As ecommerce has grown rapidly and payment methods have diversified, it has become increasingly important for businesses to adapt to new ways of conducting transactions. According to a 2023 survey conducted by Forbes Advisor, only 9% of Americans rely primarily on cash for their purchases. Over half of those surveyed—54%—prefer to use either a physical or virtual debit card, while 36% opt for a physical or virtual credit card as their primary payment method.
By adopting advanced payment systems, businesses can provide simple, secure, and efficient transactions that increase revenue and enhance the customer experience. Below, we’ll discuss the important aspects of credit card processing, including the key components that power the system, credit card processing fees, and proven strategies for building and maintaining a high-performing credit card payment system. Here’s what you need to know.
What’s in this article?
- What is credit card processing?
- Key components of credit card processing
- How credit card processing works
- Credit card processing providers
- Credit card processing costs
- Credit card processing best practices
What is credit card processing?
Credit card processing is the system that enables businesses to accept credit card payments from their customers. By facilitating easy, secure transactions, credit card processing broadens the range of payment options available to customers and increases sales.
Key components of credit card processing
Credit card processing involves several components that work together. Here is an overview of the main players involved:
Cardholder
The cardholder is the customer who owns a credit card issued by a bank or financial institution.Merchant
The merchant is the business or individual that sells goods or services and accepts credit card payments.Acquiring bank
The acquiring bank, or acquirer, is the financial institution that partners with the business to process credit card transactions. The acquiring bank receives transaction information from the business and communicates with the issuing bank to obtain authorization.Issuing bank
The issuing bank, or issuer, is the bank or financial institution that issues the credit card to the cardholder. The issuing bank approves or declines transactions based on factors such as the cardholder’s available credit and account status.Card networks
Card networks are organizations—such as Visa, Mastercard, American Express, and Discover—that provide the infrastructure and rules for processing credit card transactions. Card networks act as intermediaries between acquiring banks and issuing banks to facilitate transaction communication, authorization, and settlement.Payment gateway
A payment gateway is a tool that transmits payment information from the business’s point-of-sale (POS) system or ecommerce platform to the acquiring bank for processing. It encrypts the cardholder’s data and ensures the transaction complies with security standards.Payment processor
A payment processor, or payment processing provider, is a company that manages the transaction process on behalf of the acquiring bank, handling tasks such as communicating with payment networks, obtaining authorization, and managing the settlement process.POS system
A POS system is the hardware and software businesses use to accept credit card payments. For in-person payments, this might include a card reader or a retail terminal. For online transactions, this would include the ecommerce platform and payment gateway.
These parties ensure that credit card transactions are secure and efficient and comply with regulations and industry standards, providing an easy and fast payment experience for customers and businesses.
How credit card processing works
Credit card processing includes a series of steps that give businesses the ability to accept credit card payments and process those payments. Here’s an overview of the process:
1. Transaction initiation
The customer provides their credit card information to the business, either by swiping, inserting, or tapping their card at a POS terminal or by entering their card details on an ecommerce website or mobile app.
2. Authorization request
The payment gateway securely transmits the payment information, encrypting the data before sending it to the business’s acquiring bank. The acquiring bank forwards the transaction details to the appropriate payment network to start the authorization process.
3. Transaction authorization
The payment network routes the transaction to the issuing bank, which verifies the cardholder’s account, checks for available credit or funds, and assesses the risk associated with the transaction. Based on these factors, the issuing bank either approves or declines the transaction.
4. Authorization response
The issuing bank sends the authorization response—either an approval or a decline code—to the payment network, which forwards it to the acquiring bank. The acquiring bank relays the response to the payment gateway, which ultimately passes it on to the business’s POS system. At this point, the business receives the approval or decline message.
5. Transaction completion
If the transaction is approved, the business provides the goods or services to the customer. The approved transaction is added to a batch of other transactions awaiting settlement.
6. Settlement
At the end of each day or another predefined period, the business submits the batch of approved transactions to the acquiring bank. The acquiring bank requests funds from the issuing bank through the payment network. The issuing bank transfers the required funds to the acquiring bank, which deposits the money into the business’s account, minus any fees associated with credit card processing.
Typically, authorization takes a few seconds and settlement takes a couple of days. Go here for more details about Stripe’s payout timelines for businesses.
