What is Credit Card Processing and How Does it Work?

Credit cards are the number one payment method for consumers in Europe, and according to our data, 77% of customers in Spain chose to pay with a credit card during Black Friday and Cyber Monday in 2021 — one of the busiest shopping periods of the year. So, if you’re not already accepting credit card payments, you should be. But in order to do this, you’ll need to find a payment service provider (PSP) that offers credit card processing. 

But what is credit card processing and how does it work? Credit card processing refers to the internal operations required to complete payments made with a credit card, whether it be in person, online, or over the phone. 

Read on to learn more about what credit card processing is, the key players in credit card transactions, frequently asked questions about the processing of credit card payments, and more.

Table of contents

• How does credit card processing work?
• How to find a credit card processing system
• What does credit card processing cost?
• Credit card processing frequently asked questions
• Ready to start accepting credit card payments?   

How does credit card processing work?

Understanding your business’s internal processes is key to getting paid on time and keeping your business running smoothly. That’s where knowing the ins and outs of how credit card processing works comes in.

The process begins with a customer presenting their credit card information for payment. This can be done in different ways depending on where the customer is paying:

• For in-store or restaurant payment, customers tap contactless cards, swipe magnetic stripe cards, use EMV chip cards, or use digital wallets like Apple Pay via their mobile devices.
• For online payment, customers can enter their credit card information on your e-commerce payment page, but you’ll need to integrate your website with a payment gateway that supports card payments. 
• For payments done over the phone, customers may speak to a support representative and verbally provide their credit card information. 

After the customer submits the payment, it gets sent to the payment processor. The processor communicates with the customer’s bank, which either approves or denies the payment transaction. If the card number is correct, the customer has sufficient funds in their account, and their CVV (security) number is valid, then the payment can be sent via credit card. Then the payment is wired through your payment processor and back to your credit card reader (in-store) or payment gateway (online) to complete the process.

To further understand how credit card processing works, let’s examine the key players in the process and analyze each step of credit card processing:

The key players in credit and debit transactions

The parties involved in credit and debit transactions are as follows:

• Cardholder. A customer who obtains a credit (or debit) card from an issuing bank and proceeds to use the linked bank account to pay for goods or services.
• Merchant. Businesses that accept credit card payments in exchange for the goods or services that you provide customers with.
• Payment gateway. The virtual equivalent of a physical point-of-sale system that handles online transactions. It encrypts and transmits information to the payment processor, provides integrations and APIs for e-commerce platforms, and receives authorization from banks to pass money from the customer to the merchant.
• Payment processor. A service that conveys the necessary transaction information between the merchant, the issuing bank, and the acquiring bank. You need both a payment gateway and a payment processor to handle credit card transactions. The payment gateway handles the beginning and end of the transaction while processors move the required information from point to point.
• Acquiring bank. The bank that hosts your credit card processing account as a merchant.
• Issuing bank: Any bank that hosts the customer’s credit card.
• Card schemes or networks: Paid services that set the guidelines and technical infrastructure for credit and debit card payment processing. They set interchange rates and qualification rules, and are the mediator between issuing banks and acquiring banks. Visa, Mastercard, American Express, Discover, and UnionPay are some of the world’s largest card networks. 

📚 Further reading:

• Acquiring Bank vs Issuing Bank: 3 Minute Guide
• What’s the Difference Between a Payment Gateway and Virtual POS?

The steps of credit card processing

Credit card processing involves the following steps: authorization, settlement, and funding.

The first step is the authorization phase:

• The cardholder presents their card either in-person, online, or over the phone in exchange for goods or services that you provide. 
• Your payment gateway sends a request for payment authorization to your chosen payment processor.
• The payment processor submits the transaction to the specified card network, which then reaches the issuing bank.
• The issuing bank approves or declines the transaction, then sends the status back to the card network, your bank, and then to you directly.

In the settlement phase:

• Your payment gateway sends batches of authorized transactions to your payment processor.
• The payment processor then passes the authorized transaction details to the associated card networks, which communicate the debits with the relevant issuing banks.

Lastly, in the funding phase:

• The issuing bank charges the cardholder’s account for the transaction amount before transferring the funds to your business bank account (minus interchange fees).

How to find a credit card processing system

When it comes to finding a credit card processing system that suits your business needs, it goes beyond simple fees or which payment methods it supports.

Here are the critical things you should evaluate when determining which credit card processing system is right for you:

Costs of working with a credit card processor

All credit card processing systems have fees. However, the costs of working with one don’t end there.

