card is also a form of plastic money, but the critical difference from a credit card is that you don’t take a loan from a bank; instead, pay a deposit beforehand. The deposit you pay is loaded onto a card, and you use your own money instead of borrowing it from the bank. For a debit card, it is necessary to have a bank account; the cash you deposit is taken from the linked bank account.

However, you don’t need a bank account in some cases, for example, by using a prepaid debit card, electronic benefits transfer card, etc. In the case of debit cards, the bank takes no or fewer association fees. But it would help if you stayed aware while using the debit card. Because if you spend more than the amount you deposit, it will result in an overdraft fee—a debit card for a convenient way to manage your finances and expenditure.


In any transaction, authorization is the first step to be followed. As the name shows, authorization is a step where issuing Bank checks and grants permission to merchants to accept the payment. Every transaction begins when a customer purchases from the merchant. This purchase can be from anywhere, such as a grocery store, an online store, or a restaurant, etc. The customer swipes his card on the merchant’s credit card reader machine. Or when online, the cardholder enters his details, for example, name number, account number, address, etc.

In both cases, by the end of the process, you have to enter a PIN code. Usually a four-digit code, and enter the amount you have to pay. By entering the PIN, you confirm that you made a payment. Afterward, a cardholder’s details are transferred to acquiring bank, where the merchant’s account is present. The developing bank sends the cardholder’s information and the merchant’s report to the card association they are affiliated with. It can be both Visa or MasterCard.

The credit card association is the gateway between issue and acquirer

As the credit card association is the gateway between issue and acquirer, so it receives info from the acquirer and sends it to the issuing bank. The issuing bank follows its security procedure and checks eligibility criteria and, depending on that, accepts or declines the transaction. Suppose they receive then the payment proceeds. If it’s rejected, then they will inform the card association. A complete authorization depends on the issuing bank. They will accept the transaction when they check that funds are present for the marketing and ensure no fraud reports regarding that credit card.

Authorization also includes two methods. The first one is we are double protocol is required that is a signature of the cardholder and the PIN code. It is when the merchant receives a lot of payments in a day. All the prices are collected in an electronic draft capture file, and this file is called a batch. All the charges are contained in the batch in acquiring bank. The second one is a single message protocol where only PIN is required. In this step, all the clearings are done simultaneously, and no electronic drafts are created. Authorization is done by the settlement process, which is step two. In short, authorization is the step where the merchant’s bank sends a request to the issuer via a card association. The issuer, in return, checks the eligibility and accepts the transaction and payment proceeds to settlement.

Settlement Process:

The second step in any credit or debit card transaction process is a settlement process that requires a human element. It is not done by software, just like authorization which is a matter of seconds and doesn’t take much time. In this step, the choir bank takes the money from the issuer and transfer the funds to the merchant’s account. As the moving of funds to merchants Bank is in batches, it requires a day or two to complete a transaction. In this step, after all the verification confirmation, the issue takes the money from the cardholder’s account and transfers it to the acquirer bank. The acquirer bank gives the money to the merchants after authentication. In conclusion, this is the cause of cash from customers’ bank: the merchant’s bank is the acquirer.


Funding is the final step, and here the whole transaction process is completed. It is the step where the transaction fees are deducted from the merchant’s account. Before depositing the funds into the merchant’s history, the acquirer will deduct their transaction fees from that payment. After deducting and depositing, the whole transaction process is completed, and finally, the merchant can withdraw the money from their account.

What are the parties involved in credit card and debit card transactions?

A credit or debit card transaction occurs between two parties, but few other elements are involved in a primary transaction.

Card Holder:

A cardholder, as the name clearly shows, is someone who posses a card. In credit and debit cards, he has one of these cards and is affiliated with the bank that issued these cards. A cardholder is a verified and authorized user, and the card he owns is either a debit, credit or ATM card. In most cases, the card has the logo of VISA or MasterCard brands embedded on it. If a cardholder has a verified card, he can make purchases with the card he owns and makes successful transactions with just a swipe.


