As customer payment preferences continue to evolve, businesses must adapt their payment processing systems to stay competitive. By thoughtfully building their credit card processing systems, businesses can improve the customer experience, streamline operations, and access new growth opportunities.

Credit card processing involves several steps, including authorization of a customer’s transaction, reconciliation between involved banks, and settlement of funds. This process plays a key role in the future of payment processing technology. For example, digital wallet users are expected to exceed 5.2 billion globally by 2026.

Setting up a credit card payment processing system improperly can result in additional costs, operational inefficiencies, and increased vulnerability to payment fraud. Below, we’ll explain how credit card transaction processing works and how to set up a credit card processing system that works for your business.

What’s in this article:

• What is credit card transaction processing?
  
• Key components of credit card transaction processing
  
• How does credit card transaction processing work?
  
• Credit card transaction processing costs for businesses
  
• Why credit card transaction processing is critical for businesses
  
• How Stripe Payments can help
  

What is credit card transaction processing?

Credit card processing occurs when electronic transactions involving credit cards are authorized, authenticated, and settled between the cardholder, the business, and their respective financial institutions. This process allows businesses to accept credit card payments for goods or services, facilitating easy and convenient transactions for the business and the customer.

Key components of credit card transaction processing

While credit card transactions are typically processed very quickly, what happens behind the scenes is complex. The process requires many components that collaborate with each other to ensure that funds move securely and efficiently.

Here’s an overview of the parties that participate in this process:

• Cardholder
  The cardholder is the individual who owns the credit card and uses it to make purchases for goods or services.

• Merchant
  The merchant is the business or service provider that accepts credit card payments from customers in exchange for goods or services.

• Point-of-sale (POS) system
  The POS system is the hardware and software the business uses to accept and process credit card transactions, and includes terminals, card readers, and software applications.

• Payment gateway
  The payment gateway is a service that securely transmits transaction information between the business's POS system and the credit card processor.

• Credit card processor
  The credit card processor, also called the “payment processor,” is a company that works with the card networks and issuing banks to authorize, authenticate, and settle credit card transactions on behalf of the business.

• Card networks
  Card networks, such as Visa, Mastercard, American Express, and Discover, facilitate communication between the credit card processors and the issuing banks and set transaction rules and standards.

• Issuing bank
  The issuing bank, also called the “issuer” or “card issuer,” is the financial institution that issues the credit card to the cardholder. It authorizes and approves transactions, and it provides the funds for the purchase.

• Acquiring bank
  The acquiring bank, also known as the “acquirer” or “merchant bank,” is the financial institution that has a contractual relationship with the business to accept and process credit card transactions. It settles funds with the issuing bank and deposits the funds into the business’s account.

How does credit card transaction processing work?

Credit card transaction processing works differently depending on where a transaction takes place and what type of card is used. For example, an online credit card transaction will be initiated in a different way than an in-person card transaction. Similarly, an in-person transaction will work differently if the credit card is stored in a digital wallet compared to an in-person transaction where the customer uses a physical card.

But even with these smaller variations, the overall credit card transaction process is mostly consistent across different types of transactions. Here’s a simplified overview of how the process works:

1. Payment initiation
   The cardholder provides their credit card information to the business. For in-person transactions, this means swiping, inserting, or tapping their card. For online transactions, this means entering the card details manually or selecting a card from their stored payment methods.

2. Data transmission to acquiring bank
   The business’s POS system or payment gateway captures the transaction details and securely transmits this information to the credit card processor.

3. Forwarding to the card network
   The acquiring bank receives the transaction data and forwards it to the appropriate credit card network to act as the routing intermediary.

4. Authorization request to the issuing bank
   The credit card processor forwards the transaction data to the appropriate card network, which then routes the authorization request to the issuing bank.

5. Verification and response
   The issuing bank verifies the cardholder’s account, checking for sufficient funds and any potential fraud or security issues. Based on this evaluation, the bank either approves or declines the transaction and communicates this decision to the card network, which relays the information to the credit card processor.

6. Authorization response
   The credit card processor sends the authorization response—either an approval or a decline code—to the business’s POS system or payment gateway. If the transaction is approved, the business can complete the sale and provide the goods or services to the customer.

7. Reporting to the payment software
   The acquiring bank transmits the final authorization code to the business’s payment software or POS system, providing the technical "green light" needed to finalize the sale.

8. Completion and receipt
   The payment software completes the transaction, and a receipt is issued to the cardholder. While the funds are now authorized, the actual transfer of money, known as settlement, will follow in a separate batch process, typically within 1 to 3 business days.

Credit card transaction processing costs for businesses

Credit card transaction processing costs can vary depending on the type of credit card, the transaction volume, and the individual payment processor. Businesses need to understand these costs to make informed decisions and minimize payment processing expenses.

Here are the main types of credit card transaction processing costs:

• Interchange fees
  The cardholder’s issuing bank charges interchange fees for each credit card transaction. Interchange fees are typically a percentage of the transaction amount, plus a fixed fee per transaction. The exact interchange fee depends on the type of card, the business’s industry, and how the card is used in the transaction—for example, whether the customer swipes the credit card or enters their card information manually.

