Who Processes Credit Card Payments?

When you make or receive a payment with your credit card, it feels like a simple process. In reality, there is a lot of behind-the-scenes activity going on. Multiple parties must coordinate to fund, settle, authorize, and authenticate every transaction. 

As a business owner, it’s important to understand who is involved in processing credit card payments and how this process works. At Swipesum, we help companies get an inside look into credit card processors, fee structures, and more.

Who Processes Credit Card Payments? 

Credit cards aren’t processed by a single individual or company. Multiple actors are involved in the process. Behind the scenes, all of these parties have to do their part for a credit card transaction to be fully processed.

Card Association

Visa and MasterCard are two examples of card associations. These organizations set interchange rates, but the maximum interchange rate is capped by the Federal Reserve.

Cardholder 

A cardholder is someone who applied for a credit or debit card from their issuing bank. When they want to pay for a product or service, they use this card to begin the credit card transaction process.

Issuing Banks 

The issuing bank is the credit union, bank, or financial institution that issues cards to cardholders. It must authorize and approve each transaction before funding it.

Merchant 

Merchants are companies that sell goods and services. Besides card payments, they often accept cash or checks in exchange for their goods. However, 83% of transactions are conducted using credit cards, digital wallets, and debit cards.

Merchant Bank 

The merchant bank is also known as the acquiring bank. It is the bank that maintains the merchant’s account. When the cardholder makes a payment with a credit card, the transaction goes into this account. The merchant bank is responsible for settling funds with the cardholder’s bank. Then, they deposit the funds into the merchant’s account.

Payment Processors 

Payment processors are the businesses involved in the actual processing of the card transaction. They serve as the middlemen for merchants, cardholders, banks, and credit card companies.

What Are the Steps Involved in Processing Credit Cards? 

Whenever a transaction is handled, the merchant bank and issuing bank must move funds from one account to another. This involves a multi-step process to authorize, authenticate, settle, and fund each transaction. In general, credit card transactions only take a few days to fund.

Step 1: Authorizing the Transaction

The first step in credit card payment processing is the authorization stage. During this stage, the merchant must get approval for the payment from the credit card issuer.

1. The cardholder makes a purchase using their card. This can be done over the phone, in person, or online. 
2. Next, the merchant submits a payment authorization request to the payment processor.
3. Once the payment processor receives the request, they’ll give it to a card association for approval. 
4. If the request is approved, the card association will send it to the issuing bank for approval or denial. The issuing bank validates the cardholder’s account and available funds before approving the transaction request. 
5. Finally, the issuing bank sends its approval or denial to the card association. In turn, the card association relays this response to the merchant. The issuing bank puts a hold on the cardholder’s account for the purchase amount.

Step 2: Authenticating the Payment

After the payment is authorized, the transaction enters the authentication stage. This is when the issuing bank determines if the cardholder is making a valid transaction or not.

1. First, the card association sends a request to the issuing bank for payment authorization. 
2. The issuing bank checks to see if the account exists and if there are enough funds. 
3. Then, the issuing bank decides if they want to approve the transaction or not. They send their approval or denial to the merchant bank and card association. 
4. If the transaction is approved, the issuing bank puts a hold on the cardholder’s account. 
5. Finally, the point of sale terminal at the merchant’s shop will receive the authorization so that the settlement and funding process can begin.

Steps 3 and 4: Settling and Funding the Payment

The final stage of the process involves settling and funding the payment. Once this happens, the merchant can receive the funds from the transaction.

1. Batched approved authorizations are sent to the merchant’s payment processor. 
2. Then, the payment processor gives the card association their authorization. 
3. Once the card association receives the authorization, they forward it to the issuing bank. 
4. The funds are transferred from the issuing bank. An interchange fee is charged. The Federal Reserve caps this fee at $0.21 plus 0.05% of the transaction amount. 
5. Normally, this process takes around 24 to 48 hours to complete. Once it is done, the merchant bank delivers the funds into the merchant’s bank account.

What Are the Different Types of Credit Card Processing Fees? 

During a debit or credit card transaction, merchants will be charged a range of different fees. The fees can vary based on the transaction volume, the payment processor used, and the credit card type. 

At a typical company, these fees can easily add up to 1.5% to 3.5% of the transaction total. Swipesum helps lower transaction costs by serving as your chief payments officer. We consult with companies of all sizes about transaction fees and how to reduce them.

Activation and Setup Fees 

When you first get a merchant account, the credit card processor may bill you for a one-time fee to set up and activate the account. 

Annual and Monthly Fees 

Depending on your processor, you may be charged a monthly or annual fee for reports, account maintenance, and other activities.

Assessment Fees

These are the fees charged by a card network for using their infrastructure. While the amount can vary, it is usually a small percentage of the transaction total.

Retrieval and Chargeback Fees 

Sometimes, customers will dispute transactions. When this happens, the credit card processor will charge companies an extra fee which is known as the chargeback fee. If the company has to give the issuing bank documentation, they may be charged a retrieval fee.

Interchange Fees

These fees are charged for every transaction. The Federal Reserve limits these fees. However, they can vary based on your industry, the card type, and how the card is used to complete the transaction. 

Markup Fees 

A markup fee is charged by merchant services providers and card processors. This could be a fee for each transaction, a monthly fee, or a percentage of the transaction total.

Payment Gateway Fees 

These fees are charged for online transactions that use a payment gateway. Normally, the payment gateway is responsible for sending transactions from your company’s website to the credit card processor. In most cases, this fee is charged per transaction or per month. 

PCI Compliance Fees 

Some credit card processors charge an extra PCI compliance fee for providing data security. 

Terminal Fees 

Terminal and equipment fees may be charged for card readers and terminals. Depending on the company you’re working with, your business may be purchasing or leasing the equipment. Typically, these fees also cover the cost of software updates or any maintenance needs.

Frequently Asked Questions About Credit Card Processors 

As you research different credit card processors, you may have a few questions about their services. Read on to learn more.

What Is a Credit Card Processing Company Called?

The payment processor may be referred to as a payment service provider or payment gateway. They are the transaction agent, which means they relay information about the transaction and the funds involved between the merchant bank and the issuing bank.

How Do You Choose a Payment Processor? 

Each company has different needs, so you should consider a range of different factors when selecting a payment processor. 

• Easy of integration 
• Fees charged 
• The speed at which you can access your funds
• Comprehensive reporting
• Data security 
• User-friendly interface 
• Variety of payment options
• Reputation and experience 
• Scalability options for your business

How Are Credit Card Transactions Approved?

Credit card transactions are approved in a multi-step process that involves the acquiring bank, merchant, merchant bank, cardholder, payment card network, issuing bank, and card association. The entire process is designed to verify the authenticity of the transaction and the presence of funds so that money can be transferred from the merchant’s account to the cardholder’s account.

Learn More About Credit Card Processing

Whether you are a small business looking to grow or a multinational corporation, credit card fees can cut into your profitability. By learning more about your options, you can save your company a significant amount of money. 

At Swipesum, we specialize in helping companies learn about fees. We can help you reduce the amount you’re paying and discover the right payment processor for your needs. For more information, reach out to our integrated payments experts today. 

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