A merchant, in literal terms, means someone who does trade and sells products either online or offline. A merchant, in this case, is a seller who receives payments through the transaction of cards. For a successful transaction to occur between two parties, both the cardholder and the merchant must have a debit or credit card of any brand. A merchant is directly affiliated with the acquired bank, and now there are separate accounts for merchants named as ‘Merchant account.’ A merchant account is for e-transactions, and businesses can run their businesses more efficiently with this account.

Upon receiving an order from the customer that is a cardholder, a merchant sends the info to the acquired bank, and the other transaction process is done by the other parties involved in the whole process.

Acquired Bank:

An acquiring bank is a financial institution which it authorizes all the payment process. The acquirer bank directly deals with the merchants. Merchants must sign in agreement with the acquirer because acquirers are the ones who will provide a merchant account. They are the one who deals with the funds which a merchant receives from customers.

Without acquire, approval the merchant won’t receive the money in his account. Only after signing an agreement with the acquirer can bank merchants do transactions using a debit or credit card. The acquirer is the middleman between our card association company e and the businesses and merchants. On behalf of the business, the acquirer manages transaction and ensure a secure process.

Issuing Bank:

As we can interpret from the name, issuing bank gives credit and debit cards. Issuing banks, also known as issuers, are affiliated with the customer or, in this case, a cardholder. You might notice a master card or VISA logo on your credit or debit cards. Issuing bank issues credit and debit cards on behalf of very famous financial institutions.

These institutions are MasterCard, VISA, American Express, and many more. Their logo is embedded on the card. An issuing bank is the means of communication between two parties: a cardholder and the credit card networks. Once a customer makes a purchase, the issuer bank is the one who approves of it, and they are the ones who transfer the mentioned amount from the bank to the acquirer bank. They are the one who checks whether the funds are available or not and ensure authentication.

Card Association:

A bank card association is a financial institution responsible for licensing and launching new credit card programs. All the issuing and acquiring bank comes undercard association. They are the one who authorizes the credit card programs. The association bank offers credit card programs to the bank that wants to start a credit card business. In return, these associations take fees from the banks whom they provided a credit card program. The most famous card associations are MasterCard, American Express, and Visa.

They provide a logo on your credit or debit card. Not just logo, but they also help in security while in a transaction process. These are the most trustable associations, so if any bank has its logo on its credit card or debit card, people will most likely choose a credit card program from that bank. These associations are the means of communication between the customer’s bank that is the issuer, and the merchant’s bank is the acquirer. Join receiving a request from the acquirer, and they are the one who sends the information to the issuer. Meanwhile, this whole process also ensures security and makes sure that there is no fraud.

Advantages of a credit and debit card:

Credit and debit cards are both a financial tool and a source of convenience. Gone are the days when people used to keep a bundle of cash with themselves where ever they would go. With credit or debit cards in your hands, you can make payments within a few seconds without getting confused with the bundles of cash you have. More importantly, cards are small and are easy to carry. You can use cards anywhere without the fear of being short on money. Even if you fear credit card debt, you can always use a debit card without the fear of debt because that’s your own money.

Credit and debit cards provide you the whole records of your expenses. You get your statements online and on message by the end of each month, which helps you keep ack of four usages. Some banks provide a summary as well by the end of the year to help you cut down the taxes.

Although debit cards do not provide you with credit points or extra rewards, you sure get discounts from various partnered brands. On the other hand, a credit card even gives you credit points on every transaction along with bonuses and discounts. You can use these credit points to redeem more rewards.

By using a credit card, you can make a good credit score. If you pay credit card payments by the due time and your expenditure rate is less, your credit score improves. A good credit score will help give you a larger credit limit and assist you in future emergency loans.

Disadvantages of credit and debit cards:

Credit cards are a target for thieves and hackers. Don’t tell your PIN code to anyone and if you are using your online system, then make sure that your device does not have any spyware.

With credit and debit cards in your hands, you know that you have money, so you tend to spend more. Psychological you think that this money is easy to use and you overspend, disturbing your budget.

Although debit card companies do not take additional fees except for overdraft fees in some cases, credit card companies do take extra money, such as over-limit fees, annual fees, late payment fees, interest rates, etc.

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