Before committing to a credit card processor, determine the following:

• The size of your business
• Your payroll
• Your expenses

This will ensure that you choose a processor that has fees that align with your current budget. 

Transaction speed of the credit card processing system

The credit card processor you choose should convert transactions quickly, whether it be a singular transaction or a large volume of them.

Aim for a transaction speed of under five seconds to keep shoppers happy and avoid abandoned carts (online) or long lines (in-store).

Alongside speed, there is another factor that is as important to your customers as it is to you: minimal service interruptions.

Steps to minimize service interruptions

Frequent service interruptions can cost you both time and customer retention. 

To make sure your business is consistent, reliable, and trustworthy, choose a credit card payment processing system that has a strong uptime history. This refers to the length of time in which a piece of equipment or app is consistently functioning or is able to function.

If a piece of equipment or app has a long uptime history, then you know it has experienced very few service interruptions. You can also ask how the processor has minimized service interruptions in years past.

Credit card fraud protection

Security regarding your credit card transactions should be one of your top priorities.

To guarantee this, select a credit card processor that focuses on:

• Payment Card Industry (PCI) compliance
• Mastercard and Visa (EMV) compliance
• Having a track record of being on the cutting edge of security, such as using tokenization or end-to-end encryption
• Having suitable insurance to cover your business in the worst-case scenario 

📚 Further reading: What is PCI Compliance? Standards, Benefits, Risks

Access to customer support

Is the customer support of your chosen credit card processor reliable, readily available, helpful, and responsive?

Then you know that you’re in good hands.

Good credit card processors should have close to 24-7 customer support via a combination of live chat, email, support articles, and telephone so you and your team can easily get a hold of them in the case of an emergency.

Intuitive interface and compatibility with your most-used credit cards

Accepting card payments should help you increase efficiency and conversion rates. That’s why it’s important to use a credit card processor that’s easy to use and supports the most popular credit cards. 

Additional services included

Some credit card processing systems may offer additional services.

Depending on your business’s needs, it may be worth investing in one that offers:

• Payroll management to quickly and easily view and manage your payroll
• Inventory organization options to ensure that restocking, pausing, or re-scheduling orders can be done from one interface
• Customer engagement to provide discounts, a gift with purchase, or reward points to thank long-time customers for their loyalty

What does credit card processing cost?

Now that you know what to look for in a credit card processing system, let’s outline what credit card processing costs are.

Credit card processing fees

Fees for accepting credit cards are split into three kinds:

• Processing fee. The costs you must pay to process credit card payments. These fees are not fixed and, in many cases, include payments to multiple parties (such as banks).
• Interchange fee. Also known as interchange rates or interchange reimbursement fees, interchange fees are transaction fees that you must pay to the issuing bank each time a customer purchases from your business using a credit or debit card.
• Service or assessment fee. International processing fees charged when a customer uses a credit card or debit card issued by a bank outside of your business’s country of origin — this is also known as a cross-border fee.

Payment processor pricing models

Most commonly, you’ll come across the following pricing models:

• Flat-rate pricing model. You pay a fixed fee for all credit and debit card transactions. Within this pricing model, card-present transactions typically have a lower flat rate than transactions where the card is not physically present. 
• Tiered rate pricing model.  You pay a fee based on the card type used in each transaction, the level of risk of each transaction, and the overall transaction volume of your business. This pricing model is also called a dynamic pricing model.  
• Subscription pricing model. You pay a flat service fee on a monthly basis alongside a per-transaction fee. 
• Interchange++ pricing model. You pay a percentage of the transaction plus a fixed per-transaction fee. Interchange rates are set by card networks and are influenced by factors like card type, transaction regionality (domestic or cross-border payments), and transaction type (online or in-person). This pricing model is most commonly used across Europe and North America.

Ready to start accepting credit card payments?  

Now that you know more about what credit card processing is, how it works, and how to find a credit card processing system that works best for your business. It’s time to start accepting credit card payments. 

📌 Start by opening your MONEI account and credit card payments will be configured in your account by default. And when you’re ready, you can contact support to upgrade your plan and enjoy the benefits of routing card payments (like increased transaction approval rates) using payments orchestration. 

Alexis Damen

Alexis Damen is the Head of Content at MONEI. She loves breaking down complex topics about payments, e-commerce, and retail to help merchants succeed (with MONEI as their payments partner, of course).