Everything You Need to Know About Credit Card Processing

Credit cards lying on a laptop.

Credit card transactions might seem fairly straightforward. Your customer inserts their card into the EMV card reader, the machine transmits the information for payment processing to your merchant services providers, and the payment is approved.

Yet, there is much more going on behind the scenes that you may not understand or be fully aware of. Aside from chip-based transactions, there are others you may perform, such as swiped payments or “tap and go” payments.

Understanding how credit card processing works can provide you with valuable information to help you establish the prices you charge your customers, prepare budgets, and estimate your projected earnings.

What Is Needed to Accept Credit Card Payments?

To be able to accept credit card payments and debit card payments, your business must have certain things set up and configured. In general, you will need the following:

  1. A merchant services account with a credit card processor.
  2. A credit card terminal to process payments.
  3. An internet connection or dedicated phone line for transmitting and receiving payment processing data.

Please remember that this is the general setup required. Depending on the type of business—i.e., brick and mortar store, online store, service operation, etc.—you may need other types of equipment, applications, and configurations to accept and process debit and credit card payments.

Who Is Involved in Credit Card Transactions?

A business accepting credit card.

The next thing you need to understand is who is involved in credit card processing transactions. There are several parties involved, including:

  • Customers – Your customers are considered the cardholders. They are the ones using the debit or credit card to pay for their goods or services.
  • Businesses – The business is also referred to as the merchant. This is the store, service provider, or online retailer that sells goods or services to the customer.
  • Credit Card Processor/Acquiring Bank – This participant is the one to receive the request for payment and take care of obtaining the payment authorization for each transaction.
  • Credit Card Network – This is the entity that allows banks and other financial institutions to issue cards with their logo on the cards, including Visa, MasterCard, AMEX, and Discover. The credit card network is responsible for establishing and maintaining interchange fees.
  • Issuing Bank – This is the bank that issued the debit or credit card to the cardholder. For debit cards, the credit limit is the current balance in the cardholder’s checking or savings account. For credit cards, the credit limit is established by the issuing bank.

Stages of the Credit Card Transaction Process

Once you have everything you need to accept credit and debit card payments, there are specific stages for each transaction. Generally speaking, the stages will be similar whether they are processed in-person or online through an e-commerce store.

The time for the stages to complete is fairly fast and only takes a few seconds. During this time, a lot is going on in the background, as you will see shortly.

Stage 1: Input payment data.

  • The customer inserts their card, swipes it, taps the card on the credit card machine, or uses their mobile wallet and holds their smartphone over the credit card machine.
  • For e-commerce transactions, the customer keys in their card information, including the card number, expiration date, CVV code, and billing address.

Stage 2: Request authorization for the payment.

  • The credit card data is transmitted to the credit card processing company or acquiring bank.
  • The credit card processor transfers the data to the appropriate credit card network—i.e., Visa, MasterCard, Discover, AMEX, etc.
  • The credit card network submits the payment amount from the bank or financial institution that issued the card and requests authorization.

Stage 3: The issuing bank performs authentication verification. 

Once the issuing bank receives an authorization request, they first perform authentication verification before approving or declining the transaction.

  • The issuing bank verifies the card data, including the card number, expiration date, CVV code, and billing address.
  • Upon verification, the issuing bank checks the cardholder’s account for available funds.
  • If the funds are available, the transaction is approved. If the funds are not available, the transaction is declined.
  • For authorized transactions, the issuing bank places a hold on the funds.
  • The business completes the sale and gives the customer a receipt.

Stage 4: Debit and credit card transactions are batch processed.

At the end of the business day, or at another set interval, the business will perform batch processing of all debit and credit card payments processed throughout the day.

Stage 5: Processed credit card transactions are cleared and settled.

In this stage, the transactions are deducted from the cardholders’ available funds (clearing) and simultaneously posted to the business’s merchant account (settling).

  • When the business starts batch processing, the credit card processing company submits the batch data to the credit card network.
  • The credit card network forwards each transaction to the issuing bank for settlement.
  • In a day or two of each approved transaction, the issuing bank transfers the funds to the credit card network.
  • The issuing bank and credit card network subtract the interchange fees.
  • The credit card network pays the credit card processing company the balance.
  • The credit card processing company deposits the funds into the business’s merchant services account after subtracting a merchant account fee.
  • The funds can then be transferred into the business’s bank account by the business.

Each of these stages occurs for every debit and credit card payment a business accepts. Again, please remember that this is a general overview of how payments are processed and funds transferred to the business. There can be some variation, as with an e-commerce store, which requires a payment gateway in place of a physical credit card terminal machine.

Credit Card Processing Fees and Costs

Accepting debit and credit cards does require the business to pay various fees and has other costs associated with providing this payment option for customers. It is equally important for you to understand these fees and costs so you price your products or services accordingly.

Interchange Rates Fee

The interchange rates fee is established by the credit card network. It cannot be changed, negotiated on, or altered. The amount of the fee can vary depending on the type of transaction—swiped, chipped, tapped, or manually entered.

The fee also varies depending on the industry and risk level of your business. Additionally, the fee will be more for credit cards than debit cards.

Credit Card Network Brand Fee

For each transaction, the credit card network will collect a fee for using their brand. For example, credit card brands will charge a fee based on the percentage of the value of the sale. They will also add a fixed fee amount of a few cents on top of the percentage-based fee.

Payment Processing Fees

This fee is charged by your merchant services account provider. The fee can be a percentage of the dollar amount or a flat-rate fee, depending on your merchant account agreement and the payment plan you selected.

Equipment Fee

If you lease your credit card terminal equipment, you are charged a monthly fee. The amount is normally fixed and does not vary.

There can also be additional transaction fees, administrative fees, etc., depending on the credit card processing company you selected for your merchant services account.

A customer paying for their coffee with a credit card.

By understanding how credit card processing works, you are better able to determine who is taking a cut out of your sales for each debit and credit card transaction. In addition, this information enables you to establish sales prices for your goods or services so that you can earn a profit.

Furthermore, armed with this new knowledge, you can find the right payment processor for your merchant services account, like us, here at Adept Payments. We make credit card processing easy and simplified for business owners. We even offer flat-rate plans based on your sales volume.

For further information about our payment processing flat-rate plans and other merchant services, please feel free to contact us at 888-732-3838 today!

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