PaylobbyGuides › Payment by credit card - how does the process works?

Payment by CreditCard

Definition of credit card

Which payment method is the most widely used can vary a lot from a country to another. For example, in Germany, debit cards (EC) are more popular than credit cards, as few people know how credit cards work. A credit card can be used to withdraw money at ATM machines or for cashless payments. Unlike the debit card, the credit card can be overdrawn. As a means of payment, the credit card is attractive because it grants the user a "variable consumer credit". The credit limit depends on the creditworthiness of the customer.

The payment process by credit card

Five players are involved in the credit card process. In addition to the cardholder and the merchant, the dealer bank (acquiring bank), the bank that issued the credit card (issuing bank) and the card company play a key role in the transaction process. In the first step, a customer submits his credit card to make a purchase. The merchant bank (acquiring bank) then contacts the bank of the cardholder (issuing bank) and checks its creditworthiness. This is done through the intermediary of a credit card company. Visa and Mastercard are among the largest companies on the European credit card market. These two credit cards payments are accepted almost everywhere in Europe. The credit card companies issue licenses to banks allowing them to issue credit cards. This is taken over by the banks. The credit card provider works so to speak as an intermediary and authorizes the card data. After the cardholder's creditworthiness has been checked, the issuing bank authorizes the transaction and forwards the response to the merchant. The issuing bank transfers the payment to the dealer bank and the money is credited to the merchant's account. The transaction has been completed.

For example, a customer has an account with the Savings Bank and has applied for his Mastercard credit card, with which he now wants to pay his train ticket to Italy. The bank of the train company, i.e. the dealer bank, now checks the data on the Mastercard credit card company and then checks and authorizes the customer's credit card data at the savings bank.

Why is it worth it for banks?

Banks usually charge an annual fee for credit cards. An interest rate is applied. Additional fees are also added if minimal payment is not covered in time. Furthermore, disagio makes credit card payments to the banks a worthwhile business. This is a form of commission that is paid by the dealer bank (acquirer) to the bank of the cardholder (issuer). This means additional costs for the dealer. The level of disagio varies. In normal cases, it varies between 3 and 5 percent.


Is the credit card accepted as a payment option for merchants? We have listed the advantages and disadvantages.

Advantages for merchants

- Approx. 20 percent of Germans own a credit card
- Approx. 35 million cards are in circulation in Germany
- Customers with credit cards usually have a higher budget
- High security standards (e.g., 3D Secure)
- The ability to pay with many credit cards is crucial for the conversion rate
- Global payment method

Disadvantages for traders

- Relatively high processing fees
- Risk of a chargeback

Without a credit card nowadays, few leave the house. But what advantages and disadvantages does the credit card have for the customer?

Benefits for customers

- Granting of a short-term loan (until the end of the month)
- Accepted in more than 200 countries
- Can usually be used free of charge when traveling
- One of the safest payment methods for online purchase worldwide
- Many different insurance services offered (e.g., insurance against theft)
- Many online shops accept the credit card as a means of payment
- Reduction of the risk of loss of cash

Disadvantages for customers

- Because the credit card company charges transaction fees to merchants, smaller online shops might choose not to accept credit cards
- Partially higher fees
- Risk of interest payment, if the invoice is not paid in time

Credit cards safety procedures

On the one hand, traders take advantage of the low fees. On the other hand, the increased safety regulations have a negative impact on user-friendliness. Since November 2015, "two-factor authorization" has been the new standard for online transactions. Customers who want a higher security standard can use 3D Secure method (e.g. Verified by Visa or Mastercard SecureCode). The buyer must enter his credit card number. The card issuer is then contacted and the buyer can confirm his identity using a code. If the authentication is successfully completed, the credit card payment is carried out. More than 70 percent of dealers use the 3D Secure method. As mentioned, the new safety precautions also has some down sides.  Most retailers (61%) observed an increase in the disruption of payments with the 3D Secure method. From January 2018, two-factor authentication will also affect other means of payment. It remains to be seen what impact this has on the use of credit cards.

 

Request a free quote?

AGBs*

  • I accept the terms and condition and privacy policy

Payment Guide
Debit cards

Debit cards

Debit cards are an integral part of daily payment transactions. Find all important information about them here.

Fraud prevention tools

Fraud prevention tools

Finding the right combination of tools to automatically screen fraud is essential to a good fraud prevention strategy. Learn more here.

Payment Gateway

Payment Gateway

What is a payment gateway and how does it work? Here you will find the most important terms for the payment gateway.

Blacklisting and Whitelisting

Blacklisting and Whitelisting

Blacklists and whitelists are among the common mechanisms for fraud management among e-commerce companies. Read all the information here.

Payment Provider for Games

Payment Provider for Games

This guide will bring light on what to pay a particular attention to when choosing the right partner as well as information on established PSP in the gaming industry.

E-Wallet

E-Wallet

How does the newest payment method, E-Wallet, differentiate itself from traditional payment systems?

Direct Debit

Direct Debit

The debit system is still an extremely popular method of payment. Find out what you have to take into consideration when offering this payment method.

Prepaid Cards

Prepaid Cards

The alternative to credit cards is prepaid cards. Find out what sets this method apart from others.

Credit Cards

Credit Cards

Credit card payments are becoming more popular online. Find out which advantages and disadvantages this method has and what you should take into consideration.

International E-Commerce

International E-Commerce

The preferred payment method varies from country to country. Find out what your ideal entrance into the international E-Commerce payment system looks like.

Online Shops and Mobile Payment

Online Shops and Mobile Payment

M-Payment in online shops is becoming more and more common. Find out how mobile payment works and how Apple and Co. are positioning themselves in the market.

Online Payment Systems

Online Payment Systems

Find out which payment systems are the most popular on the internet and understand the pros and cons of each.

Criteria for Choosing a PSP

Criteria for Choosing a PSP

Learn which aspects you must pay attention to when you search for a suitable payment provider. Here you’ll find the most important criteria.