What Is Credit Card Processing?

What Is Credit Card Processing? A Comprehensive Guide

Every time a customer swipes, dips, or taps their credit or debit card at your business, their payment embarks on a complex yet rapid journey. Although it only takes a few seconds for your payment terminal to flash “accepted” and prompt the customer to remove their card, a lot happens behind the scenes. During those moments, the customer's funds are transferred through a series of electronic steps, ultimately depositing the funds into your business account. It's a complicated process but to put it into perspective, Visa alone processes upwards of 100,000 transactions every second, totaling roughly 0.72 billion Visa transactions per day.

Credit card processing is the system that facilitates this entire process. It involves multiple parties, including the merchant, credit card processor, card networks, and issuing banks, all working together to ensure that the transaction is completed smoothly and securely.

Understanding Credit Card Processing

Credit card processing refers to the electronic handling of credit and debit card transactions. This broad term encompasses everything from traditional credit card payments to mobile wallet transactions like Apple Pay and Google Pay. Whenever a payment is made that isn’t cash or check, it goes through the credit card processing system.

The process, while intricate, can be broken down into three key stages: authorization, authentication, and settlement. By understanding these stages, merchants can better grasp the fees they are charged and potentially identify opportunities to save on processing costs.

The Steps of Credit Card Processing: A Relay Race

Imagine the credit card payment process as a relay race. The funds from a customer’s card are passed along like a baton between various participants in the payment ecosystem. Each participant completes a part of the process and, in turn, takes a small piece of the transaction value as a fee.

Step 1: Authorization – The Race Begins

The race starts when the customer swipes, dips, or taps their card. The payment information is sent through a secure gateway that connects the merchant’s terminal to the credit card processor. The processor, often referred to as the “team captain,” plays a critical role in coordinating the entire transaction. They send the payment details to the card network (e.g., Visa, MasterCard) and then to the issuing bank (the customer’s bank) for approval.

Step 2: Authentication – Rounding the Bend

Once the payment data reaches the issuing bank, the bank verifies the transaction, checking for potential fraud and ensuring the customer has sufficient funds or credit. If everything checks out, the issuing bank approves the transaction and sends the authorization back to the card network, which then relays it to the processor.

Step 3: Settlement – The Finish Line

After the transaction is authorized, the issuing bank transfers the funds to the acquiring bank (the merchant’s bank), minus interchange fees. The processor then deposits the remaining funds into the merchant’s account. The entire process is completed in just a few seconds, although settlement (the actual transfer of funds) may take a couple of days.

Common Credit Card Processing Fees

Credit card processing fees can vary widely, but they typically include the following:

• Interchange fees: Paid to the issuing bank for processing the transaction.
• Assessment fees: Charged by the card network (e.g., Visa, MasterCard).
• Processor fees: Charged by the credit card processor for handling the transaction.
• PCI compliance fees: Fees for ensuring that the merchant complies with Payment Card Industry Data Security Standards (PCI DSS).

These fees are usually expressed as a percentage of each transaction plus a fixed amount (e.g., 2.9% + $0.30 per transaction). However, some fees, such as PCI compliance fees or monthly service fees, may be fixed costs regardless of transaction volume.

Why Credit Card Processing Transparency Matters

The credit card processing industry is often criticized for its lack of transparency. Hidden fees and confusing contracts are common, making it difficult for merchants to understand what they’re actually paying for. This opacity can lead to merchants paying more than they should for processing services.

At Swipesum, we’re committed to transparency in credit card processing. We work with merchants to ensure they fully understand their processing fees and help them negotiate better rates. By taking the time to educate yourself on how credit card processing works, you can protect your bottom line and avoid unnecessary costs.

Conclusion

Credit card processing is an essential part of modern commerce, enabling businesses to accept a wide range of payment methods. While the process is complex, understanding how it works and the fees involved can help you make informed decisions about your payment processing services. Whether you’re a small business owner or a large enterprise, having a grasp of credit card processing can save you money and improve your overall financial health.

For more information on how to optimize your credit card processing and reduce costs, book some time for a consultation.