Credit Card Processing: What Is It & How It Works

May 22, 2022

For many, this is a mystery that doesn’t need solving. However, business owners fall into a different category than the common consumer. Understanding what happens when a customer taps their phone or card on a reader helps owners make educated business decisions.

Not all processing companies are created equal.

Likewise, every business is unique.

The business owner who understands how credit card processing works is a business poised to choose the ideal partner to work with. The correct processing company will work with the business to create a symbiotic relationship that succeeds only when both parties succeed.

Credit Card Processing

Credit card processing is a complex system with multiple steps to transferring capital from one party to another. For the customer, the transaction is relatively simple. For those behind the scenes, it is a long journey taken almost instantaneously.

Understanding the steps helps a business owner find the processor who will work for them.

What is Credit Card Processing?

In layman’s terms, credit card processing is the transfer of funds for goods or services from a customer’s wallet to a business bank account.

In reality, it is a complex dance of funds and credit moving through a series of steps to ensure that the customer receives what they pay for. That journey begins with a credit card company believing in the customer enough to extend them a line of credit.

Once the credit has been extended and a card has been entrusted to a consumer, they take that card and use it at the store.

Perhaps they buy some gas, or purchase tickets to a theme park, or buy some extra turns on their favorite phone game. Whatever they decide to purchase, whether goods, services, or a digital token, money has changed hands.

However, at this time it isn’t the customer’s money that is involved in the transaction.

When the processing company goes through their steps they validate that the customer has the credit and they cover the bill. It isn’t until the customer receives the monthly statement that they have to cover the cost of the purchase.

In the meantime, the business doesn’t go without. The processing company ensures that once the transaction is approved, the money makes it into the business’s bank account.

At its core, credit card processing is just a complex way to move money around in bundles that eliminates the need for customers to keep cash on hand, allows the same customers to spend more money, and creates an easier way for business owners to keep track of their revenue.

Who is Involved with Credit Card Processing?

There are five parties involved with the transaction: the customer, the credit card company, the processor, the business, and the bank.

Sometimes there can be some overlap if the processor is linked to the bank, but for the most part, they remain separate entities. Here is a brief breakdown of each of the five groups involved with each transaction.

The customer – the person or company making the purchase to whom the credit card bill is sent at the end of the month.

The credit card company – also referred to as the issuing bank, this is the company extending credit to the customer or company. This is the entity that initially pays the business for the transaction.

The processor – this intermediary is sometimes called the network processor.  It is the business that facilitates the financial process. They collect all of a business’s transactions, bundle them, and submit them to the credit card companies for payment. They ensure the transaction proceeds and will deal with chargebacks and refunds. There are also other services rendered by the processor, but their focus here is strictly on the financial transaction.

The business – the business or individual providing the services or goods being purchased in the transaction.

The processor’s bank – is also called the acquiring bank. This is the institution where a business’s funds are collected and made available for disbursement to the business’s bank.

Most websites cap this list at three: the credit card company (issuing bank), processor, and processor’s bank (acquiring bank). Perhaps this is a simplification of the process or they assume the business and customer are a given for each transaction. However, they are both vital and potentially limiting to the process.

Without the three parties listed above, there would still be business transactions, but without the customer and business, there would be no reason for the processing components to exist.

They also dictate the products being offered by selecting who they work with to complete the credit card processing. Ultimately they are the two parties who have the most impact on what terms are the industry standards.

How Does Credit Card Processing Work?

Credit card processing is a multistep process that ultimately transfers money from one party to another. For the customer, it is often a convenient payment method that seems simple. The rewards offered by credit cards, in conjunction with being able to complete all transactions in a traceable, digital manner make the process very appealing.

The customer lives with the illusion that a credit card transaction is simple.

For everyone else, the reality is that a credit card transaction is infinitely more complicated than a cash transaction. However, that inconvenience is worth the increase in transaction totals that a business sees when they accept credit cards.

Processing credit card payments means increased revenue, even if it means parting with a transaction fee.

So how does credit card processing work? 

The Charge

Every time a customer swipes, inserts, or taps a card, the customer’s account is checked to ensure they have the proper account balance.


This is done through an encrypted channel to provide added layers of security for the customer. In a fraction of a second, the information bounces to and from the credit card company.

Once the account is verified, the transaction is authorized.

Transaction Complete

At this point, the receipt prints up, and the customer is allowed to leave the premises with their goods or services completed. For an eCommerce transaction, this is the point where a company starts packing up goods for shipment.

Batches and Bundling

The transactions sit until the end of the day. At that point, the different types of credit card transactions are divided up into bundles and submitted to their respective companies by the processor.

Funds Released

The processor’s bank holds the funds for a set amount of time to ensure they have cleared. Once that happens the funds are deposited into the business’s bank account. This tends to take around 48 hours.

At the end of the transaction, the money has changed hands multiple times, been validated, verified, and deposited. Credit card processing is far from simple.

Credit Card Processing Cost and Fees

The downside for any business looking to accept credit cards is that the process does not come for free. There is an initial processing rate that is either calculated as a flat rate or an interchange-plus rate. This is a percentage that is negotiated at the beginning of a contract.

The percentage will be influenced by business type, risk, and volume.

On top of this, there are fees set out by each credit card processing company. These charges may include monthly and/or annual fees, batch fees, early termination fees, etc.

The fees are laid out in the contract each business owner signs. They will often vary from company to company. By shopping around, a business can find the perfect fit for its needs. By being proactive and making sure to read the full contract, business owners can avoid paying excessive fees out of their profits.

Credit Card Processing for Your Business

Each business is an individual manifestation of the proprietor’s dream. Each business is unique at the core. However, some similarities will allow you to search for the perfect credit card processor for your business.

Keeping in mind that your business is unique and that you have the power to shop around allows you as the business owner to choose your fate when it comes to credit card processing.

Just as unique as your business is, remember that each credit card processor is just as unique. There is a widespread number of processors; from huge multinational corporations to small regional shops.

Each credit card processor will offer you a different mixture of services.

The best strategy for finding the right processor is understanding your business and having established goals. If you have a firm grasp on what you are trying to achieve, you can be selective in your search.

Most credit card processors will give you a free quote. Some may offer a free month to compare your existing business to what they have to offer. Most processors will be willing to work with you to craft a contract that fits your needs.

Some processors focus on specific merchant types or risk types. Finding the one that fits your needs is the first step in finding the contract that suits you.

In Conclusion

There are thousands of credit card processors in the United States. This means there is a wide variety of services each business can find to fit their situation.

The credit card processing format is the same, but everything surrounding that process is customizable to a degree. To find what fits you just requires diligence and patience. Like most business situations, taking the first offer can lead to disappointment.

Shop around. Weigh your options. Find the credit card processing company that meets the individual needs of your business. Most importantly, don’t be afraid to be your advocate.

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