How Does a Credit-Card Transaction Happen?

AUTHORIZATION: You go to Wal-Mart to buy some chips and a deck of cards for your weekly game night. You pull out your Chase Visa credit card and swipe it through Wal-Mart's credit-card terminal. The terminal transmits an authorization request message through the Visa network, in this case. The terminal receives a response message from the credit card network showing that the authorization was approved or declined. If the transaction is authorized, you sign for your purchase and leave the store with your merchandise.

BATCHING: All authorized transactions are held in groups called "batches". In this example, we'll say that the batches are sent to Wal-Mart's bank at the end of every day.

CLEARING AND SETTLEMENT: Wal-Mart's bank sends your batched transaction through Visa, which debits (takes) the money from Chase and credits (gives) it to Wal-Mart.

FUNDING: Wal-Mart gets its money from your purchase, minus any transaction / interchange fees Wal-Mart has to pay to their bank, to Visa, and the lion's share that they will pay to your credit card company (in this example, Chase).

 Finally, customers then repay their credit card company for the goods or services purchased, either in full (in such cases the customer is referred to as a 'transactor') or just a portion of the balance on the statement (these customers are known as 'revolvers'). If they only pay back a portion to the credit-card company, then a loan is essentially extended to them for the outstanding balance and interest is charged on their account.