Confused about How Credit Card Processing Works?

With the number of credit card holders crossing the 450 million mark back in 2016, this is a population that significantly impacts business owners. Whether you run a brick-n-mortar enterprise or an online e-commerce website, credit cards have become a preferred mode of payment.

According to Statistia, 34% of people surveyed in a 2017 study reported that they use a credit/debit card most of the time and cash only occasionally. With cash and checks slowly fading away, plastic has emerged the front runner. Small business owners who have decided to start accepting credit card payments often feel that they need more basic information.

Cast of Characters

Though the actual operation seems simple and almost magical, the behind-the-scenes operations are highly complex and technical. Most payment operations are completed in a matter of seconds but there are a number of players involved in this process. They are:

  • Card associations: The four major card associations in the US are Visa, MasterCard, Discover and American Express. They regulate the industry and set rates, research security issues. Each association has its own network.
  • Issuing Banks: They print credit cards, and issue them to cardholders.
  • Acquiring Banks: These are members of card associations and have agreements with merchant services to accept deposits for card transactions.
  • Merchant Services Provider: These are independent companies handling sales/marketing of card processing services and providing customers with merchant accounts.
  • Payment Processors: They actually move the money from the cardholder’s account to the merchant’s account, assuming much of the risk associated with potential fraud or chargebacks.
  • Payment Gateway: enables communication between the Internet and the traditional banking network to facilitate online transactions.

How Does Credit Card Processing Work?

  • The cardholder swipes or dips their card or gives card information to merchant.
  • The merchant accepts the information in either a) a card physically present transaction in-store or mobile device b) a card not present transaction, such as an online transaction or phone order.
  • The card processing company collects this information and sends it to the appropriate card network.
  • The card network passes information to the cardholder’s bank.
  • The cardholder’s bank receives the information and does the necessary verification.
  • The information passed back through the networks and transaction is approved or declined.
  • The information returns through the same channels back to the merchant and based on whether it’s approved or declined, the goods or services purchased can then be given to the cardholder

While this is just a simple description of the actual processing route, it gives small business owners basic facts about the process. It’s important to understand how the system works so that you can identify all the players involved. Among other things, this helps you to make sense of any fees charged.

Processing fees are charged by card processing companies. They are typically based on factors like processing method (card present/not present), average transaction size, kind of business (high or low risk).

For more information if you are confused about how credit card processing works, or to sign up for a merchant account, please call (888) 924-2743 or go to

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