Skip to content
Home » Blog » Credit Card Payment Processing: What It Is And How It Works

Credit Card Payment Processing: What It Is And How It Works

A person using a credit card on a laptop to purchase something from an online merchant.

If you’re looking to take credit card payments for your small business, you’ll need to understand what credit card payment processing is and how it works. Processing credit card payments is a routine part of business for many companies. 

Payment processors can help you quickly process credit cards from your customers no matter if it’s online, in person, or through another method. They add a level of security and several other benefits to the payment process to benefit your business and your customer.

A woman in a blue shirt accepting a credit card from a customer that will be processed through credit card payment processing.

What Is Credit Card Payment Processing?

Credit card payment processing occurs when a card processor works as a middleman between the credit card company and the merchant accepting the payment. Funds transfer from the customer’s credit account to the merchant’s account when they make a purchase, and the processor facilitates the process.

A person using a laptop and credit card to pay a merchant through a merchant's payment gateway for credit card payment processing.

Who Is Involved In The Credit Card Payment Process?

There are several key players in the credit card payment process, including:

  • Credit Card Networks: A credit card network determines when a particular credit card is accepted and sets the fees for each transaction. There are four major credit networks, Visa, Mastercard, American Express, and Discover. 
  • Cardholder: The cardholder is the customer that is making a purchase with a credit card
  • Issuing Banks: The issuer gives the cardholder the right to use the card, determines the credit limit, and approves or declined transactions. Most credit cards are issued by banks that partner with Visa or Mastercard. American Express and Discover typically act as both the credit card network and issuer.
  • Merchant: The merchant is the business that is receiving the payment from the credit card. 
  • Credit Card Processors:  A credit card payment processor is a company that a business hires to process credit card payments. Credit processors provide business access to a merchant account through a bank.

Credit Card Payment Processing Stages

Credit card payment processing happens in just seconds, but in that short time, the credit card process is very involved. Credit card payment processing includes the following steps:

  1. Authentication And Authorization

This stage is where the merchant and cardholder interact either in person, over the phone, or online to complete the transaction. The process occurs in a few steps:

  • The cardholder presents a credit or debit card to the merchant for payment. This can happen in person, online, etc.
  • The merchant sends a request through the payment portal to the cardholder’s bank to approve or decline the transaction.
  • The payment processor gets the merchant’s authorization request and transaction information and forwards it to the credit cards network such as Visa, MasterCard, American Express, or Discover.
  • The credit card network gets the information from the payment processor and sends it to the cardholder’s issuing bank for authentication. 
  • The issuing bank checks the transaction details against the cardholder’s account balance or line of credit and then approves or declines the transaction. The issuer sends the approval or denial back to the credit card network. If the transaction is approved, the issuer also places a temporary hold on the cardholder’s account for the transaction amount.
  • The credit card network sends the bank’s response to the payment processor.
  • The payment processor sends the bank’s response to the merchant payment portal.
  • The merchant receives the response and issues a receipt to the cardholder.

2. Clearing and Settlement

Even after the initial transaction is processed, money still needs to change hands, processing fees still need to be paid, and the funds need to transfer from the card to the merchant’s account. 

Clearing and settlement happen in several steps:

  • The merchant sends the payment processor a “batch” of approved payment requests through the payment portal.
  • The payment processor sorts the transactions and sends them to the appropriate credit card network.
  • The credit card network sends the transaction details to the card issuing bank.
  • The issuing bank then debits or charges the cardholder’s account, takes the interchange fees due to the issuing bank, and sends the remaining amount to the merchant’s payment processor.
  • The payment processor then sends the funds to the merchant’s bank, which deposits the money, minus fees, in the merchant’s bank account.

Processing Fees

Blocks spelling out the word fees surrounded by blocks that have percent signs on them to symbolize processing fees.

Transaction fees can be broken down into wholesale and markup costs. Wholesale fees or interchange fees are charged by the card issuing bank and card network. Markup fees are charged by the credit card processor and credit card processing gateways which can be negotiated. 

Processing fees include: 

  • Interchange Fees: The interchange fee is a standard non-negotiable that is the cost of processing the transaction, the payment approval risk, and the risk of fraud. This fee is collected by the cardholder’s bank and is a percent of the total transaction. 
  • Service Fees: This fee is also non-negotiable and is charged by the card network. This fee is a small percentage that can be affected by transaction volume and the risk level assigned to you by the card network.
  • Processing Fees: Each payment processor charges their own fees, and it varies. 

Choosing Payment Processing Gateways 

Credit card payment gateways are just as crucial to the success of your business as the bank you choose. Gateway credit card processing is about more than the fees or the payment types you can accept. The best credit card payment processing should provide reliable, cost-efficient, and secure service. 

When choosing a gateway for processing credit card payments, search for these things:

Fraud Protection And Security

To protect your business and customers from fraud, you will need to choose a credit card processing gateway that provides security, including:

  • PCI compliance
  • EMV compliance
  • Option to enter additional card information such as security codes or the customer’s zip code for the card.
  • An excellent track record of staying on top of security technology, including biometrics and end-to-end encryption.
  • Insurance 

Transaction Types

Transaction types are the way the payment information enters the system, which can include in-person, online, invoiced, mobile entry, and more. Look at the different ways your business takes payments and confirm that the payment processor can take these methods of payment. 

Deposit Time

The time it takes to get the funds from card transactions should be short, with the next day being ideal. Some payment processors even offer same-day deposits; however, if there is a fee for same-day deposits, be sure to calculate that into your total cost for the service.

Merchant Services

Merchant services are the services that businesses rely on to accept and process payments via credit card, debit card, and other electronic payment options. Some credit cards payment processing provides these services with their plans. 

Customer Service

A payment processor should provide service that is responsive, available, and knowledgeable. The best credit card payment processing goes above and beyond troubleshooting to offer enhanced assistance. 

Additional Services

Credit card payment processing offers additional services that you may need for your business, including: 

  • Credit lines, loans, or other advances
  • Payroll management
  • Inventory organization
  • Employee management
  • Customer engagement programs

You will want to choose a processor that offers additional benefits for your business with extra services you may need.


When choosing a payment processor, the cost is another significant consideration. You will want to look at the overall cost of the service. This can include transaction fees, chargeback fees, monthly fees, membership fees, setup costs, PCI compliance fees, etc. The total monthly cost needs to be considered when choosing a service. 

The cost per transaction for interchange-plus pricing is usually less per transaction than flat-rate pricing. However, the monthly fees and volume fees that are associated with an interchange-plus pricing system add to the overall service cost.

Final Thoughts

Credit card payment processing is crucial for your business to give customers convenience, more transaction options, and more sales for your business.

Choosing a credit card payment processor can provide your business and customers with security against fraud, adequate customer service in case issues occur, provide you with multiple transaction options for your customers, accept funds quicker, provide you with additional services your business may need, and more.

Bankful offers simple credit card processing that easily integrates into several eCommerce sites, accepts several types of payment methods, provides excellent data security and more to keep your business running smoothly and your customers satisfied.

Try Bankful today and run your business smoothly.

Share :