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What is credit card processing, and how does it work?

Credit card processing is a transformative technology completely revolutionizing the business world with simplified automated payments. Just what, however, is credit card processing, and how does it work? The first step in this process is to create a merchant account. A merchant account allows you to accept credit cards as a form of payment for goods and services sold. From there, you’re well on your way to processing payments seamlessly. Read on to discover more about credit card processing and how you can choose the best provider. 

abstract diagram showing transparent hand holding a credit card with numbers floating off it

How a business processes credit cards

Most companies now rely heavily on card processing to generate revenue and profits. It’s a form of transaction processing in which data about transactions are captured electronically on computer systems for authorization, clearance and settlement purposes. The credit card issuer authorizes a purchase at a business by verifying that the purchaser has sufficient funds to cover it. The credit card processor captures the information from the credit card, including virtual credit cards, and withholds payment from the merchant’s account for what was sold. The settlement phase involves transferring funds from the bank to the business’s bank account for what was sold.

To process card payments, a business needs to have a merchant account with a company that can process them. These companies will charge businesses for the service and there may be monthly fees as well as transaction fees. The business may also need an account with the bank that they prefer to do business with and they will need a terminal or point of sale (POS) device and software to be able to accept credit card payments or cash. This can be done through an online application process for free.

What is a card processing service?

A credit card processing service is a financial institution that processes the numbers and codes on a credit card. A card processing service does not charge a fee to process a customer’s payment, but instead charges a merchant a small percentage of the transaction amount.

Consumers often worry about the security of their credit card information when providing it to companies. However, the fact is that most major banks and credit card processors use encryption to protect data as it travels over the internet. Credit card processing services securely stores credit card data and manages the paperwork involved in accepting a card as a form of payment. These services typically include some extra features, such as fraud protection and customer management.

Female technician smiling while looking at her tablet screen in front of a computer

Who is involved in card processing?

Credit card processing is a service that allows merchants to accept payments from credit cards. It consists of three main parties: the merchant, the customer and the card-processing company. Card processing is primarily used by small and local merchants. Large retailers like Walmart and Target usually pay their bills using cash or they use something like an Electronic Data Interchange (EDI) that connects the two. Local merchants often need to accept credit cards because many customers don’t carry cash anymore, so they rely on credit card processing to do business.

Card processing systems are typically operated by banks, financial institutions or commercial enterprises called “merchant service providers.” To process payments from customers, merchants will have to pay for what is called an “acquirer” or “merchant processor.” Merchant processors can be either independent companies or banks that have been approved as an acceptor of cards from certain issuers. These providers, such as banks, often offer a wide range of services to their customers, from savings, loans and credit cards to investment advice and insurance. They can also provide a variety of technologies that can help a business manage its finances and cash flow more effectively.

The four steps to processing credit cards

Imagine you’re in a restaurant and the waiter takes your credit card. He hands it to the bartender to swipe, hands it back to the waiter, who then hands it back to you. You might think this is just for show – that they have already swiped your card – but in reality, this is one of four steps involved in accepting credit cards:

four steps of credit card processing

1) Card presentation

The customer presents a credit card to a merchant.

2) Information transmission

This information is transmitted to the acquirer as the merchant swipes the card through a machine that reads it and transmits information about the credit card and transaction to a processor for authorization.

3) Processing

The credit card processor sends this information along with their bank’s routing number to verify that this is an authorized transaction. The processor checks with the bank that issued the credit card—typically using an encrypted connection—and verifies whether or not there is enough money in the account and assesses whether or not other criteria such as age restrictions have been met for this specific purchase to go through successfully.

4) Authorization

If authorized, funds are withdrawn from the customer’s account and transferred to the merchant’s account.

Accepting virtual credit cards as part of a payment processing strategy is an increasingly popular way for small businesses to expand their customer base and make money. Credit cards are the most popular way to purchase products and services. It’s convenient for both the buyer and the seller, despite the process of setting up a new credit card processing service.

What should I be paying for credit card processing?

Credit card processing can be costly, but it doesn’t have to be. There are a variety of factors that can affect the cost of processing credit cards, including the type of business you have, the type of cards you accept, the volume of transactions and more. To better understand how much you should be spending and calculate your card processing fees, ask yourself these questions

  • What types of cards do they accept?
  • Does the company offer you a discount on your processing fees every time you sign up for a monthly billing service?

Understanding the card processing fee is essential for any business owner. The card processing fee consists of two parts: a percentage, which is paid to the merchant account provider, usually 2%-3% of each purchase, and a flat fee that is usually $0.0015 or less per transaction. Understanding your needs for your card processing fees will help you determine the best way to go about choosing a credit card processor.

The bottom line? There are a lot of options out there, and everyone has different needs amid the digital revolution. Whether you’re an individual or running a business, the right credit card processing company for you is out there.

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