How Credit Card Processing Works

Credit Card Processing Solution Basics

From the smallest café to the largest financial institution, credit cards are an important part of every business. As a merchant, it’s important you understand how credit card processing works – and what your options are when shopping for payment providers.

What Is Payment Processing?

Payment processing describes the steps required to move money from a successful sale into your business’s bank account – as quickly, cost-effectively, and easily as possible.

While accepting cash payments is fundamental for many businesses, accepting credit cards is a key part of expanding.

According to one study, 30 percent of all transactions were paid with cash, suggesting the majority of consumers rely1:

  • Directly on credit card processing (using traditional consumer plastic)
  • Indirectly on CC processing (via digital wallets on their smartphones)

Any business unable to process credit card payments risks missing out on a large percentage of potential sales.

To help ensure this doesn’t happen to you, it’s important to understand what credit card processing involves – and how payment processing works behind the scenes.

What Is Credit Card Processing?

Credit card processing is what allows businesses to securely accept payments made via credit, debit, gift, and even loyalty cards. This ability to capture card-based sales used to involve a one-size-fits-all approach, complete with complex configurations and long authorization delays. Today, there are more payment processing options than ever before – many of which are tailored for specific types of businesses.

For example, the online credit card processing solutions that an eCommerce merchant might explore are very different from what a brick-and-mortar retailer needs – and vice versa.

Ultimately, this variety is a plus as business owners can find the right payment solutions for their individual needs. With so many options available, it’s easy to feel overwhelmed. That’s why it’s important to pick a trustworthy partner that can guide you throughout the entire process – from selecting a POS system to learning how to process payments quickly and securely.

If you’re not sure how payment processing works, the following represents the minimum to get started. Though, depending on your specific payment environment, you may need to invest in additional tools and equipment:

  1. Select a merchant account – Before a business can accept credit cards, it first needs to set up a merchant services account.
  2. Merchant accounts are a specific type of bank account that allows businesses to accept payments by debit, credit, or gift card. Ultimately, a merchant account is an agreement between a retailer, a merchant acquiring bank, and a payment provider for the processing of credit and debit card transactions.

  3. Select a POS system – This is the combination of hardware and software that allows brick-and-mortar merchants to capture in-person credit card payments.
  4. In addition to payment processing, a POS system can help merchants manage their business operations, from tracking inventory to scheduling appointments to logging employee hours.

  5. Select a payment gateway – As an eCommerce merchant, payment gateways are necessary for online credit card processing.
  6. A payment gateway is linked to your business’s online checkout form or shopping cart. It captures and encrypts customers’ credit card data and sends this information to the payment processor for authorization.

How Payment Processing Works – Who’s Involved?

Understanding credit card processing basics allows you to make better-informed decisions about which payment solutions are best suited for your business. For example, you can avoid unnecessary add-ons and fees by designing a payment environment that only delivers the specific features you need to securely, quickly, and easily process incoming card-based sales.

In the next section, we’ll explore the details of how payment processing works. First, we need to meet the key parties that make each transaction possible:

  • The cardholder is the customer who initiates an in-person or online purchase using a credit or debit card
  • The card issuer is the bank that provides its customers with consumer plastic
  • The merchant is the card-accepting business owner selling whatever goods or services the customer is trying to purchase
  • The payment processor is responsible for securely routing the transactions captured by the merchant’s point-of-sale device to the customer’s card-issuing bank for approval
  • The card association is the network maintained by the major brands (Visa, Mastercard, Discover, etc.). This card association is responsible for setting fees, resolving disputes, and establishing security guidelines for the network
  • The acquiring bank is what the merchant uses to ultimately collect funds from the issuing bank. This may be the same entity as the merchant’s payment processor

How Payment Processing Works – What Steps Are Involved?

Now that you understand the parties involved, let’s look specifically at how credit card processing works behind the scenes. Although every payment environment is slightly different, almost every successful card-based sale goes through two main steps – authorization and settlement.

Step 1: Payment Authorization

Below are the credit card processing basics of how authorization works:

  • When a cardholder swipes, dips, or keys in payment information during checkout, the merchant’s POS terminal or payment gateway tokenizes and encrypts this data before sending it to the payment processor
  • The payment processor routes this data to the customer’s card-issuing bank through the card association’s network
  • The card-issuing bank verifies the identity of the customer and whether he or she has sufficient funds to cover the sale
  • An authorization or decline is sent back through the chain from the card issuing bank to the payment processor to the merchant’s POS terminal or payment gateway

If the transaction is approved, the merchant has technically made a successful sale. However, this money is not deposited into the merchant’s acquiring bank just yet. This is because the transaction must go through another step – settlement.

