Here are some of the most frequently asked questions about credit card processing. You can find more FAQs here.
• What is a credit card?
• What is the difference between a credit card, a debit card and an EBT card?
• How does a credit card/debit card work?
• Why do some cards charge a fee, and is it worth it?
• What is a “hold” on an account? How long does it last?
• What is a merchant?
• How does a merchant “clear” a transaction?
• What is a billing cycle?
• Why does money come out instantly but take two to three billing cycles to be refunded?
• What is the Fair Credit Billing Act (FCBA), and when does it apply?
A credit card is simply a piece of plastic with either a magnetic strip, or a smart chip embedded on it or in it used to pay for a purchase without having to physically exchange money in person, or without having to write a check and wait for it to clear. Most cards are standardized throughout the world; however, in some countries, individual merchants still issue credit cards to be used in their establishment, and many of those are in non standard sizes, and in fact, in some countries these may simply have a number, or barcode printed on them.
There are also cards that are considered contactless where you only have to hold your card near the merchant’s processing terminal in order to pay for a transaction. Another innovation in credit cards is not a card at all, but rather your cell phone. If you have an iPhone 6 or higher, you have access to Apple Pay which is another contactless technology whereby your phone transmits a token to the merchant’s terminal. Regardless of which technology you happen to have in your pocket, this FAQ will provide the knowledge necessary to decypher what goes on behind the scenes.
The difference between a credit card and a debit card is exactly what the name implies. A credit card allows the holder to draw on a line of credit, and a debit card is virtually the same as writing a check on an account at a financial institution. That account can be a checking account, a money market account, a share draft account, a negotiable order of withdrawal (NOW) account or other accounts. It is also important to note that the institution issuing the card can be a brick-and-mortar bank, a virtual bank or even a credit union.
An Electronic Benefit Transfer (EBT) card works like a debit card, but EBT cards are issued by the government of a U.S. state to deliver benefits, which can include Supplemental Nutrition Assistance Program (SNAP), also known as food stamps, Transitional Employment Assistance (TEA) cash benefits, and in some states, child support payments.
When you make a purchase, you swipe your card or insert your EMV (chip card) into the terminal, and the terminal transmits your card information to a processing company to finalize your transaction. If you are paying at a store, the merchant will transmit the actual total of your purchase to their processing company and ultimately to your financial institution’s mainframe, where the institution’s transaction processing system will either accept or decline the transaction and transmit that reply to the processing company. Many large companies have their own in-house processing systems, whereas small companies contract their processing to a third party.
The reply the merchant receives is either an authorization number or a decline. Merchants do not normally receive a specific reason for a decline. This means that a merchant is normally unable to give you a specific reason if your card is declined. There are four main exceptions to that rule:
- “Incorrect Personal Identification Number (PIN)”: in which case usually the terminal will prompt a second and third time for a PIN. if a correct PIN is not input, most banks will suspend the card to prevent fraud.
- ”EBT benefit amount exceeded”: the EBT system will transmit the remaining balance to the merchant so they can zero balance the account.
- “Insufficient funds”: this reason code is specific to individual banks, and only to debit cards. “Insufficient funds” is transmitted when the linked account does not have a sufficient balance to cover the transaction.
- “Code 10”: Usually returned when a card has been reported stolen.
In this situation, the merchant calls a special number to the processing company. The operator who takes the call will ask questions of the merchant, that can all be answered with “yes” or “no.” This helps the credit card company determine if the charge is fraudulent, without alerting the person presenting the card. If it is thought to be fraudulent, the operator will contact the local police, and the call is designed to take enough time to allow the police department to arrive.
Some cards charge an annual or monthly fee. These fees are designed to cover the costs incurred by the issuing bank. The costs include call center operators, lower APR, frequent flyer miles, ATM fee reimbursements, EMV cards, processing fees and system upgrades. In essence, the issuing banks have to make money somehow. Banks make money each time you use the card, as well as on the finance charge if you carry a balance, these fees also make up a substantial portion of the issuing bank’s revenue.
Are those fees worth it? In short, maybe. It all really depends on how you use your card, what features you use, and how often you use them. If you charge $100,000 a year on your card, earn rewards of some type, and always pay the balance off every month, a fee of $500 per year may be a good value. On the other hand, if you are charging $200 a month and carry a balance, a fee is probably not a good decision.
A hold is actually an “authorization,” which is issued when you use your card for certain things, most notably for purchasing gasoline by swiping your card at the pump. When you swipe your card before a purchase, the merchant must estimate the amount you will spend. In the case of gas pumps, the usual authorization is for $125. The merchant will transmit an authorization request to your bank for $125 and your bank will either approve or decline the authorization. If the transaction is approved and you are using a debit card, your bank’s policy will apply. Most banks will actually remove the authorized amount from your available balance. The amount will still be in your account as part of your ledger balance, but the entire $125 will be unavailable.
