How the Credit Card Process Works

In the 21st century, accepting electronic payments is a must for any business. The modern consumer is well aware of how convenient, secure, and seamless credit card transactions are. And as a result, they prefer the form of payment over any other. So, if you are still asking for cash, it’s time to reconsider your business’ payment infrastructure.

Whether your business is accepting payment online or in-store, it’s essential to include credit card processing systems. And to do so, you must have a provider that can securely facilitate these transactions for you.

However, as typical as credit card payments are, not everyone is familiar with how the process completes from start to finish. The below guide will help you understand how credit card processing works.

What Is Credit Card Processing? 

The credit card process starts when a client’s card information processes at a POS terminal or online via a virtual terminal. A merchant provider, such as Payment Savvy, channels the payment to the cardholder’s issuing bank. The latter approves or declines the transaction and sends the result back to the processor, and, ultimately, the merchant. As complex as the process may seem, all the above occurs in a matter of seconds.

Key Components of Credit Card Processing

• Cardholder – The person who owns and uses the credit card to make purchases or payments. The cardholder is responsible for managing their account, making timely payments, and safeguarding their card details.
• Merchant – The business or individual that accepts credit card payments in exchange for goods or services. Merchants can operate physically or online and must set up a merchant account to process transactions.
• Payment Processor – A company that handles transaction processing between the merchant and the acquirer. The payment processor handles the technical aspects of processing transactions, including authorization, data encryption, and settlement.
• Card Network– Networks like Visa, MasterCard, American Express, and Discover that facilitate the processing of credit card transactions. They provide the infrastructure for transaction routing, authorization, and settlement between the acquirer and issuer.

• Issuing Bank – The bank that issues the credit card to the cardholder. The issuer approves or declines transactions, extends credit to the cardholder, and handles billing and collections.

• Acquiring Bank – A financial institution that processes credit card transactions on behalf of the merchant. The acquirer manages the merchant’s account, provides the necessary equipment, and ensures funds are transferred from the cardholder’s bank to the merchant’s account.
• Payment Gateway – A technology solution that securely transmits transaction data from the merchant to the acquirer or processor. It encrypts sensitive information and ensures compliance with security standards.
• Point-of-Sale (POS) System – The hardware and software used by merchants to accept credit card payments in a physical location. POS systems can include card readers, terminals, and software applications.

How Does Credit Card Processing Work?

The entire payment process is divided into three stages:

PAYMENT AUTHORIZATION STAGE

The first and most important step in credit card processing is the payment. Regarding online credit card processing, payments can be made via a website or mobile app. In physical stores, payments are swiped, inserted, or tapped. Customers may also use digital wallets linked to their credit cards of choice.

Irrespective of the payment mode, once a client authorizes a transaction, the card details are securely obtained and sent to the store’s payment processor. The payment processor forwards the details to the relevant card network and ultimately passes them to the issuing bank for authentication.

PAYMENT AUTHENTICATION

After the issuing bank receives payment, authentication occurs next. The issuing bank confirms the customer’s available balance and approves or declines a request. Also, security measures in place authenticate the cardholder’s details and evaluate for signs of fraudulent activities.

If all lines up, the payment is approved, and the transaction is sent back to the payment processor and, ultimately, back to the merchant.

PAYMENT CLEARING

The final step includes sending the payment details to both the merchant and the customer. Funds are withdrawn from the cardholder and transferred to the merchant for payment of goods and services. Payment details also come in the form of bank statements on the consumer side and processing statements for the merchant.

Processing statements details daily payment totals and disclose appropriate monthly transaction fees. Some of the payment costs include card brand and interchange fees. With programs such as Payment Savvy’s compliant Fee-Free Payments solution, some businesses may qualify for low to no-cost payment processing. We also offer next-day funding to get access to your funds quickly.

Credit Card Processing Fees

Credit card processing fees are the costs that merchants incur when accepting credit card payments. These fees cover various services and risks involved in processing transactions, ensuring smooth operation from card swipes to fund transfers. Understanding these fees helps merchants manage their costs and make informed decisions.

Here are the three main credit card processing fees. 

Fee Type	Definition	Purpose	Structure
Interchange fees	Paid by the acquirer to the issuer	Covers processing and risk management	% of transaction + flat fee
Assessment fees	Charged by card networks	Covers network operations and compliance	% of the transaction amount
Payment Processor Fees	Charged by processors for handling transactions	Covers technology and support	% of the transaction, flat fee, or both

 

Additional Fees 

While interchange, assessment, and payment processor fees are the primary costs, merchants should also be aware of other potential fees, which include: 

• Chargeback Fees: When a cardholder disputes a transaction, a chargeback fee is imposed to cover the cost of resolving the dispute.
• PCI Compliance Fees: To ensure secure handling of cardholder data, merchants must comply with PCI DSS standards. Compliance fees help cover the cost of necessary security measures, such as data encryption and regular security audits. 
• Gateway Fees: Payment gateways facilitate the secure transmission of transaction data. Fees for using a gateway can include a monthly access charge and a per-transaction fee. 
• Batch Processing Fees (also known as Batch Fees: Batch processing fees are incurred when a merchant processes and settles a batch of transactions. This usually occurs at the end of the day, and the fee is applied each time the transactions are sent to the processor for settlement. It helps cover the cost of aggregating and transmitting the day’s transactions for final approval and fund transfer.

