How Does Online Credit Card Processing Work?

Online credit card processing enables businesses to accept payments over the internet, forming the financial infrastructure for e-commerce. This system facilitates the seamless exchange of funds, connecting customers and merchants across digital platforms and supporting countless daily transactions.

Understanding the Key Participants

Online credit card transactions involve several key participants. The process begins with the cardholder, who initiates a purchase by providing payment details to a merchant.

The merchant is the online business accepting credit card payments. Merchants use a payment gateway to securely handle customer payment information. The gateway encrypts sensitive transaction data and transmits it from the merchant’s website to the payment processor.

The payment processor manages credit card transactions, routing data between banks and networks. It mediates fund transfers from the customer’s account to the merchant’s. The acquiring bank, or merchant bank, maintains the merchant’s account and receives funds from the issuing bank.

The issuing bank is the financial institution that issued the credit card to the customer, authorizing transactions and managing the cardholder’s account. Card networks, such as Visa, Mastercard, American Express, and Discover, connect these banks, providing infrastructure for communication and data transfer.

The Online Credit Card Transaction Flow

An online credit card transaction begins when a customer enters payment details on a merchant’s website and clicks “Pay Now.” The payment information is securely transmitted to the payment gateway, which encrypts this sensitive data.

The encrypted data then travels from the payment gateway to the payment processor. The processor forwards the request to the relevant card network, which routes it to the customer’s issuing bank.

The issuing bank evaluates the transaction based on factors like available funds and potential fraud, then approves or declines it. This decision is sent back through the card network, processor, and gateway, which communicates the status to the merchant’s website and the customer.

Following approval, the transaction moves into the settlement phase, typically at the end of the business day. The merchant’s approved transactions are batched and sent to the acquiring bank. The acquiring bank requests funds from the issuing banks via the card networks. Once transferred, funds are deposited into the merchant’s bank account, usually within one to three business days.

Ensuring Transaction Security

Securing sensitive cardholder data is crucial in online credit card processing, involving multiple layers of protection. Encryption transforms sensitive information, like credit card numbers, into an unreadable format using complex algorithms. Transport Layer Security (TLS), the successor to SSL, is a common encryption protocol that establishes a secure connection between a customer’s browser and the merchant’s server.

Tokenization replaces sensitive card data with a unique, non-sensitive identifier called a “token.” This token processes payments without exposing original card details, which are stored securely. If a data breach occurs, only these valueless tokens are compromised, reducing fraud risk.

Compliance with the Payment Card Industry Data Security Standard (PCI DSS) is mandatory for all entities that process, store, or transmit payment card information. This standard outlines twelve requirements to create a secure environment for cardholder data, including firewalls, data protection, encryption, and access controls. Adherence to PCI DSS helps prevent data breaches.

Fraud detection tools are employed by processors and banks to identify suspicious transactions. These include Address Verification Service (AVS), which verifies the cardholder’s billing address, and Card Verification Value (CVV) checks. Machine learning algorithms also analyze transaction patterns to detect anomalies, adding defense against financial crimes.

Associated Costs and Fees

Merchants incur several fees when accepting online credit card payments. Interchange fees are the largest component, typically 1% to 3% of the transaction. These are paid by the acquiring bank to the issuing bank, compensating for card issuance, account management, and payment risk. Rates vary by card type, transaction type, and industry.

Assessment fees are charged by card networks (e.g., Visa, Mastercard) directly to the acquiring bank. These cover network operating costs and are typically 0.15% to 0.25% of the transaction. Unlike processor markups, interchange and assessment fees are non-negotiable, set by networks and issuing banks.

Processor markup fees are charged by the payment processor as their profit. These can be structured as a percentage of each transaction, a flat fee per transaction, or monthly service fees. The markup is often negotiable, especially for businesses with higher sales volumes.

Payment gateway fees are specific charges for using the gateway service, which securely transmits transaction data. These can include monthly fees, per-transaction fees, and setup costs. Merchants may also encounter PCI compliance fees, which are annual or monthly charges from some processors.

Chargeback fees are incurred when a customer disputes a transaction, leading to a reversal of funds. The payment processor charges a fee to cover administrative costs, typically $20 to $100 or more per incident. Common pricing models include interchange-plus, where the merchant pays direct interchange and assessment fees plus a processor markup, and flat-rate pricing, which charges a fixed percentage plus a per-transaction fee. Tiered pricing categorizes transactions into different rates based on risk.