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Evolution of Credit Card Processing

When cash was virtually the only tender type for purchases, a Sale transaction consisted of totaling a bill and exchanging money and receipts. Today, however, most merchants find that accepting checks and credit or debit cards as tender is the only way to maintain or purchase their market share.

The greatest obstacle to accepting these additional forms of tender is that merchants are held to a set of rules and regulations outside their control. The card cooperatives, such as Visa and MasterCard, continually enhance their requirements in order to reduce fraud and chargebacks.

Verification of credit cards begins the process of authorizing their use. First, anyone accepting a credit card must always compare the signature on the card with the one on the receipt. Next, the banks or companies that issue the cards authorize their use.

The authorization process began with weekly Warning Bulletins, printed on newsprint. The merchant would look up the credit card number and refuse to accept any card listed in the bulletin.

To keep the authorization information more current, Voice Authorization Centers were established. With this method, the merchant called an 800 telephone number, read the card number, and noted an authorization code on the receipt. As you can imagine, both Warning Bulletins and voice Authorization methods left much margin for error.

The two methods mentioned above led to the electronic transaction, where the merchant keyed the card number into a stand-beside terminal, or better yet, the stand-beside terminal read the card number from the magnetic stripe encoded on the card. This authorization method greatly improved security, since the electronic transaction could be sent via telephone lines to a transaction processor, then switched to the issuing bank. The issuing bank authorizes or declines the use of a card at the time of use. Electronic transactions also provide merchants with reduced cost of transactions and faster monetary transfer.

The stand-beside terminal, however, left much to be desired from the merchant's point of view. First, valuable counter space was taken up by the terminal and its printer. Added bookkeeping procedures involved reconciling the credit transactions with all transactions run through the POS system. Duplicate receipts and separate telephone lines for each stand-beside terminal added to real cost, procedural time, and training.

Next: Advances Since the Stand-Beside Terminal >>