How Are Online Credit Card Transactions Processed?

9 min read • Published 17 March 2023
Written by Samarth Tandon

As more and more people are venturing towards online shopping, there are growing e-commerce platforms for all needs. In this era of simple payments and faster deliveries, online credit card transactions have become the norm. 

Online transactions are more convenient and hassle-free from the consumers’ end. However, to ensure safer transactions, it is essential for the customer to be aware of the process of online credit card transactions.

This blog will take you through the entire procedure from the customer paying for a product to the payment processing network that settles it.

How Are Online Credit Card Transactions Processed?

Here is a step-by-step guide on the journey of money from your end to the retailer when using credit cards.

Step 1: Initiation of Transaction

After adding items to the cart on an e-commerce website, a customer moves forward with their purchase. In the checkout menu, they will find various payment options that also include credit cards. 

For instance, you are purchasing Biriyani from Swiggy. As you reach the page for payment options, you can opt for credit card payment. Following this, you will need to enter your card’s CVV number. After this, the second step of data recognition begins.

Step 2: Payment Gateway and Data Encryption

With the help of data encryption, merchant accounts safely transfer your information to a payment gateway website. 

Going back to the previous example, after entering the CVV, a payment gateway page, say Razorpay, will open. This page will carry all your financial information. However, the payment gateway will not send the data to Swiggy. It will transfer this information to a payment processor, for example, VISA.

Step 3: Processing the Transaction

The payment processor (say VISA) for a credit card will make the final move for a payment. Here, you are required to enter your CVV again. Following this, you would require to enter an OTP to go ahead with the same transaction. The payment processor will send this code to your mobile number registered with the card and savings account. 

Once you enter the OTP, the successful transaction of funds will occur. Finally, the payment processor page will close and you will return to Swiggy’s order tracking page. 

Who Are Involved in Online Credit Card Transactions?

To understand the above online credit card transaction process clearly, you must know the entities involved here. The points below highlight the important members of this entire procedure. 

  1. Merchant

A merchant is the seller of certain goods or services that you wish to purchase. A merchant sets up the online payment system to accept credit/debit cards or UPI or cash payments. In the above example, Swiggy is the merchant, from whom you are purchasing Biriyani. 

  1. Consumer

The person who is purchasing from the merchant in exchange for online payment is the consumer. A consumer can pay the merchant from any given option, say, credit cards, debit cards, cash on delivery or UPI payment. 

For instance, as you are purchasing your favourite dish from Swiggy (merchant), you are the consumer. 

  1. Acquiring Bank

As the name suggests, an acquiring bank is one linked with the merchant. This bank receives any payment made by the consumer. When a transaction is processed, the amount is debited from the consumer’s account and credited to an acquiring bank account of a merchant. 

  1. Issuing Bank

This is the bank which issues credit or debit cards to consumers. When an online transaction is processed with a credit card, you borrow a certain amount from your card-issuing bank. This amount is subsequently transferred to the acquiring bank account of the merchant. On the other hand, with debit cards, the amount debited for your purchase comes directly from your bank account.

  1. Payment Gateway

This entity processes the online payment from the consumer to the merchant. Usually, payment gateways are pretty much like counters that are linked with the acquiring banks of merchants. These are connected via card networks and they process the transaction from issuing to acquiring banks. 

  1. Payment Processor

Payment processors allow safe transactions between merchants and consumers with online payment. Companies like Razorpay, Bill Desk, PayU, etc., act as payment processors where you enter sensitive information regarding your card. This processor site receives them and keeps them safe without sharing them with e-commerce sites. 

Benefits of Online Credit Card Transactions

There are a number of benefits of online credit card transactions that you can enjoy. 

  • Instant Transaction

To shop with credit cards, all you need to do is enter your CVV number after saving your card details. The e-commerce site will save all the basic details of your credit card. As a result, you do not need to enter them for every purchase you make. This saves a lot of time and is also better than a cash-on-delivery service. 

  • Less Risky

Credit cards are one of the safest financial instruments for e-commerce transactions. Credit card payments follow several layers of security checks before completing the transaction. This includes entering CVV into the payment gateway followed by OTP sent to the linked mobile number. This culminates in successful credit card payments. 

