A Simple Guide to The Inner Workings of Credit Card Processing

Florence Carpenter

Many SMBs avoid credit card processors because they cannot grasp the idea behind payment processing. They would stick to cash transactions instead just to avoid the hassle of shifting to a new model. Admittedly, the inner workings of processing card payment transactions involve several complex steps, so we understand why first-timers might feel intimidated.

Unfortunately, the modern market also has a high demand for card payments. Surveys show that nearly 60% of all small businesses in the country get asked about credit cards daily. So, if you still don’t have a POS system, you need to invest in one right away. Otherwise, the limited payment options will eventually hurt your customer retention rates.

Which Parties Are Involved in Credit Card Processing? 

Payment processing goes far beyond just you and your customers. In fact, several institutions and parties play an active role in processing electronic payments—these include the following:

Acquiring Bank

The acquiring bank, otherwise known as the merchant’s bank, processes and stores card transaction funds on behalf of the merchant. They are also responsible for sending authorization requests to credit card companies.

Issuing Bank

Issuing banks provide brand-associated credit cards. So, in this context, they are the customer’s bank. They authorize transactions and verify the legitimacy of the card used during the payment process.

Payment Provider

The payment service provider (PSP) oversees transactions processing electronic payments via credit cards, debit cards, mobile wallets, and gift cards, among other mediums. They also provide merchants with the technology to process card transactions (e.g., POS systems, payment gateways).

What Are the Steps Behind Credit Card Processing? 

Here’s a step-by-step breakdown of what happens when a customer uses their credit card:

  • Step 1: The customer uses their credit to purchase your goods or services, either in person or online.
  • Step 2: Your POS system collects the necessary information, then sends them to your acquiring bank.
  • Step 3: The merchant acquiring bank sends a card authorization request to the credit card company, and in turn, they forward the request to the customer’s issuing bank.
  • Step 4: After an automated review, the issuing bank responds to the request—either the card is authorized to make a purchase or not.
  • Step 5: Assuming that the transaction pushes through, the issuing bank will send the cleared funds to your acquiring bank.
  • Step 6: The acquiring bank deducts the corresponding processing fees, then sends the cleared amount to your merchant account.

Overall, the transaction will push through as long as the customer uses a legitimate credit card with existing credit. Your POS will instantaneously decline any stolen or unfunded account.

Also, while the process involves multiple authorization requests, steps one to four typically only take a few seconds to complete. The institutions involved have several systems to automate the process. However, transferring the cleared funds from the issuing bank to your merchant account will take at least two to three business days.

How Do You Evaluate Between Different Credit Card Processors? 

Here are the most critical factors to consider when assessing the different credit car¿ processors on the market:

Customer Support  

Credit card processors provide varying levels of customer support. Some brands have 24/7 service hotlines, while others assign clients with their respective account managers. 

If you have a physical store that operates only during business hours, you might benefit from having an account manager. However, stores that operate 24/7 will also require 24-hour support. 

Additional Fees

Always read the fine print. Watch out for hardware rental fees, monthly subscription rates, and early termination penalties, among other unfair charges.

Transaction Speed

Look for payment processors that operate quickly and accurately. Trust us—even a few seconds of delay would drastically increase the likelihood of customers abandoning their online shopping carts. For in-person sales, a tedious checkout process hurts customer retention rates.

POS System Reliability

Look for payment processors that provide fast-loading payment gateways and reliable POS systems. Having multiple downtimes gives your brand a bad reputation.

Can your business afford a POS system? Processing Card advises SMBs to review their prospective processors’ pricing plans before pushing through with the application process. Check out our quick introduction to transaction fees!

Frequently Asked Questions

What is the average fee for credit card processing?

Most processors charge around 1.3% to 3.5% per transaction. However, keep in mind that the exact fees would still vary based on the company’s respective pricing model. For instance, since Square follows an interchange-plus pricing plan with a 2.6% + $0.10 fee, a $100 transaction will be deducted $2.70.

Can you negotiate credit card processing fees?

Merchants do not have the power to negotiate card processing fees, although you can compare the different pricing plans available on the market. If you want an inexpensive processor, try either PayAnywhere and GoPayment. These companies charge a 2.69% and 2.4% + $0.25 transaction fee, respectively.

Are credit card processing services secure?

While no one can wholly eliminate cybersecurity risks, a reputable, stable processor has the capacity to mitigate privacy issues right from the get-go. You can also go through online forums for genuine, unfiltered reviews.

What is a merchant service fee?

Issuing banks charge acquiring banks an interchange fee for processing card transactions. In turn, the acquiring bank passes the payment onto their clients, which they call merchant service fees. The declared amount is often a percentage of the total transaction value.

How are processing fees calculated?

Payment processors calculate processing fees based on the following pricing plans: tiered rates, flat rates, interchange-plus pricing, and simple flat-rate subscription fees.

Feel free to explore the payment processors on the market. As we mentioned above, different processors have varying features. Generally, you need a system that matches your target market’s payment preferences, the products or services you offer, and your budget limitations.

Also, avoid agents coercing clients into buying one-size-fits-all plans. Any PSP that promotes cookie-cutter plans does not prioritize their clients’ best interests. You will only waste your resources in the long run.
Still struggling to qualify your business for a POS system? Processing Card can help! Check out our resources for more information on credit card processing.

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