Processing credit card payments is part and parcel of doing business today. It offers companies a secure way to accept and manage payments from customers, whether in-store or online. As online commerce becomes prevalent, it is critical for business owners who strive to optimize workflow, enhance customer satisfaction, and keep data secure to understand how this process functions.
This guide delivers an overview of the whole credit card payment processing process, including the leading players and their roles, some of the costs, and best practices for selecting a payment partner safely and compliantly.
How Credit Card Payment Processing Is Done
The process may sound overwhelming initially, but it is an organized sequence that includes certain important stages and players. Here’s what a typical trade looks like:
- Transaction Initiation
The customer hands over their credit card — swiped, tapped, dipped or entered online — in exchange for purchasing a product or service.
- Data Transmission
The transaction information is transmitted securely to the payment processor via the company’s point of sale (POS) system or online gateway.
- Authorization Request
This data is passed from the payment processor to the appropriate card network and then to the card-issuing bank for authorization.
- Approval or Decline
The bank that issued the card calculates available funds, verifies the customer’s identity, and screens for signs of fraud before subsequently accepting or rejecting the card.
- Completion and Settlement
If the transaction is accepted, then it is completed. The payment gateway batches authorized transactions and sends them to the merchant processor, which deposits funds into the merchant’s bank account, usually within 1–3 business days.
- Cardholder Billing
Lastly, the issuing bank posts the transaction to the customer’s statement, and the cardholder is accountable for paying according to the cardholder agreement.
Who Are the Key Players?
There are several participants in the processing of a credit card payment:
- Merchant: The business that takes the credit card payment.
- Cardholder: The person who is buying something.
- Payment Processor: A Service provider that processes the flow of transactions.
- Receiving Bank: The bank at which the merchant has an account from which funding can be made.
- Who Issued It: The bank that issued the card and approved or declined the transaction.
- Card Networks: Enable communication and routing (e.g., credit card networks).
The Cost of Processing Credit Card Payments
Companies need to consider fees when processing credit card payments. The actual costs are usually between 1.5% and 3.5% of the transaction amount. These fees include:
- Interchange Fees: This is the cost paid to the issuing bank, and can typically fall anywhere from 0.1% to 3%, depending on the card and transaction type.
- Card Scheme Fees: Fees paid to card networks for infrastructure services.
- Processor and Acquirer: Fees imposed by the merchant’s processor and bank.
- Extra Charges: These may encompass PCI compliance costs, monthly service charges, statement charges, or non-compliance charges.
Timeline and Speed of Settlement
Some services even provide same-day or next-day settlements, which I find can help a lot with cash flow management.
- Authorization: Will happen in seconds.
- Settlement: Tends to be the next 1-3 business days.
Which Payment Processor Will Be the Right One?
A good provider ensures the reliability of the payment, above all, the security and the comfort of the order for the client. Things to consider when choosing a payment processing provider:
- Supported payment types (contactless, mobile, online)
- Transparency of fees and structure
- Settlement timelines
- Security coverage and PCI DSS guidance
- Integrates with existing POS or ecommerce system
- Quality of customer service
PCI Compliance & Security of Data
In order to safeguard customer data—and to avoid being hit with potential legal liability—it is necessary for businesses to comply with Payment Card Industry Data Security Standards (PCI DSS). This includes:
- Packaging data on the fly (on-the-wire encryption)
- Safeguarding sensitive information securely
- Keeping software and systems up to day
- Accessing entirely to the payment data
Frequently Asked Questions
Q: Can small businesses accept credit card payments?
A: Absolutely. Payment processors serve the full gamut of companies, from massive corporations to tiny startups—and everything in between!
Q: Are there choices for people with special diets (low-carb, gluten-free, vegan)?
A: This is more applicable to product businesses, but you are now seeing more processors supporting niche models as long as they serve a specialized market or your platform.
Q: What do merchants usually pay to accept credit card payments?
A: Transaction costs typically run between 1.5–3.5% per transaction, and vary depending on the type of card, volume of transactions, and how the transaction is processed.
Q: How soon do I access the money from a transaction?
A: The majority of settlements arrive within 1–3 business days, though some services offer same-day or next-day transfers.
Q: What if something goes wrong with a transaction?
A: Disputes or chargebacks are handled through a specific evidentiary process requiring documentation from the merchant and cardholder. Merchants are usually walked through the process by processors.
Q: What would you do to cut my processing fees?
A: Yes, your rates may be lower and you may avoid unnecessary middle-man penalties if you are able to negotiate terms and shop providers for PCI compliance.
The processing of credit card payments is much more than a technical requirement—it is a vital process of any business impacting revenue, security, and customer satisfaction. But if they can understand how it works, choose vendors wisely and abide by security best practices, they can set themselves up for long-term success in their payment system