• Assessment fees
  Card networks often charge assessment fees for the use of their payment infrastructure. These fees are usually a small percentage of the transaction amount and can vary depending on the card network and the transaction volume.

• Processor markup
  Credit card processors and merchant services providers, which are companies that handle payments for businesses, charge a markup fee for their services. These fees include handling authorization, settlement, and communication with card networks and banks. This markup can be a percentage of the transaction amount, a per-transaction fee, or a monthly fee.

• Payment-gateway fees
  For online transactions, businesses may need to use a payment gateway, which securely transmits transaction information between the business’s website and the credit card processor. Typically, payment gateway providers charge a monthly fee or a per-transaction fee for their services.

• Operational and equipment fees
  Maintaining a payment system also involves paying for infrastructure. For example, businesses may need to invest in POS terminals, card readers, or other equipment to accept credit card payments. These costs can cover purchasing or leasing the equipment, as well as ongoing maintenance and software update fees. Some credit card processors charge a one-time fee for setting up the merchant account and activating the processing service, while other processors charge monthly or annual fees for maintenance and access.

• Chargeback and retrieval fees
  If a customer disputes a transaction, the processor may charge the business a fee for the chargeback process. Retrieval fees may also apply if the business needs to provide transaction documentation to the issuing bank. Different merchant services providers have different ways of addressing these types of fees.

• PCI-compliance fees
  To ensure the security of cardholder data, businesses need to comply with the Payment Card Industry Data Security Standard (PCI DSS). Some processors charge a fee for PCI compliance, while others include it in their service offering.

Businesses should carefully compare processing costs for different providers and choose the most cost-effective solution that meets their needs. Negotiating rates and fees, as well as maintaining a low chargeback ratio and adhering to PCI DSS guidelines, can help businesses minimize their credit card transaction processing costs.

For example, Stripe offers Chargeback Protection, which covers all costs associated with chargebacks and waives any fees.

Why credit card transaction processing is critical for businesses

Credit card transaction processing directly impacts a business’s ability to provide convenient and secure payment options for customers, which can affect sales, customer satisfaction, and overall growth. Finding the optimal credit card processing system offers several benefits in these areas, including:

• Enhanced customer experience
  By offering a simple, convenient credit card payment experience, businesses can meet the evolving needs of their customers, increasing customer satisfaction and loyalty. The benefits are even greater with a unified commerce model, where businesses integrate all sales channels, data, and back-end systems into a single, seamless platform.

• Increased sales and revenue
  Credit card payments can boost revenue for businesses, since customers tend to spend more money when using credit cards compared to cash. Accepting credit cards also enables businesses to accept payments in different currencies without needing to deal with conversion, further expanding their market reach.

• Increased efficiency and reduced costs
  Accepting credit card payments and providing a simple payment experience can give businesses a competitive edge. By carefully selecting the right credit card processor, businesses can streamline operations, minimize processing expenses, and maximize their cost margins. Credit card transactions also settle faster than some other payment methods, increasing cash flow.

• Secure and compliant transactions
  A strong credit card processing system helps protect the business and its customers from fraud and data breaches by adhering to security standards such as PCI DSS. This compliance is important for safeguarding sensitive customer information and maintaining trust.

• Access to valuable data and insights
  Credit card processors often provide detailed transaction data and reports, allowing businesses to track sales, identify trends, and make data-driven decisions that can optimize their operations and marketing strategies.

• Reduced risk
  By accepting credit cards, businesses can minimize the risks associated with handling large amounts of cash, such as theft, loss, or mismanagement.

• Adaptability
  A thoughtfully designed credit card processing system enables businesses to adapt to new payment technologies, such as contactless payments or digital wallets. This flexibility helps them stay ahead of industry trends and cater to evolving customer preferences.

Setting up a credit card processing system in a strategic way enables businesses to access these benefits and create a more robust, adaptable foundation for growth and stability. ​​

How Stripe Payments can help

Stripe Payments provides a unified, global payments solution that helps any business—from scaling startups to global enterprises—accept payments online, in person, and around the world.

Stripe Payments can help you:

• Optimize your checkout experience: Create a frictionless customer experience and save thousands of engineering hours with prebuilt payment UIs, access to 125+ payment methods, and Link, a wallet built by Stripe.
  
• Expand to new markets faster: Reach customers worldwide and reduce the complexity and cost of multicurrency management with cross-border payment options, available in 195 countries across 135+ currencies.
  
• Unify payments in person and online: Build a unified commerce experience across online and in-person channels to personalize interactions, reward loyalty, and grow revenue.
  
• Improve payments performance: Increase revenue with a range of customizable, easy-to-configure payment tools, including no-code fraud protection and advanced capabilities to improve authorization rates.
  
• Move faster with a flexible, reliable platform for growth: Build on a platform designed to scale with you, with 99.999% historical uptime and industry-leading reliability.
  

Learn more about how Stripe Payments can power your online and in-person payments, or get started today.