How Credit Card Processing Works

Credit card processing is the sequence of steps that allows a business to accept credit card payments securely and efficiently. This process enables seamless financial exchanges between consumers and merchants, ensuring funds are verified and transferred from a cardholder’s account to a business’s account.

Key Participants

Credit card processing involves several entities. The cardholder is the individual who possesses the credit card and initiates a purchase. The merchant is the business accepting the credit card as payment.

Financial institutions and technology providers support these transactions. The issuing bank provides the credit card directly to the consumer, managing their account and credit line. The acquiring bank maintains the merchant’s account and receives funds on their behalf.

Card networks, such as Visa, Mastercard, American Express, and Discover, connect these banks. They act as intermediaries, routing transaction information between issuing and acquiring banks and establishing payment standards. The payment processor serves as a technological conduit, facilitating the secure exchange of transaction data among the merchant, card networks, and banks.

The Transaction Flow

A credit card transaction unfolds through a series of interconnected stages. It begins the moment a card is presented and concludes with the transfer of funds.

Authorization

This stage begins when a cardholder presents their card at a point-of-sale terminal or through an online gateway. The merchant’s system transmits transaction details, including card information and purchase amount, to the payment processor. This request routes through the card network to the issuing bank. The issuing bank assesses the cardholder’s account for sufficient funds or credit and verifies the card’s validity, sending an approval or decline response back to the merchant’s system, typically within seconds.

Batching

Following authorization, the merchant engages in Batching. Approved transactions are held in a batch by the merchant’s processing system. At a predetermined time, the merchant sends this compilation of authorized transactions to their acquiring bank or payment processor. This step consolidates multiple transactions for efficient processing.

Clearing

The next phase is Clearing, where transaction data from the batch is communicated across the payment ecosystem. The acquiring bank forwards the batched transaction data through the card network to the respective issuing banks. The card network facilitates the formal request for funds from the issuing bank to cover the authorized purchases. The issuing bank then processes these requests, converting the temporary hold on the cardholder’s account into a permanent charge.

Settlement

Finally, Settlement occurs, which is the actual transfer of funds. After the issuing bank confirms the charges during clearing, the funds, minus certain fees, are transferred through the card network to the acquiring bank. The acquiring bank then deposits these net funds into the merchant’s designated bank account. This final step typically completes within one to three business days from the initial transaction.

Understanding the Costs

Accepting credit card payments involves various fees that merchants incur, typically ranging from 1.5% to 3.5% of each transaction’s total value. These costs are distributed among different entities.

Interchange Fee

The largest portion of these expenses is the Interchange Fee. This fee is paid by the acquiring bank to the issuing bank for each transaction and compensates the issuing bank for the value and risk associated with the payment. Interchange rates are set by card networks, such as Visa and Mastercard, and vary based on factors including card type, transaction method, and merchant’s industry. These fees can range from approximately 1.30% to 2.90% of the transaction amount, often with an additional fixed fee per transaction, such as $0.10.

Assessment Fees

Merchants pay Assessment Fees directly to the credit card networks. These fees cover the operational costs of maintaining and developing the network infrastructure that facilitates secure and efficient transaction routing. Assessment fees are non-negotiable and applied consistently across all merchants using a particular network. These typically fall within a range of 0.11% to 0.15% of the transaction amount, sometimes combined with small per-transaction fees.

Payment Processor Markup

The final component is the Payment Processor Markup, the fee charged by the payment processor for their services. This is the processor’s compensation for providing technology, customer support, and other services that enable a merchant to accept card payments. This markup can be structured in various ways, including a flat percentage, a fixed per-transaction fee, or a combination of both. Unlike interchange and assessment fees, the processor’s markup is generally negotiable, especially for businesses with higher transaction volumes.

Acceptance Methods

Merchants employ diverse methods to accept credit card payments, catering to various business models and customer preferences. These methods represent the initial point where card information is captured to begin the processing flow.

Point-of-Sale (POS) terminals

One common method involves Point-of-Sale (POS) terminals, physical devices found at checkout counters in retail stores and restaurants. These terminals read credit card data through magnetic stripe swipes, EMV chip insertions, or contactless taps using Near Field Communication (NFC) technology. After capturing the card information, the POS terminal securely transmits transaction details to the payment processor, initiating the authorization process.

Online Payment Gateways

For online businesses, Online Payment Gateways are the standard mechanism for accepting card payments. A payment gateway acts as a digital bridge, securely connecting a merchant’s website or e-commerce platform to the payment processing network. When a customer enters card details during an online checkout, the gateway encrypts this sensitive information and performs immediate fraud checks before transmitting the data to the acquiring bank for authorization. These gateways ensure the security and integrity of card-not-present transactions.

Mobile Card Readers

Mobile Card Readers provide flexibility for businesses that need to accept payments on the go. These compact, portable devices typically connect wirelessly via Bluetooth or physically through a port to a smartphone or tablet. They allow merchants to accept card payments by swiping, inserting, or tapping cards, similar to a traditional POS terminal, with transaction details processed through a dedicated mobile application. Mobile card readers are beneficial for mobile vendors, service providers, or pop-up shops.