Key takeaways

  • Credit card processing is overseen by card networks and implemented through acquiring banks, which grant businesses the ability to accept credit card payments.
  • Fraud is the number one concern in credit card transactions, which is why card networks, banks, and payment software providers work together to secure payment information.
  • The cost of accepting credit card payments varies depending on card type, payment platform, and transaction volume, among other factors.

What is credit card processing?

Credit card processing is the process of requesting, validating, and approving a payment request. It involves a system of financial institutions and payment software working together to allow businesses to exchange goods and services for a customer’s bank-supported credit. Businesses are charged a portion of the transaction amount as a processing fee.

How does credit card processing work?

Infographic showing the stages and process of credit card processing

The credit card payment process begins at the point of sale (in-store, mobile, or online) and card data is secured before it goes through a series of validations. The customer’s bank settles the transaction for approved payment requests.   

Key components

To understand how credit card processing works, we first have to be familiar with the key components and their roles in accepting credit card payments.

For the customer:

  • Card network: These are the major card brands — Visa, Mastercard, American Express, and Discover — that work with banks to provide consumers with a credit line in the form of a credit card. Card networks also set the guidelines on interchange fees and regulations that follow federal laws.
  • Card-issuing bank: The card-issuing banks partner with card networks to extend credit lines to individuals and businesses.

For the business:

  • Merchant-acquiring bank: The merchant-acquiring bank partners with the card networks to provide businesses the ability to accept credit cards as a form of payment.
  • Merchant account: Every business that is “acquired” by a bank is provided a merchant account. This is where all proceeds of a credit card sale are deposited until the merchant withdraws the funds and sends it to their business checking account.
  • Payment gateway: The payment gateway is a customer-facing software where buyers enter their credit card information. Its role is to validate and encrypt the information, then forward the data to the payment processor with a payment authorization request.
  • Payment processor: The payment processor is a service that provides merchants with the technology to process credit cards for various types of transactions such as invoicing, B2B, subscriptions, cross-border, e-commerce, and more. Some payment processors provide their own payment gateway and hardware, and even work with merchant-acquiring banks to offer sub merchant accounts, making them a one-stop payments solution.
  • Business software and hardware: A platform used by businesses for trading such as a CRM, POS, and e-commerce website. This is where the payment gateway is embedded and the payment processor is integrated in order for merchants to start accepting credit card payments.
  • Business checking account: A private business bank account linked to the merchant’s payment processor where sales proceeds are sent from the merchant account. The business checking account is a major factor used by financial institutions for evaluating credit history.  

Stages of credit card processing

We break down credit card processing into three stages and look closer at the roles played by each key component.

Payment data collection stage

Infographic showing the payment data collection process

In the data collection stage, the customer enters their credit card information on the payment gateway embedded in the merchant’s business software. Fraud protection tools, such as address and IP verification, work at the back end to verify the identity of the user making the payment. Once authenticated, the payment gateway encrypts the credit card data and sends a payment request to the customer’s issuing bank via the payment processor.

Payment authorization stage

Infographic showing the payment authorization process

The payment authorization stage begins with the payment processor verifying the transaction type and determining the card brand used for the transaction. The payment processor then forwards the information to the card brand, where the latter applies the interchange fees. 

Lastly, the data is sent to the customer’s issuing bank, which approves the payment if: 

  • It verifies the customer’s account, and 
  • It confirms that the customer has the credit balance to fund the transaction   

Otherwise, the customer’s issuing bank informs the payment processor that the payment request is denied and the result is displayed on the payment gateway. At this point, the merchant can request a different credit card from the customer, which restarts the data collection stage. 

Payment settlement stage

Infographic showing the payment settlement process

For approved payments, credit card processing moves to the settlement stage. It begins with a notification sent to the payment processor of the approval and displayed on the payment gateway. The issuing bank deducts the requested amount from the customer’s balance and holds it until the payment processor requests for the transfer. 

The transaction fees are deducted before the proceeds are deposited into the merchant account. Afterward, the merchant’s funds within the merchant account undergo “batch processing,” where the funds are withdrawn and sent to the merchant’s business bank account. Note that it takes two to three business days, on average, for the funds to appear in the merchant’s account.

How much does credit card processing cost?

The cost of processing credit card payments differs for every business. This is because fees are assessed based on a number of factors and combine charges from the card network, card-issuing bank, and payment processor. To date, the average credit card processing fee of traditional (low-risk) businesses ranges from 1.5% to 3.6% per transaction.

Credit card processing fee is computed as: Interchange fee + Assessment fee + Merchant services markup

Infographic showing the allocation of credit card processing fees

Interchange fee

An interchange fee is based on the percentage of each transaction. Card networks have their own fee matrices that assign interchange rates based on a number of factors such as card type and business type. Card brands set the interchange fee, but the proceeds are paid to card-issuing banks for handling and acquiring the risk of the transaction.  