Credit card processing providers
When choosing a credit card processing provider, businesses should consider several factors to ensure they select the right partner for their needs:
Assess your business needs
Understand your transaction volume, average transaction size, and whether you require in-person, online, or mobile payment processing. Consider every market, audience segment, and channel where you currently do business or plan to expand. You’ll want a payment provider that accepts all the preferred payment methods and currencies in these areas.Compare pricing and fees
Processing providers may charge various fees, including transaction fees, monthly fees, setup fees, and hardware fees. Compare different providers’ pricing structures to determine which one offers the best value for your business. Read here about Stripe’s payment processing fee structure.Evaluate customer support
Issues with your processing system can directly impact your sales and customer experience. Make sure you choose a provider that offers reliable customer support. Here are more details about the various channels where Stripe customers can access support 24/7.Consider security and compliance
Ensure that the provider complies with the Payment Card Industry Data Security Standard (PCI DSS) and other relevant security standards to protect your customers’ sensitive data and minimize the risk of fraud.Review integration compatibility
Check if the provider’s payment processing solution is compatible with your existing POS system, ecommerce platform, and accounting software to ensure that integration is as seamless as possible and future operations run smoothly.Research provider reputation
Look for reviews from other businesses to gauge the provider’s reputation and reliability. Consider asking for recommendations from your industry peers. While it’s advisable to stay aware of new payment processing options and approaches, it’s also important to partner with a vetted provider.Analyze additional features and services
Some providers may offer value-added services, such as advanced reporting, recurring billing, or multicurrency processing. Determine which features are necessary for your business and which features would be a nice addition.
Carefully evaluating these factors and comparing different credit card processing providers is the best way for businesses to make an informed decision that suits their requirements, budget, and long-term goals.
Credit card processing costs
Credit card processing costs can vary depending on the provider, transaction type, and other factors, so it’s important to understand what credit card processing fee structures look like for different payment processors. Common costs associated with credit card processing include:
Transaction fees: These are fees that the payment processing provider charges per transaction, usually expressed as a percentage of the transaction amount plus a fixed fee. For example, Stripe charges 2.9% + $0.30 per successful card charge.
Monthly fees: Some providers charge a monthly fee for their services, which may include access to a payment gateway, reporting tools, or other features.
Setup fees: Some providers charge a one-time setup fee for creating and configuring your account.
Terminal or equipment fees: If you require physical equipment to accept payments in person—such as a card reader or POS system—there might be costs associated with purchasing or leasing this hardware. This is especially important to consider for businesses that need to accept in-person payments at scale.
PCI-compliance fees: Some providers charge an annual fee for maintaining PCI compliance or assisting your business in achieving compliance.
Chargeback fees: If a customer disputes a charge, you may be subject to a chargeback fee, which is typically a fixed amount per disputed transaction. These fees tend to be greater for high-risk businesses or those with a history of high chargeback ratios.
Credit card processing best practices
With cashless transactions on the rise, businesses should take a strategic approach to credit card payments. By carefully considering their payment processing systems and practices, businesses can reduce costs, minimize risks, and enhance the customer experience. Businesses that want to create a frictionless, secure, integrated credit card payment system should follow these best practices:
Align your approach to your sales channels
There isn’t a single credit card processing strategy that fits every use case. For example, a platform business supporting a large number of users that need to accept in-person credit card payments in a number of global markets will have different requirements than an ecommerce retailer that doesn’t operate any in-person sales channels. Understanding your specific needs will allow you to vet the best options for your business.Implement fraud prevention measures
Fraud prevention is built in to most credit card processing solutions, but businesses still need to make sure they are protected from fraud, depending on where and how they conduct transactions. You can use basic tools—such as address verification service (AVS) and card verification value (CVV) checks—and advanced fraud detection software to minimize the risk of fraudulent transactions.Monitor and analyze transactions
Regularly review your transaction history to detect unusual patterns, identify potential issues, and refine your processing strategy. Make sure your payment processor offers this type of monitoring. Stripe Radar uses machine learning to detect and prevent fraudulent transactions.Create clear, accommodating refund and chargeback policies
Establish transparent, fair refund and chargeback policies to reduce disputes, maintain customer satisfaction, and avoid unnecessary fees.Offer multiple payment options
Cater to a wide range of customer preferences by providing multiple payment options, including credit cards, debit cards, digital wallets, and other alternative payment methods. This doesn’t mean you need to accept every payment method. Instead, research how your customers prefer to pay and which payment methods are most commonly used with the types of products and services you offer.Maintain up-to-date hardware and software
Keep your POS systems, payment gateways, and other processing components updated to ensure smooth operations, enhanced security, and improved customer experiences.
To find out more about how Stripe can power a credit card processing strategy that accommodates every customer segment, channel, and market where you do business, get started here.