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Confused? Credit Card Processing Explained

While it’s not critical to have the complete lowdown on how credit card processing works, it can help to have a broad understanding. A general idea of the basics can help you to find the best credit card processing company to suit your business’s unique needs, your preferences, and your budget. You can compare fees across different processors and discover potential cost-savings areas. A better understanding of the process can enable you to make smarter decisions and gain better insights into where your money is going, and how to make sure that as much of it as possible gets to you.

Cast of Characters

There are many parties involved in the process. They include:

  • Business-owner or merchant
  • Cardholder who makes the purchase
  • Card associations who govern and regulate the card industry, set norms and rates, improve/maintain networks
  • Merchant bank, which is the business-owner’s bank that accepts funds and allocates them to your account
  • Card-holder’s bank or issuing bank, which pays the merchant bank for purchases made by the cardholder. This has to be paid back by the cardholder to the issuing bank according to agreed-upon terms and conditions.
  • Payment processing company, which processes the purchases made via card payment, authorizes the transaction, and moves the funds from the cardholder’s account to the business owner’s account.

How Does Credit Card Processing Work?

When a purchase is made, all the parties listed above play an important role in the process. Breaking it down, the entire process involves authorizing, settling, and funding. It can be described as a sequence or series of steps:

  • The customer pays for a purchase using a credit card
  • The credit card is swiped or read by a terminal that recognizes the card and connects with the card company which authorizes/rejects it
  • If authorized, the credit card company forwards the payment amount to the merchant bank
  • The amount is deposited in the merchant’s bank account
  • The credit card company’s fees are calculated at the end of the month and a complete statement is provided to the merchant

As a small business owner, It’s important to find the right credit card processing company that best serves your requirements. It’s worthwhile to spend the time and effort to understand the process and shortlist a few companies that appear likely to suit your needs. Fraud and identity theft are of most concern to customers, while fraud, high processing fees, hidden extras and chargebacks are the bane of the business owner.

Keep a list of questions ready to ask them. The areas that most need attention are transaction speed, reliability, uptime, equitable and transparent rates, and top-quality customer support.

Analyze your business model and decide whether it’s big or small ticket, high or low volume, and so on. Card associations usually set the rates for interchange and also decide which businesses are considered “high-risk” where higher processing fees are charged.

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

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