Step 2: Payment Settlement

Here are the credit card processing basics of how payment settlement works:

  • Once a transaction has been authorized, the merchant’s POS terminal or payment gateway sends the approval to the payment processor that reconciles the transaction
  • The payment processor deposits the transaction amount in the merchant’s acquiring bank (minus any fees). This settlement period typically takes one or two business days, with most transactions being batched together on a daily basis instead of going through the settlement process in real time. Batching helps to reduce total processing costs – especially among merchants that generate hundreds or thousands of sales every day
  • While the payment processor deposits money in the merchant’s acquiring bank account, the card network deducts the purchase amount from the card-issuing bank before sending this transaction balance to the payment processor or acquiring bank (minus fees)
  • The card-issuing bank deducts the amount from the customer’s account before sending an invoice or statement to the cardholder (minus fees). If using a debit card, the customer’s job is finished. If paying with a credit card, the customer needs to settle his or her statement in the next billing cycle or pay interest charges

The Right POS Technology Can Help Improve How Payment Processing Works

We specialize in a range of payment processing solutions to help you securely capture new sales in today's ever-changing marketplace – whether you want to accept:

  1. Credit and debit cards
  2. Mobile payments
  3. Online transactions

Our extensive portfolio of innovative small business credit card processing and large merchant services is designed to help businesses get more value from every transaction.

Below are some of the most popular POS systems that integrate seamlessly with our PCI-compliant credit card payment processing solutions.

1. Clover® Station Pro

The Clover Station Pro is our fastest, most secure, and most customer-engaging POS system yet.

The innovative technology makes it easy to:

  • Capture customer information
  • Offer rewards
  • Accept mostly any type of payment available – from contactless mobile payments to EMV® chip cards

It also comes with a smart terminal to enable customers to confirm their orders and complete payment faster.

2. Clover Station

The Clover Station is a POS solution that can manage an entire business all in one system, from accepting payments to managing employees to tracking inventory.

The Clover Station can take virtually all kinds of payments, including:

  • Magnetic stripe
  • EMV chip
  • Contactless payments

Additionally, the Clover Station is compatible with a variety of peripherals from barcode scanners to kitchen printers.

3. Clover Mini

The Clover Mini is the sleekest, most flexible payment terminal around. It is a simple and entirely self-contained credit card processing solution that allows you to accept more kinds of payments, including:

  • Magnetic stripe
  • EMV chip
  • Contactless payments

As your business grows, the Clover Mini can easily scale up to full POS functionality, thanks to a range of specialized apps from the Clover App Market.

4. Clover Flex

The Clover Flex is an all-in-one device with built-in capabilities to help you better serve customers, whether it's in-store or in the field.

The Clover Flex helps protect your customers, your business, and your reputation from fraud with Clover Security Plus.

5. Clover Go

Using your smartphone or tablet, the Clover Go allows you to securely and reliably accept both credit and debit cards on the go – including EMV chip cards and contactless payments such as:

  • Apple Pay®
  • Samsung Pay®
  • Google PayTM

Clover Go is ready right out of the box. Just pair it with your iOS or Android device, and start accepting chip cards, contactless payments, and more.

Credit Card Processing Solutions Help Boost Sales

The simple act of accepting credit card payments can help boost your business. Research shows that sales can double (or even triple), with one survey finding that2:

  • 83 percent of small businesses that started accepting credit cards saw increased sales
  • 52 percent of businesses made at least $1,000 more a month
  • 18 percent made at least $20,000 more a month

The bottom line is that if you want your business to grow, you need to accept credit and debit cards.

Want to Learn About Our Credit Card Processing Solutions?

If you still have questions about how payment processing works, schedule a free consultation with our team today for your:

1 “2018 Findings from the Diary of Consumer Payment Choice," Federal Reserve Bank of San Francisco, 15 November 2018

2 “Cash Isn’t Always King: Accepting Credit Cards Can Increase Your Business," Small Business Trends, 28 January 2019