How Does Credit Card Processing Work?

Choosing a credit card processing company and accepting card payments is a crucial part of running an ecommerce business, helping you reach more customers.

Completing credit card transactions easily, efficiently, and securely is essential to thriving as a modern business. The vast majority of US consumers (76%) have at least one credit card, and those cards account for approximately $300 billion in annual ecommerce sales, or 47% of all ecommerce transactions. 

By offering ways to buy that are convenient to the customer, credit card processing helps your business reach a broad customer base and, ultimately, increase sales.

What is credit card processing?

Credit card processing is everything that happens from the moment a customer taps, swipes, or inserts their credit card into a point-of-sale system until the funds are deposited into the seller’s bank account.

During this process, payment data travels through an involved network of stakeholders, each of whom plays a vital role in completing the transaction. These stakeholders are either affiliated with the cardholder or the merchant.

There are three major players on the cardholder’s side of the transaction:

  • Consumer: The individual attempting to make a purchase with a credit card.
  • Credit card network: The consumer’s credit card-issuing company, such as Visa or American Express.
  • Issuing bank: The bank that provides the credit card to the consumer, branded with the name of the affiliated credit card network. The issuing bank manages the consumer’s account. 

The players on the merchant end are:

  • Merchant: A person or business selling products and services.
  • Point-of-sale System (POS system): Also known as a payment depot, this is where customer’s orders are placed and credit card information is collected. 
  • Payment gateway: A merchant service or ecommerce platform that transmits encrypted payment data to the payment processor and ultimately communicates to the merchant and customer if a transaction has been approved.
  • Payment processor: Also known as merchant service providers, this intermediary body communicates transaction details between the consumer’s bank and the merchant’s bank. They also ensure purchases are secure and merchants are in compliance with payment industry standards. Traditional payment processors require the business owner to set up a merchant account, which requires a business license.
  • Payment service provider (PSP): A payment service provider, or PSP, is a type of payment processor that facilitates the collection of online payments for merchants in lieu of setting up a merchant account. In contrast to a payment processor, a PSP like Square or PayPal, is not tied to one bank or payment network, can pool money from multiple businesses in one place, and can integrate with a variety of payment methods including debit cards, credit cards, and e-wallets.
  • Acquiring Bank: The merchant’s bank that receives payment upon authorization. 

How does credit card processing work?

The credit card processing steps­ for in-person and online purchases are generally the same—submission, authorization, and funding.

  1. Submission: A customer presents their credit card information to a merchant for payment. Then, the customer swipes, inserts, or taps their card at the merchant’s credit card terminal, or enters their card details into a payment form on the merchant’s ecommerce site. These actions submit credit card information to the merchant’s point-of-sale system.
  2. Authorization: The merchant requests payment authorization from a PSP or credit card processor, who then reaches the customer’s issuing bank and asks for further authorization by verifying funds or credit limit, as well as security features like the cardholder’s address and card verification value (CVV). The issuing bank either authorizes or declines the purchase.
  3. Funding: The authorization information is sent back down the line to the credit card network, the merchant’s bank, and eventually, the merchant. If the transaction has been authorized, the customer’s funds are then deposited into the merchant’s bank and the merchant finalizes the transaction with the customer.

How to Choose a Credit Card Processor

  • Compatibility
  • Security Features
  • Fees
  • Customer Service and Support


Depending on factors like transaction volume and industry, some credit card processors are going to be more compatible with your business than others. 

For instance, some banks, payment processors, and PSPs, won’t work with businesses that operate in highly regulated industries, such as businesses that sell cigarettes and alcohol, which require complex licensing and legal compliance. 

The equipment also affects compatibility. If you’re selling in person, make sure that your processor will offer credit card equipment like a will offer credit card equipment like a point of sale terminal. If you’re an ecommerce business, make sure your provided payment gateway will integrate with your webshop.

Security features

Credit card processors are often the first line of defense against fraud. As a result, many processors offer special features and automations to help you enhance security and fight fraud.

