The Procedure behind Credit Card Processing


The quest for cashless economies globally has gained momentum in the past years, with technological advances propelling the realization of this pursuit. Mobile money transfers, e-billing, and credit card payments are now a widely adopted trend. Here is an interesting fact: There are estimated over 2.8 billion payment cards in use globally. With this evidence, installing credit card processing systems is a critical step to the success of any modern business. But first things first. What is credit card processing, and how does it work? 

This guide has every detail you need to know. 

Who are the Key Players? 

The following entities are involved in the ecosystem of card payment processing. 


Also known as the customer. This is the individual or institution issued with a credit or debit card by the bank, which they use to initiate a purchase. 


This is a business, enterprise, or entity selling goods and services in exchange for money wired via payment cards. 

Acquiring Bank 

Also known as a Merchant’s bank, an acquiring bank is an entity contracted by merchants to accept card payments on their behalf through merchant accounts. 

Issuing Bank 

An issuing bank, otherwise known as the cardholder bank, is the financial institution that provides cardholders with payment cards. When a transaction is initiated, an issuing bank verifies and processes payments to the merchant’s bank. 

Card Associations 

These are entities that oversee transactions between merchants and card issues. Card associations are responsible for the licensing and processing of credit cards. They include Visa and MasterCard. 

Credit Card Networks 

These are organizations that establish card payment terms and facilitate card transactions. 

A Breakdown of the Process 

Credit card processing follows a defined flow of authorization as follows; 

Step 1: Cardholder initiates payment at the merchant’s card terminal, physically or online. The merchant processes the payment information, launching credit card processing. 

Step 2: A payment gateway taps the card payment information and transmits it to the credit card network through a credit card processor. 

Step 3: The payment gateway submits the transaction data to the acquiring bank. 

Step 4: The acquiring bank sends the payment information to the credit card network. 

Step 5: The Credit Card Network processes the transaction data to the issuing bank requesting payment authorization. 

Step 6: Once the transaction is validated and the availability of funds confirmed, the issuing bank informs the merchant of approval or disapproval of payment via a code. 

Step 7: The issuing bank initiates a hold on the cardholder’s account for the amount transacted. 

Step 8: The issuing bank releases the money to the acquiring bank. Usually, the issuing bank will hold approved funds for multiple transactions, after which the money is wired to merchant accounts. Fees and charges accrued throughout credit card processing procedures are deducted before the funds are settled in the respective merchant accounts. 

Types of Credit Card Processing Fees 

The benefits of payment processing solutions do not come without a price, usually in the form of fees and charges. Notably, the total cost of payment processing varies with different processors and banks. You might want to look into the pricing model of service before adapting card payments to your business. 

Interchange Fees 

These are fees and rates deducted by issuing banks for every credit card transaction. The credit card network collects the interchange fees on behalf of the issuing bank every time users swipe a card on the payment terminal. 

Payment Processing Fees 

Payment processors also charge an amount to complete a card transaction. These deductions are known as payment processing fees. They include statement fees, per-transaction costs, and monthly fees. Processing fees are a revenue stream for payment processors since such gateways do not generate income from interchange fees. 

Assessment Fees 

These are charges collected by card associations for every credit card brand accessed by a merchant. Unlike most credit card processing costs that are calculated per transaction, assessment fees are charged on a monthly basis. 

Chargeback Fees 

Chargeback fees are costs you incur for every bank dispute raised by customers. When a customer disputes a transaction, the amount in question is deposited into their account as a refund. However, merchants will be charged chargeback fees to cover for costs involved in handling the dispute. While the fees vary with different institutions, most acquiring banks will charge you somewhere between $20 to $100 per dispute. 

Is Credit Card Processing Secure? 

Essentially, credit cards are not directly integrated into your bank account. As a result, your bank account is safeguarded against cyberattacks targeting credit cards. However, cybercriminals and hackers are always discovering new ways to penetrate card payment systems. Therefore, credit card processing remains secure only when done right, and the necessary security obligations are strictly adhered to. 

Credit card processing security basics include such elements as Payment Card Industry Data Security Standard (PCI DSS) Compliance, Data Encryption, Secure Socket Layer, and Tokenisation. Also, your business must be EMV compliant to protect you from credit card fraud. 


Whether you are managing an established enterprise or starting up a new venture, card processing is crucial to the success of your business. Understanding how credit card processing works, the costs involved, and the risks you are exposed to will help you maximize the benefits of card payments. Credit card processing is generally secure, and businesses can adapt the system to increase sales and lower costs linked to traditional payment channels. 

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