1. When you make a credit card purchase at a store (which we'll refer to as the merchant), their payment system submits the details of the transaction (including the amount and your credit card details) to the merchant's bank.

2. The merchant's bank then checks with your bank (the issuer) to make sure your credit card number is valid, the transaction type is valid (i.e. you're permitted to make credit purchases) and you have sufficient limit on your card to cover the cost of the transaction. If your bank approves the transaction, they will reserve the amount on your account then generate an approval code and send it back to the merchant's bank.

3. The merchant's bank then responds to the merchant's payment system and informs it that your transaction has been approved. The process up to this point takes only a few seconds. You can then leave the store with the goods, but the process does not end there.

4. The merchant's payment system stores all the approved transactions in a batch, then periodically (usually once per day, at the end of the business day) uploads that information to their bank. This is sometimes referred to as reconciliation. Anyone who has worked in retail has probably performed reconciliation before. If the transaction isn't submitted in the batch, or the merchant doesn't reconcile daily, the transaction remains valid for a certain amount of time (called the authorization hold) before it expires and the transaction amount is refunded to the customer. The length of the authorization hold is set by the merchant's bank.

5. The merchant's bank then collects up all the transactions from all its merchant customers and sends then to the appropriate issuer (the customer’s bank who issued their credit card). The issuer then credits the merchant's bank.

6. Once the merchant's bank is paid by the issuer, they pay the merchant, minus any transaction processing fees.

7. If the customer elects to dispute the transaction (because it was fraudulent, the amount charged was incorrect or the goods were never received), they contact the issuer, who return the transaction to the merchant's bank for resolution. The merchant's bank typically notifies the merchant by letter, who must decide whether to accept or contest the chargeback.

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