Online credit card transaction

Online credit card transactions are processed in much the same way that in-store purchases are, with the major differences being that online merchants never see the actual card being used, no card impression is taken, and no signature is available. Online credit card transactions most closely resemble Mail Order-Telephone Order (MOTO) transactions. These purchases are also called Cardholder Not Present (CNP) transactions and are the major reason that charges can be disputed later by consumers.

There are five parties involved in an online credit card purchase: consumer, merchant, clearinghouse, merchant bank (sometimes called the 'acquiring bank'), and the consumer's card-issuing bank. In order to accept payments by credit card, online merchants must have a merchant account established with a bank or financial institution. A merchant account is a bank account that allows companies to process credit card payments and receive funds from those transactions.

An online credit card transaction begins with a purchase. When the consumer wants to pay, a secure tunnel through the Internet is created using SSL/TLS. Using encryption, SSL/TLS secures the session during which credit card information will be sent to the merchant and protects the information from interlopers. SSL does not authenticate either the merchant or the consumer — the transacting parties have to trust one another.

Once the merchant receives the credit card information, the merchant software contacts a clearinghouse — a financial intermediary that authenticates credit cards and verifies account balances. The clearinghouse contacts the issuing bank to verify the account information. Once verified, the issuing bank credits the account of the merchant at the merchant's bank (usually in a nightly batch process), and the debit to the consumer account is transmitted in a monthly statement.