How does credit card processing work?

Understanding the credit card transaction process is essential to make sense of the many complexities involved. It is not just a matter of swiping a card to complete a transaction. The process involves numerous parties and steps, making it a complex one. In this article, we will discuss how credit card processing works, including the three processing stages:

  • Authorization
  • Authentication
  • Settlement

Key participants in credit card processing

Behind the scenes of every credit card swipe or tap are several important entities who ensure that the money transfers to the right place — correctly and securely. These parties include:

  • Merchant. A merchant is a business that accepts credit card payments from customers for its goods or services. These include in-person, online, or phone payments.
  • Cardholder. A cardholder is the customer, or consumer, who is using the card for payment. The cardholder could be either the owner of the card or an authorized user.
  • Merchant bank. A merchant bank, also known as an acquiring bank, maintains the merchant account where the funds from credit card transactions are deposited. Some merchant banks act as payment processors in the card transaction. Others rely on third-party payment processors to manage the payment details.
  • A payment processor. A payment processor which is also known as a merchant services company, assists in managing the transaction process between merchants, banks, and card networks. Payment processors not only help authorize transactions and ensure the transfer of funds, but some also provide the hardware and software required to accept card transactions.
  • Issuing bank. The Issuing bank is the organization that provides the credit card to the cardholder and has the responsibility to authorize the transaction. When a transaction is approved, the issuing bank transfers funds to the merchant bank, which then charges the cardholder through a monthly credit card statement.
  • Credit card networks like Visa, Mastercard, American Express, and Discover are responsible for providing the infrastructure that facilitates the transmission of credit card details between the merchant bank and the issuing bank. These networks have established rules regarding the usage of their networks and also charge interchange fees for their services.

How does credit card processing work?

Credit card processing happens in two steps: authorization and settlement. Although the authorization step — when a card is approved or declined — generally takes only a few seconds, the settlement stage is just as important to the merchant receiving its money.


The cardholder starts the process by providing their card information through the merchant’s card-reading device. The card information is then sent to the merchant bank or the payment processor, which, in turn, routes the information through the appropriate card network to the issuing bank. After the issuing bank confirms the card details and checks the cardholder’s account status and available credit, it sends an approval or denial to the merchant bank. The merchant bank or payment processor then forwards the decision to the merchant’s card reader.

The authorization process for online and e-commerce card transactions may be slightly different and could require a payment gateway in addition to a payment processor.


In the settlement process, funds are moved from the issuing bank to the merchant account. Generally, merchants send batches of authorized credit card transactions to their merchant bank or payment processor at the close of business or another scheduled time. These transactions are routed to the card networks, which work with the issuing banks and merchant banks to ensure funds are deposited into the appropriate merchant account.

The issuing bank deducts interchange fees from the transaction amounts before transferring the funds to the merchant account. As a general rule, it takes one to three business days for the settlement process to be completed.

What’s needed to process credit cards?

A merchant will typically need hardware and software to capture the information needed to process a credit card transaction.


The hardware for credit card transactions can be as simple as a compact card reader that plugs into a smartphone, or it can be a device with more features, such as a terminal, register or an entire point-of-sale, or POS, system. These devices collect and then transmit card data through the internet or a phone line to the merchant’s payment processor. Payment processors typically offer a variety of options when it comes to hardware.


A payment app is generally needed for credit card processing. Some are free with the purchase of hardware, and others may require a monthly fee. These software programs can include features such as inventory management, customer tracking, the ability to send email receipts, and reporting and analytics.

How much are credit card processing fees?

In addition to the costs associated with the hardware and software, a merchant will also pay credit card processing fees. In general, total fees range from 1.5% to 3.5% of the transaction amount and involve three separate fees:

  • Interchange fees: Interchange rates are set by the card networks, and fees are paid to the issuing bank. They’re typically the largest portion of the processing fees.
  • Assessment fees: These fees are paid to the card networks.
  • Payment processor fee: This fee goes to the payment processor, which may be the merchant bank or a third-party processor.

Merchants can pay additional fees based on the payment processor they use and the services provided. For example, some payment processors charge a fee for PCI compliance, while others don’t.