How credit card processing works, step by step.

Credit card processing works in two stages: authorization, where the customer’s bank approves the sale in a few seconds, and settlement, where approved sales are batched and the money moves to your bank, often within one to two business days. Every party that touches the payment along the way takes a small fee, and those fees add up to your processing cost.

Below is the full path of a single payment, the players involved, and where each line on your statement comes from.

The players in every card payment

Five parties take part in almost every card sale. You only deal directly with one or two of them, but they all show up on your statement in some form.

Party	What it does	How it is paid
Cardholder	Pays with a card	Pays the card bill
Issuing bank	Approves the charge and bills the cardholder	Interchange
Card network	Visa, Mastercard, Discover or American Express route the payment and set the rules	Network fees (assessments)
Acquiring bank and processor	Run your merchant account, send the sale for approval and settle it	Processor markup
You	Sell the goods or service	Receive the sale minus fees

If you’re new to the account side, start with what is a merchant account. It explains the relationship between your processor and the acquiring bank.

Step 1: Authorization (the first few seconds)

Authorization is the part your customer sees. It happens while they wait at the counter or click Pay online.

1. The customer taps, dips, swipes or types in their card. Your terminal, POS or gateway encrypts the card data.
2. The request goes to your processor, which sends it to the right card network.
3. The network routes it to the issuing bank, the bank that issued the customer’s card.
4. The issuing bank checks available credit or funds, fraud signals and account status, then approves or declines.
5. The answer travels back the same way. Your terminal shows Approved or Declined.

At this point no money has moved. The issuing bank has only placed a hold for the amount. That’s why a customer may see a pending charge for a day or two.

Online and phone orders follow the same path, with a payment gateway standing in for the terminal. Because the card isn’t physically present, the gateway may also check the billing ZIP code and security code. Those checks help the issuing bank judge the risk, and they can affect the interchange rate the sale qualifies for. Hotels, rental businesses and fuel sites sometimes authorize an estimated amount first and then adjust it to the final total before the sale settles.

Step 2: Batching and settlement (end of day)

At the end of the business day, your approved sales are grouped into a batch and sent for settlement. Many terminals and gateways close the batch automatically at a set time. Restaurants that adjust tips usually close later, after tips are entered.

During settlement, the card networks tally up what each issuing bank owes and move the money to the acquiring bank. Interchange and network fees are applied at this stage, based on the card type and how the sale was taken. A chip card read in person usually costs less than the same card typed into a website, because the risk of fraud is different.

Next, the acquiring bank funds your business checking account. How fast depends on your processor, your bank and your batch time. We cover the details in when do card payments deposit.

Step 3: Fees, and where they show up

Every processing cost on your statement traces back to one of three buckets. Two are the same no matter which processor you use. One is not.

• Interchange. Paid to the issuing bank. It’s the biggest part of the cost and varies by card type, how the card was taken and your business category. See who sets interchange rates.
• Card-network fees. Small assessments charged by the card brands on each sale or on volume.
• Processor markup. What your processor charges for its service. This is the only part that changes between providers, and the only part you can really negotiate.

Some processors bundle all three into one rate, which hides how much of it is markup. Others use tiers like qualified and non-qualified. Interchange-Plus pricing passes interchange and network fees through at cost and lists the markup on its own line. That’s the easiest model to check against your statement.

Quick test: divide your total monthly fees by your total card volume to get your effective rate. Then ask your processor to show how much of that figure is interchange, how much is card-network fees and how much is their markup. If they can’t split it out, that tells you something too. Our guide to comparing processing quotes uses the same idea.

Refunds and chargebacks

Payments don’t always flow one way. A refund is something you start: you return money to the customer’s card, and it settles back through the same path. A chargeback is something the customer starts: they dispute the charge with their bank, the money is pulled back from your account, and you get a chance to respond with proof of the sale.

Good records, clear receipts and chip or tap acceptance in person all help you win disputes or avoid them. Card-brand rules set deadlines for responding, so open any dispute notice right away.

What PayZoom does

PayZoom has run card payments for businesses since 2006 and now serves clients in nearly every U.S. state. We recommend Interchange-Plus pricing so interchange and card-network fees pass through at cost and our margin sits on its own line. For Interchange-Plus merchants, that margin never increases, in writing.

We set up credit card processing to fit the POS, gateway or cart you already use, with no early termination fees and no non-compliance fees. If you’d like to see these steps on your own numbers, send us a recent statement for a free statement analysis. A real person will walk you through it.