First and foremost, you want to ensure whoever you work with is in compliance with Payment Card Industry Data Security Standards (PCI DSS), which sets the industry standard on how merchants should secure customer data. From there, choosing the best security features in a credit card processing company comes down to the type of transactions your company engages in. 

  • All-in-one: Designed to help businesses that deal with the security breaches and fraud that can stem from both in-person and online transactions, this may be the best option if you process transactions both online and in-person.
  • EMV Chip Cards: If you’ll only be processing payments in person, EMV chip card technology can help prevent the use of counterfeit cards.
  • SSL Certification: If you’re an entirely ecommerce company, you’ll want to ensure your processor offers Secure Sockets Layer (SSL) certification encryption that uses a mathematical algorithm to change data into incoherent ciphertext to secure customer information online. 
  • Tokenization: Tokenization replaces vulnerable customer data with a string of randomized characters called a token. Unlike with encryption, a token is created at random and not through a mathematical algorithm, meaning it is undecipherable, as there is no connection between the original data and the final token.


Credit card processing fees are, unfortunately, unavoidable. The most common fees you’ll encounter are fixed transaction credit card processing fees, such as interchange fees set by your card network. Additional fees that may be applied to your transactions are: 

  • Per-transaction fees: A fee applied by the processor every time you make a sale.
  • Annual fees: A fee paid every year with interest, depending on your sales volume. 
  • Maintenance fees: Fees charged for the administration of your payment processing account. 
  • Compliance fees: Fees to keep your card processing in compliance with PCI DSS and other industry standards.
  • Equipment or terminal lease fees: Charges for use of processing equipment, like POS systems and ecommerce web services.

While some fees are standard, some processors mark up base market costs. These markup costs are negotiable and vary depending on your payment processor, your transaction volume, and the pricing model you’ve agreed to.

Ask a credit card processor about their fees before you sign a contract with them, so you can renegotiate any markup fees upfront. Payment processors should be transparent about their fees, including which fees are markups and credit card chargeback fees, in your credit card agreement with them. 

Customer service and support

Though credit card processing systems are reliable overall, there are times when service and operations can be interrupted. Hence, reliable customer service is essential in a card processor. 

You may run into problems at any time, even after you close up shop for the day, so customer support should be easily accessible by phone or live chat 24/7. You can assess a company’s customer service quality by having a test interaction with their customer service personnel. Call in with a problem and monitor how quickly customer service agents answer your call, how quickly they supply you with solutions, and if the solutions they provide are effective. 

Final thoughts

As a business owner looking to accept credit cards, you need to first understand the fundamentals of credit card processing, your customer profile, and your business’s potential risk profile to determine if a payment processor is compatible with your business. 

From there, take a sober look at security features, fees, and customer service quality. Compare and contrast results among several different providers to find the payment processor best for your business.

Credit Card Processing FAQ

What does processing credit card mean?

Processing credit card means to accept and process payments made with credit cards. This usually involves verifying the card’s validity, confirming that the cardholder has sufficient funds, and collecting the payment information from the cardholder. This process is usually done with a payment gateway that connects the merchant to the payment processor.

What are the 4 steps of credit card processing?

  • Authorization: A cardholder's request to make a payment is authorized by the credit card issuer.
  • Clearing: The card issuer sends the transaction information to the cardholder's bank.
  • Settlement: The cardholder's bank processes the transaction and pays the merchant.
  • Funding: The merchant's account is credited with the funds from the transaction.

What are the duties of a credit card processor?

  • Receive customers’ payments and process them using a point-of-sale terminal, credit card reader, and other devices.
  • Verify customer information and ensure all required documents are complete and correct.
  • Input cardholder information into the processing system and check for errors.
  • Calculate and process refunds, adjustments, and other transactions.
  • Reconcile accounts and report discrepancies to the appropriate personnel.
  • Monitor and investigate suspicious activity such as fraud.
  • Ensure compliance with all applicable laws and regulations.
  • Prepare and submit reports to management.
  • Maintain a database of customer information.
  • Provide customer service and answer inquiries about payment processing.