A lot happens behind the scenes in just seconds when a customer swipes, taps or submits a credit card payment online. And more and more people prefer to use plastic for purchases. Research by Fundera shows that 80% of consumers prefer credit over cash, 76% of people have at least one credit card, and only 10% use cash all the time. If you’ve ever wondered how payment processing works, follow along on the technological journey.

Know the lingo

Before jumping into how payment processing works, it’s important to understand the key players involved in a transaction.

  • The customer – The consumer making the purchase with a debit or credit card
  • The business/merchant – This is the retailer or seller of the product or service
  • The acquiring bank – The merchant’s bank (where the payment will be deposited after it is processed)
  • The credit card processor – The company that routes the payment data back and forth to complete a transaction
  • The payment network – The operators of the credit card (i.e. Visa or Mastercard)
  • The issuing bank – The bank where the customer’s credit or debit card is from (i.e. Chase, Capital One)
  • Merchant services – A financial service that sets up merchants to accept credit, debit, gift card and electronic payments

As you can see, there are a lot of moving parts involved in allowing a simple card payment to happen. The good news is that most of it happens behind the scenes with little effort on your part. And by offering your customers a variety of payment options, you can remove a potential obstacle for closing a sale (since many consumers don’t carry cash) while providing convenience.

Let the payment process begin

As soon as a customer decides to pay for a product or service using their credit or debit card, the payment process begins. Payments can be made in person, online, or over the phone (the latter two are referred to as card-not-present transactions). Once a card is swiped, tapped, or digits are keyed in, the payment process will follow these steps:

First, the merchant accepts the customer’s credit card information such as through a terminal device, card reader, or via an e-commerce website.

Next, the credit card processor takes over and sends the card information to the credit card payment network.

Once in the payment network’s hands, it then forwards the transaction to the next stop, the issuing bank, to get authorization.

The issuing bank will then validate the payment information and decide if it can authorize the transaction amount. If it is approved, it goes back through the processor and to the merchant. If it is not approved (such as if the card is maxed out, or if fraud is suspected), the transaction will be declined.

If the transaction is authorized, the issuing bank then places a hold on that amount so that it’s ready for collection.

The merchant must then perform a batch settlement (which is submitting through all of the daily transactions at once). This settlement is sent through the credit card processor again, then to the payment network, the issuing bank, and back to the merchant.

Once the batch settlement is complete, the transaction becomes official, and the issuing bank will then release the amount of the purchase to the acquiring bank (which is the merchant’s bank). Any fees that are charged by the credit card processor or interchange will be taken out of the merchant’s cut.

The first part of the process – the customer’s purchase – takes just a few seconds. The second part – the batch settlement – takes a bit longer, as payments are typically deposited into the business’ bank account within two business days. In some cases, merchants can receive deposits more quickly, such as if the service provider is also their financial institution.

Have questions about setting up payment processing so your business can accept card payments? Connect with a Merchant Services Business Consultant for customized solutions.



This content is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.


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