  • Travel Bookings

Booking flights, hotels and resorts are more rewarding with a credit card than with other modes of transaction. Furthermore, with regular credit card payments, you would receive AirMiles as a reward. By redeeming the same, you can gain free access to free flights and international and domestic lounges. These can ensure a memorable and luxurious trip around the globe for cardholders. 

  • Coverage of Fraudulent Activities

Credit cards offer theft insurance, these are liabilities from the credit card company’s end to address cases of card hacking. This adds up to your card’s safety feature on online shopping. This liability feature is not available with debit cards or any other payment methods. 

When a bank takes this liability, it clears all debts from cardholders after they pay a nominal fee. 

  • Attractive Offers

When you shop online with credit cards, you are likely to receive several discounts and other offers. Also, on timely repayment, you can earn cashbacks as well. These offers are rarely available with debit cards and UPI payments. 

Things to Keep in Mind Regarding Online Credit Card Transactions

Here are certain points that you must know while making online transactions with credit cards. 

  • Avoid Shopping from Unsecured Websites

To ensure safe transactions with credit cards while online shopping, consider avoiding unauthorised websites. You can understand the website’s authenticity with a glance at its portal link. 

If the link begins from “https://” and there is a lock sign before the web address in the address bar, it is a secured link. You can choose to shop using a credit card from here. Also, it is better to purchase from renowned websites, if you are opting for online payments.   

  • Create Strong Passwords

To keep your information safe and avoid illegal transactions, ensure to use strong passwords. A password which is a mixture of numbers, alphabets and signs is considered strong. Also, consider avoiding predictable passwords for your credit card PIN. This includes your date of birth or your spouse’s date of birth.

Furthermore, you would also need to change your passwords every two to three months to maintain their safety.

  • Opt for the Mobile OTP Option

Most popular e-commerce sites offer several credit card payment options to cardholders. This includes OTP payments and a 3D PIN payment option. The latter requires you to enter a certain pin to make a successful payment from your credit card. This can be risky in case your card gets stolen or the PIN is leaked. 

Therefore, always opt for the OTP option to make credit card payments on e-commerce sites. With this, whenever, you or anyone will conduct an online transaction using your card details, you will receive an OTP on your phone. Only by providing the same, the transaction will move forward. 

In this way, you will always receive a direct alert whenever an unknown transaction occurs with your credit card. 

  • Refrain from Saving Your Card Details

Most often, to save time, we tend to save our card details on e-commerce sites. This saves time while shopping as you do not need to re-enter them for purchase a second or third time. However, if more than one person is using your e-commerce profile, there are chances of misuse of your details without your knowledge. 

To avoid such instances, avoid saving these credentials to the platform. This will also prevent the misuse of your card details by any hacker on the e-commerce platform. 

Final Words

Although the online credit card transaction process looks crisp and simple on the consumer’s end, a handful of entities work together to make it secure. Consider following the proper cyber safety protocols when making any online transaction with your credit card. Furthermore, avoid making any online credit card transactions with public Wi-Fi to ensure safe online payments. 

Frequently Asked Questions

What is a 3DS transaction?

Any online transaction that you conduct using your card is a 3DS transaction. This stands for 3 Domain Secure Transactions. The issuing bank, acquiring bank and card networks are the three domains that participate in this transaction and hence, this name.

Why is the card number essential information?

The card number is a set of digits present on the front of your card. The very first digit of your credit card number signifies the card network. To access your credit card, anyone would need physical access to the card, or its card number and CVV. That is why you should keep this information secured.

What is a card network?

Card networks are also known as card schemes or card brands. Visa, MasterCard, and RuPay are a few examples of popular card networks. These networks assist to connect issuing and acquiring banks during an online credit card transaction. Your credit cards carry the logo of their card networks.

Does online shopping with credit cards improve my credit score?

Using your credit card for making any online purchases can offer a significant boost to your credit score provided that you pay your bills on time. However, too frequent credit card purchases can lead to you exceeding your credit limit, which can lower your credit score.

Was this helpful?

Samarth Tandon

Investment Principal
Worked with more than 50 institutions for their Debt raise post MBA. Previously worked with Northern Arc, Unitus Capital, Nomura and Darashaw.

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