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How Credit Card Processing Works in 2022

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Danny Randell | March 3, 2021

“Credit cards are an extremely popular form of payment. They are used every day by millions around the globe. But how do they work, really?”
6 min read

    Updated on 03-03-2022: Though it all happens in a flash, the tap of your credit card on the screen of a card terminal is more than a simple beep. In reality, credit card processing is one of the most complex networks of interdependence on the planet. There are a lot of stakeholders in the credit card transaction process, all of which have a reason to benefit from the use of the card network. We've included credit card diagrams and flow charts of our payment process to break down the credit card process for you and answered some of those common terms you might encounter.

    Key players in credit card processing:

    Cardholder "“ the customer or owner of the credit card using the network to make purchases.

    Merchant "“ the business owner with a card terminal or ability to accept credit card payments online. Read more here.

    Acquiring Bank "“ the "merchant bank" which settles & distributes credit card payments to business owners.

    Issuing Bank "“ these are the banks with which we are all familiar, who supply us with credit cards to use.

    Payment Processor "“ often the go-between for merchants and the acquiring bank, payment processors facilitate credit card transactions.

    The Card Brands "“ Visa, Mastercard, Amex are all examples of card brands that allow payments to be processed via their card network.

    The Credit Card Processing Cycle (from Cardholder to Settlement)


    1. A cardholder visits a merchant location and uses their credit card to make a purchase by tapping, inserting, or swiping it through a payment terminal.

    how credit card processing works

    1. The payment terminal communicates with the credit card processor (or acquirer in the instance where the acquiring institution fulfills both roles) and sends information about the transaction. Information includes the credit card details, cardholder information, and the amount being processed.

    how credit card processing works

    1. The processor will detect what type of credit card it is and communicate with the appropriate network (i.e., Visa).

    credit card processing authorization


    1. Visa determines the issuing bank (e.g. Citi Bank) and communicates the transaction to them.

    how credit card processing works

    1. The issuing bank ensures that the card is valid, has not been flagged for fraud, and that the funds are available. If so, it provides a response back to the network with an APPROVAL CODE.

    how credit card processing works

    1. The network responds back to the processor with the approval information.

    how credit card processing works

    1. The processor sends a message back to the merchant's equipment, which then displays the approval message.


    credit card processing settlement

    1. At the end of the night, the network will transfer the funds from the cardholder's issuing bank to the processor or acquirer, which will then transfer the funds to the merchant.

    What's amazing about the above is that the credit card transaction process goes through these steps in less than a second, providing real-time authorizations to merchants across the world. Visa alone processes thousands of transactions per second across its network, serving over 150 million transactions between cardholders and merchants worldwide every day.

    Merchant and processing costs of credit cards

    All of the players in the credit card processing chain have a reason to benefit from the passing of funds via credit card from customer to merchant.

    Customers want credit, or they want rewards (and of course to shop online and have a convenient way to pay in person), and merchants want to make it as easy as possible for people to pay (even when they haven't got "˜cash in hand').

    Issuing banks want to loan money at interest because that's how they make money, and acquiring banks and processors take their cut of the transaction cost in exchange for giving merchants access to the card networks.

    Finally, the card brands themselves benefit most from this arrangement, as the more people that use credit cards, the more they can earn too.

    So, when it comes to calculating the costs of accepting credit cards, we need to think of everyone that's involved in a transaction and the fees associated with an electronic purchase.

    The most important of these is the interchange fee, which comprises the bulk of credit card processing costs for merchants. This is the fee set by the card brands to offset the risk of customers defaulting on their credit, or the risk of a fraudulent transaction. (This fee is also part of what helps pay for rewards programs for cardholders).

    Other fees include the card brand fee, and the processing fee, both of which are usually a percentage of the total transaction cost.

    While interchange plus may seem more complicated, it is often cheaper than flat rate pricing, tiered pricing, and differential pricing, which are all various pricing models that make up the total cost of a transaction for a merchant.

    When considering the cost of transactions, a merchant will look at these different pricing models offered by credit card processors as well as other elements which separate how credit card processors compare.

    Some of these factors include:

    • Contracts (or no contracts)
    • Monthly and hidden fees
    • Signup and merchant approval process
    • Customer service, setup, and support
    • Transaction volume discounts or penalties
    • Software integration with other platforms or tools
    • Sales, inventory management, and analytics tools
    • Ease and speed of receiving funds "“ and how quickly issues are resolved and funds are released
    • POS system capabilities include mobile, virtual, in-person, and card-not-present transactions
    • Platform and features (and whether they cost extra)
    • E-commerce capabilities
    • Setup timeline and ease

    Cardholder fees: What are surcharges and convenience fees? When learning about how credit card processing works, you might be wondering what a surcharge and convenience fee are? These terms come up when we are talking about credit card processing fees.

    A surcharge fee is a percentage cost that the merchant charges to the customer for paying via credit card in order to cover the processing fee they pay to the issuing banks. Customers can opt to pay another way to avoid this small fee, but they are incentivized to pay with credit because of perks such as rewards or cashback.

    A convenience fee, on the other hand, is a fixed cost that a customer may choose to pay when choosing to pay with a particular payment method such as an invoice or online. It is a fee for the convenience of that payment method. Often merchants decide to impose this when their time or cost for the tools to process these payments is exceptionally high.

    Final Thoughts

    Credit card processing is more than just tapping some plastic to pay. It's an intricate patchwork of organizations and stakeholders who all work together to make money move. The credit card network is really a wonder of the modern world, bringing buying power to everyone and giving businesses the ability to get paid instantly, from anywhere in the world.


    What happens when my card is declined?

    Although the merchant receives the final message, the issuing bank decides whether a credit card is approved or not, and they may send a declined code back to the merchant. There are a few reasons.) your card may be declined; it could be suspected fraud (possibly merchant or they don't believe the physical card is in the cardholder's possession) or because of insufficient funds, and rarely because of an error.

    How are credit card transactions protected against fraud?

    All the key players in credit card processing are equipped with the means to protect both merchants and cardholders against fraud. The card itself is encrypted and tokenized with added features like an EMV enabled chip, a secret PIN, and a CVV code to protect in-person and card-not-present transactions. Merchants and payment processors are subject to PCI compliance and ensure card vaults and customer information is secure.

    What is a chargeback?

    A chargeback is a process a cardholder goes through when they want to refute a charge that they believe is fraudulent or when the goods and services were not as described when delivered.

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