  • Visa: 1.23% to 3.15%
  • Mastercard: 1.15% to 3.15%
  • American Express: 1.10% to 3.15%
  • Discover: 1.56% to 2.40%

Assessment fee

Credit card service providers charge merchants a fee for the convenience in using their brand. The amount is based on a percentage of the total monthly sales. Card networks impose and collect the fees.

  • Visa: 0.14%
  • Mastercard: 0.14% (transactions < $1,000); 0.15% (transactions > $1,000)
  • American Express: 0.13%
  • Discover: 0.17%

Visit card brand sites to learn more about their fees:

Merchant services markup

The merchant services markup is the cost imposed by the merchant’s payment processor that provides the software for processing credit card payments. It is based on a percentage of each transaction plus monthly and incidental fees. Merchant services markup varies widely depending on what fee structure a service provider uses.  

  • Flat rate: Monthly account fee + (% + cents per transaction)
  • Interchange plus rate: % + cents per transaction
  • Wholesale rate: Monthly account fee + (cents per transaction)

Read more: Check out transaction fees of the best credit card processing companies in 2024

In general, fees are lower if the credit card payment is done in-person than when the credit card is not physically present owing to the higher risk involved. Other factors that affect the cost of accepting credit card payments include:

  • Sales volume: Businesses that regularly process large-volume credit card transactions are qualified for volume discounts.
  • Business type: Businesses considered high-risk are charged higher transaction rates compared to traditional businesses. 

Read more:Cheapest credit card processing companies

Credit card processing best practices

Accepting credit card payments carries some challenges, and the following best practices should help minimize the risks.   

Secure all payment information

Securing information is an important factor to consider when processing a credit card transaction. There are regulations around this that should be observed for businesses to keep their ability to accept credit card payments. This means both business hardware and software that are involved in transmitting credit card data should have security measures in place. 

Some methods of securing payment data are:

  • Installing fraud detection tools to authenticate the user before accepting credit card payments 
  • High-level encryption protocols to make the data unusable to hackers in the event of a breach
  • Password-protected access to all hardware and payment terminals
  • Working only with PCI-compliant payment processors that offer secure software for processing and storing credit card data 

Provide clear payment policies

Businesses that intend to process credit cards should have clear and transparent payment policies in place. These policies should help set a customer’s expectations on everything from returns and refunds to shipping and incidental fees. It’s also important to make sure that the payment policies are visible at the checkout counter, on your receipt, and at the checkout page on your website right before a customer clicks on the “Pay Now” button. This helps businesses protect themselves from any potentially fraudulent chargeback claims in the future.

Keep card network compliance

The card network ultimately sets the regulations for businesses that accept credit card payments. And as card networks fall under federal jurisdiction, it’s a safe bet that whatever is prohibited under federal law would also be unacceptable with the card networks. This includes:

  • Guidelines for storing credit card information and keeping payment systems secure implemented by the PCI Security Standards Council (PCI SSC) 
  • The types of businesses that can accept credit card payments. For example, marijuana sales are legal in most states. But, using credit card to pay for it is illegal because marijuana sales are still prohibited under federal laws
  • Keeping your business chargeback rate below 1% to avoid being classified as high-risk 

Note that any breach in a merchant account agreement will land a business in a card network blacklist (MATCH list). 

Find ways to lower credit card transaction costs

The cost of accepting credit card payments can grow if not properly managed. While interchange rates are non-negotiable, payment processor markups are, and there are a number of ways to keep your credit card fees low. 

Such as:

  • Encouraging more in-person credit card payments as the card-present transaction fees are lower compared on card-not-present transactions.
  • Opting for an interchange plus fee structure instead of a flat rate so you have better visibility of the costs
  • Applying for volume discounts when possible
  • Choosing a less expensive setup, such as a mobile reader and smartphone POS app

Read more: 

FAQs

In general, proceeds from a credit card transaction are sent out immediately after it has been approved, though it takes at least two business days for the funds to reach the business merchant account. 

The cost of a credit card transaction is a percentage of the sales amount, but fees vary depending on how the transaction was completed. Credit card payments done in person cost merchants an average of 1.83% + 8 cents for Visa, Mastercard, Discover), and 2.61% + 8 cents for American Express. Meanwhile, credit card payments accepted remotely (such as on an online platform) costs an average of 2.27% + 25 cents for Visa, Mastercard, and Discover, and 3.01% + 25 cents for American Express.

In credit card processing, approval takes only a few seconds. At this stage, the customer receives the product or service they purchased. On the back end, the card-issuing bank has already deducted the same amount from the customer’s funds and is in the process of sending the proceeds to the merchant account.

Anna Lynn Dizon Avatar
Anna Lynn Dizon
Senior Staff Writer
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Anna is a retail software expert and senior staff writer for Fit Small Business. She specializes in POS and payments technology and has evaluated dozens of software for more than six years. She began her career in PayPal customer service, resolving account and technical issues. She also spent 4 years handling business and financial management with hands-on experience in setting up payroll and banking automation for a US Risk Mitigation company based in Singapore.