How Credit Card Processing Works

How Credit Card Processing Works Biz360

Pay with credit cards is quickly becoming the preferred payment option. Businesses and consumers are now embracing the various credit card processing technologies available. Plus, the number of consumers paying cash for merchandise decreases each day. Companies have no choice but to set up a credit card payment option or lose potential customers.

Pay by card fever is not a challenge for large and established enterprises alone. Small retail businesses as well are feeling the pressure. Because of this, business operators need to seek information on the inner workings of credit card processing. Though unnecessary, it's better to have a general understanding of how credit card processing works. So if you need this information, read on!

Before delving deeper, here is a list of key players and their roles in credit card processing.

  1. Cardholder: A customer who gets a credit card from an issuing institution for transactional purposes like buying.

  2. Merchant: A business owner with a card terminal allows credit card payment.

  3. Merchant bank: The acquiring bank provides business owners with accounts for payment processing.

  4. Cardholder bank: These include financial institutions that issue credit cards to cardholders.

  5. Payment processors: These companies act as the go-between merchants and acquiring banks. They facilitate credit card transactions.

  6. Card Schemes: These are also known as card brands, card associations, or credit card networks. They set fees and guidelines that businesses must adhere to before accepting their branded cards. Examples include Visa, Mastercard, and Amex.

The Process of Credit Card Processing

Credit card processing occurs in three stages: authorization, settlement, and funding. Interestingly, it only takes a few seconds to complete the entire transaction.

Let's check out each stage:


In this stage, all the key players mentioned above play a role.

The process involves the following steps:

Step 1: Involves the cardholder swiping, taping, or inserting their card into a card terminal to make payment. (or keying card number if it's an online purchase.)

Step 2: Merchant card machine transfers customer's card details to their acquiring bank or payment processor.

Step 3: The merchant service provider’s bank receives card details and sends them to the card network.

Step 4: The card brand routes the cardholder's purchase details to their issuing bank.

Step 5: The issuing bank receives cardholder information and can decline or approve the transaction, depending on the cardholder's account status. If the balance is enough, the process will be successful. But if the amount is insufficient, the bank will decline the transaction.

Step 6: The issuing bank responds to the merchant via card network and shows the transaction status (approved or declined).

Settlement and Funding

The settlement and funding processes take place simultaneously. As a cardholder's issuing bank settles payment requests made by the merchant bank after verification, it funds the merchant's account by depositing the requested amount. Also, both issuing and acquiring banks communicate and transfer money to a merchant account without involving the merchant or cardholder.

The Fees of Processing Credit Cards

Payment processing companies charge fees that apply per transaction. However, multiple parties beyond the cardholder and merchant charge fees for facilitating the transaction. These parties include issuing banks, acquiring banks/bank processors, and card brands.

Each party charges a fee on their part. For example, the issuing bank deducts an inter-charge fee before sending payment to the merchant bank. Also, the merchant bank takes a small fee before crediting payment into the merchant account. At the end of the transaction, the merchant receives less than what the customer paid.

In short, the processing fee charged on a credit card includes bank interchanges, card brand fee, and a percentage of the total transaction.


As a business operator, we expect you are now more informed on the above subject. So keep up with trends by installing a card terminal in your business. We hope you know that the credit card network is the latest wonder in the business world, which gives outlets the power to receive payments from customers across the globe. In addition, it's secure and takes a few seconds to process payment.

Reach out to us today.


PHONE: 888-803-3668

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