A Simple Guide To Credit Card Processing

By OneCard   |   January 29, 2025

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Have you ever stopped to wonder what happens behind the scenes when you make a credit card payment? While most of us use credit cards, not many understand how credit card processing works. Behind every successful credit card transaction is an intricate process that allows a seamless transfer of funds from your account to the vendor’s account.

So, let’s dive into the world of credit card processing. By the end, this blog will provide you with a better understanding of the inner workings that keep our financial lives running smoothly.


What is Credit Card Processing?

At face value, it appears simple: you swipe, tap, or insert your credit card into the card reader to pay for the meal. The transaction is then either approved or declined within seconds. But the actual process is much more complex with many steps involved.

Essentially, credit card processing is a series of functions required to complete a transaction. This process allows businesses to accept payments for services, making transactions convenient for both the business and the customer.

Steps Involved in Credit Card Processing

Here’s a breakdown of the key steps in the process:

1. Transaction Initiation

The process begins with you, the cardholder, providing your credit card information to the business. After this, the merchant’s point of sale system or the payment gateway (if the transaction is online) will read the details. Then, the credit card processor securely sends forward the information.

2. Authorisation Request

Now, the credit card processor sends an authorization request to the merchant’s bank. During this part of the process, the system checks whether you have sufficient funds or credit to cover the cost of the request.

3. Authorisation Approval

Here, the merchant bank forwards the request to your bank, which sends the authorisation response of either an approval or a decline. When approved, the acquiring bank notifies the merchant.

4. Transaction Approval

This is the settlement stage. Here, the process of depositing money into the merchant’s account begins. The merchant bank forwards the request to your bank, which sends the authorisation response of either an approval or a decline. Upon approval, the receiving bank notifies the merchant.

5. Batching

At the end of the day, the business submits the batch of all approved transactions to the credit card processor for settlement. It is called batching, as payments are sent in a big group. This step also forwards the transaction details to the respective card networks. At the end of the day, the business submits the batch of all approved transactions to the credit card processor for settlement. It is called batching, as payments are sent in a big group. This step also forwards the transaction details to the respective card networks.

6. Funding

The step when businesses get the money from a credit card sale deposited into their account is called funding. This process takes between one to three working days.

7. Cardholder Billing

Typically, the issuing bank adds the transaction amount to your account balance and includes it in the monthly statement. Providers like One Credit Card offer apps to manage and settle payments conveniently.

Also Read: How To Manage Your Credit Card Bills Effectively

Fees and Charges Associated with Credit Card Processing

To gain a clearer understanding of card processing, let’s look at the various credit card fees associated with it.

1. Interchange Fee

An interchange fee is a standard, non-negotiable fee covering the costs of processing the transaction and the risks of fraud and bad debt. The issuing bank charges this fee for each credit card transaction. This fee is typically a percentage of the transaction amount plus a fixed fee per transaction, with the exact amount depending on the type of card.

2. Assessment Fee

This is another non-negotiable fee, but this time, it’s the card network that charges it. Card networks often charge assessment fees for using their payment infrastructure. This fee is usually a small percentage and affected by your transaction volume and your risk level as assessed or calculated by the card networks.

3. Merchant Service Charge

These are charges that businesses pay to the bank for having a merchant account that lets them accept credit card payments. These fees cover several aspects, such as account setup, regular maintenance, and closure fees.

Aside from the above transaction fees, payment processing companies might charge one-time or monthly fees. Sometimes, they will hide these in the fine print, so read the contract terms carefully before you sign any agreement.

Understanding the various steps and fees associated with credit card processing will let you assess its benefits and limitations. High processing fees can result in businesses adjusting their pricing strategies or implementing measures such as minimum purchase requirements. This could lead to higher prices for customers or limit their payment options. So, the next time you are out for lunch with your family, knowing these things can help you make more informed decisions, ensuring you choose the most suitable payment method.

Also Read: How to Become a Credit Card Power User


**Disclaimer: The information provided in this webpage does not, and is not intended to, constitute any kind of advice; instead, all the information available here is for general informational purposes only. FPL Technologies Private Limited and the author shall not be responsible for any direct/indirect/damages/loss incurred by the reader for making any decision based on the contents and information. Please consult your advisor before making any decision.