Once the merchant clears the transaction, the difference between the actual purchase and the authorization amount will be refunded. For example, say your purchase was $25 and the gas station authorized $125. When the merchant clears the transaction, your bank will refund $100 into your account. In reality that money was never gone, but it was not “available.” The average length of a hold is 7 days. Holds typically do not apply to credit card transactions; as the issuing bank will approve authorizations without actually affecting your available credit.
A merchant is simply a seller or supplier. In most instances, a merchant is a company from which you make a purchase In the case of travel, however, this can be complicated. Your travel agent may pass your card info to the supplier and allow the supplier to process your card. In this instance, the supplier becomes the merchant. In essence, the merchant is the company that actually processes the transaction against your card.
When you swipe your card, the merchant will authorize the transaction as above. Once the amount is authorized, and the merchant has captured your card info, they or their processing company will hold that transaction in their system until the merchant processes their batch. At large stores, batches are processed several times per day. At smaller companies, batches may be processed only once a day, once every two days, or even once a week. Until the merchant processes their batch, the amount will remain on your account as a hold or authorization. Once the merchant processes their batch, the information is transmitted to their processing company, and then to your bank, where the transaction is applied to your account.
There are some banks that will process transactions as they come in, but will not remove authorizations until the close of business, so there is the possibility you may see a charge on your account twice for up to 24 hours, and, in fact, even having twice the amount tied up for that long.
Once the transactions clear, the authorizations are removed from your account, and the difference between the authorized amount and the purchase amount is once again available.
If the merchant does not process the batch before the hold time set by your bank, the money will go back into your account as available funds. If you spend those funds, you may be assessed overdraft fees on a debit card, or over limit fees on a credit card. American Express is the notable exception to how all of this works. American Express uses in-house processing channels, and typically Amex charges are only batched once per month, but American Express doesn’t authorize as other banks do. Their process is proprietary, and not much information is available about it, not even from their merchants.
A billing cycle is, simply put, the period that is covered by your bill. For example, your billing cycle may be the 12th of one month to the 11th of the following month. Generally, statements are sent out a week after the close of the billing cycle, and payments are due 14 days after that. Thus, your billing cycle starts roughly three weeks before your bill is due, or one week after it is due.
Why does money come out immediately but take two to three billing cycles to be refunded?
The short answer is it doesn’t come out immediately, or take two to three billing cycles to be refunded. The long answer is it has everything to do with the authorizations discussed above. When an authorization is processed, the money looks like it is removed almost immediately. However, it is not visible, it still is an authorization, but on a credit card, it doesn’t look like one because you don’t have an available balance and a ledger balance to compare against each other.
A purchase made on the last day of your billing cycle, that charge will show on your bill. But if you requested a refund on a purchase on the last day of the billing cycle, you may not see it immediately. For example you might request the refund fifteen days after the original purchase. If the merchant only processes their batch once a week, that takes it to 22 days as to when the refund would be processed to your bank. If your bank holds transactions for a while, the transaction may not be processed to your account until after the close of the next billing cycle. In this case, you would receive another bill that would also not show the refund. Finally, on the third bill, you would see the refund.
In the case of online banking, or mobile banking, you would actually see the refund on the day that your bank processed it, even though it would not show up on your actual paper statement. Most banks will credit the transaction back as of the date of original purchase.This means that you would not pay interest on that balance even though your money was not necessarily available. If you had already paid the balance off, you would usually see a refund of the interest amount.
What is the FCBA? When does it apply?
The FCBA is the Fair Credit Billing Act, a federal law codified as 15 USC § 1601. The FCBA gives you specific legal rights. For the full text, visit this site. The FCBA protects you from:
- Unauthorized charges
- Incorrect charges
- Charges for goods or services not received
- Charges for damaged goods
- Failure to properly post payments
- False advertising
- Calculation errors
- Statements incorrectly mailed
There are specific procedures that must be followed. Most Importantly disputes must be made in writing. Some banks will accept disputes by telephone; however, disputing by telephone does not preserve your rights under the Act. Once you dispute a charge, the bank is required to acknowledge the dispute within 30 calendar days, and they must resolve the dispute within 90 days.
Other Conditions must be met as well:
- the purchase must be over $50, and must be made in the purchaser’s home state or within 100 miles of their home address. (This rule does not apply if the merchant is affiliated with the bank that issued the card, or if the purchaser relied on an advertisement supplied by the issuing bank.)
- The purchaser must have made a good faith effort to resolve the problem with the merchant before disputing the charge.
It is also wise to mail the dispute via certified mail or other trackable method to provide proof of delivery. Another important fact to remember is that the dispute must be initiated within 60 days of the first statement in which the error or charge appeared. Some banks extend this deadline, but no bank is required to. — Researched by William Leeper
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