How Credit Card Fees Vary by Business Type

Different business types may encounter varying fee structures depending on their transaction methods and industry. For instance, e-commerce businesses often face higher fees due to increased fraud risk compared to brick-and-mortar stores. 

High-risk industries, such as travel, may also see higher processing fees. It’s important for merchants to understand how their specific business type influences the fees they incur and to negotiate terms that reflect their unique transaction patterns.

Tips for Minimizing Credit Card Fees

Merchants can take several steps to reduce their credit card processing fees:

• Negotiate with Providers: Don’t hesitate to negotiate with your payment processor or acquiring bank for better rates, especially if you have high transaction volumes.
• Optimize Transaction Handling: Encourage customers to use lower-cost payment methods, such as debit cards, which often have lower interchange fees compared to credit cards.
• Maintain PCI Compliance: Adhering to PCI DSS standards can prevent data breaches and reduce compliance fees. Regularly review and update your security measures to stay compliant.
• Use a Flat-Rate Pricing Model: Consider a flat-rate pricing model, where you pay a single fee for all transactions, regardless of card type. This can simplify your billing and make fees more predictable.
• Limit Manual Keyed Transactions: Avoid manually keyed transactions whenever possible, as they often incur higher processing fees. Use EMV chip readers or contactless payments to lower the risk of fraud and reduce costs.
• Reduce Chargebacks: Implement strategies to reduce chargebacks, such as having clear return policies, accurate product descriptions, and excellent customer service. Fewer chargebacks can lead to lower processing fees.
• Review Your Statements Regularly: Regularly review your credit card processing statements to identify any hidden fees or errors. Address any discrepancies with your provider promptly.
• Batch Transactions: Batching transactions at the end of the day may help lower fees, as some processors charge less for a single batch compared to multiple individual transactions.
• Avoid Early Termination Fees: When choosing a payment processor, be aware of early termination fees. Opt for providers offering flexible terms without high penalties for switching services.
• Implement Fraud Detection Tools: Use fraud detection and prevention tools to minimize fraudulent transactions. Reducing fraud helps avoid related fees and chargebacks.

Setting Up Credit Card Processing for Your Business

At Payment Savvy, we specialize in providing tailored credit card processing platforms that empower your business to thrive. Here’s what you need to do: 

Open a Merchant Account

To accept credit cards, your first step is to obtain a merchant account. This is a specialized account that allows your business to process credit card transactions. At Payment Savvy, we simplify this process, making it easy to get started. Our team will guide you through the application, underwriting, and setup, ensuring a smooth experience.

Documents Needed:

• Photo ID for all signers
• Processing Statements from the last 3 months (if applicable)
• Business Bank Statements for the last 3 months
• Tax Return or Business Financials
• Proof of EIN (IRS Form SS-4)
• Articles of Organization
• Voided Business Check

 

Select the Right Processing Solution

Payment Savvy offers various solutions to fit your business model. Whether you need to process payments online, over the phone, or via text message, our proprietary platform supports all major credit cards, including Visa, Mastercard, Discover, and American Express. Our systems operate 24/7, ensuring you never miss a sale.

Integrate with Your Business Systems

Our advanced payment platform easily integrates with your existing business systems. This seamless integration allows for real-time transaction monitoring, which helps you maintain efficient cash flow and minimize processing delays.

Benefit from Competitive Rates

Enjoy transparent and competitive pricing with Payment Savvy. We offer straightforward rates without hidden fees or long-term contracts. You only pay for the services you need, making it easier to manage costs.

Get Ongoing Support

Our relationship doesn’t end at setup. Payment Savvy provides continuous support to ensure smooth payment processing. Our expert team is always ready to assist with any questions or issues.

Ensure Security and Compliance

We prioritize security and compliance. Our platform meets the highest industry standards, safeguarding your transactions and protecting customer data.

Benefit From Payment Savvy’s Convenience Fee Solution

At Payment Savvy, we’re proud to offer a groundbreaking “convenience fee solution” that transforms the way you handle payment processing. Our solution allows your business to accept credit and debit cards, and electronic checks, at no cost to you. This means you receive 100% of your payments while we take care of the processing fees.

Here’s how it works: When your customer pays, the full amount is deposited into your bank account. The convenience fee, which varies by company, is then deposited into our account. This straightforward method ensures you get every dollar of your payments without the burden of traditional processing costs.

Our convenience fee solution is tailored to meet the needs of a variety of industries, including:

• Collections agencies
• Healthcare
• Utility companies
• Law firms
• Telecom providers.

We also specialize in providing custom solutions for medium to high-risk businesses, ensuring you have the flexibility and support to handle your unique payment processing needs.

With Payment Savvy, you gain access to a cost-effective and compliant way to manage transactions. Our focus on eliminating processing fees allows you to enhance your revenue while offering convenient payment options to your customers. 

Final Thoughts

The above details the three key stages the credit card process takes. By understanding the process, merchants can realize how adding credit card processing is an essential platform for business growth.

If you have any questions on how you can add the perfect payment acceptance for your business – give Payment Savvy a shout. Since 2010, our innovative and custom payment solutions have helped numerous merchants realize success and profit.