A credit card processing system enables small and mid-size businesses (SMBs) to accept in-person and digital payments. But merchant account services and support vary between card processors. Understanding how credit card payments are processed can help you choose a provider that suits your business model, transaction volume, and customer payment preferences.
In this guide, we break down the key players and stages in the credit card payment process. Learn how credit card processing works, what to look for in a merchant services provider (MSP) or payment service provider (PSP), and how to negotiate lower processing fees.
What is credit card processing?
Credit card processing is the system for handling electronic payments. The transaction process and tools allow small businesses to accept credit and debit cards from customers. It moves payment data and funds between parties during authorization, clearing, and settlement stages.
Although payment processing happens in seconds, behind the scenes, it is more complex. Knowing who’s involved in credit card transactions and how credit card payments are processed helps you assess merchant services and providers.
Key parties involved in credit card processing for small businesses
When you accept a credit card payment, several parties work together to authorize and settle the transaction. Some work on behalf of merchants, providing payment gateways and point-of-sale (POS) systems, while others serve customers or credit card companies.
The entities, tools, and participants involved in payment processing include:
- Cardholder: Your customer who is the owner or authorized user of a credit card from an issuing bank. The cardholder uses a physical card or digital wallet to buy goods or services.
- Merchant: Your business, which accepts credit card payments through a POS system, credit card terminal, online checkout, or mobile payment app.
- Issuing bank: The customer’s bank, known as the card issuer, that provides the debit or credit card. It’s responsible for authorizing transactions during the card payment process.
- Acquiring bank: The merchant’s bank, known as the acquirer, communicates with the issuing bank during processing and maintains a merchant account for deposits.
- Card networks: Credit card associations for Visa, Mastercard, American Express, and Discover set processing rules and interchange fees. In card transaction flows, the payment network acts as an intermediary between issuing and acquiring banks.
- Payment processor: This entity manages the payment process by transmitting transaction data between merchants, banks, and card networks. Payment processors work on behalf of merchants and may offer merchant services and credit card processing hardware.
- Payment gateway: This service acts as a bridge between an ecommerce platform or POS system and the payment processing company. It encrypts and sends transaction data to processors.
- POS hardware or credit card terminal: The hardware and software that merchants use to accept card payments. Card terminals and POS hardware transmit payment data to processors.
How credit card processing works for small businesses
The credit card payment process follows a series of steps across three phases: authorization, clearing, and settlement. It begins when a customer submits payment in person, online, or over the phone and ends when funds transfer from the merchant account to the business’s bank account. Let’s go through how credit card processing works step-by-step.
Credit card processing steps: from authorization to settlement
There are slight differences in the credit card transaction flow depending on where the customer pays and which card they use. But the overall processing stages are similar: credit card authorization and authentication (identity verification) followed by clearing and settlement.
The credit card transaction steps include:
- Transaction initiation: The cardholder swipes or taps to pay or otherwise provides card details at checkout, and your credit card processing system captures the payment data.
- Authorization request: The data is sent from a payment gateway or terminal to the processor, which routes it to the acquiring bank. The acquirer forwards transaction details to the customer’s bank (card issuer) via the card network for approval.
- Transaction authorization: The issuing bank verifies cardholder information, checks for available funds and fraud signals, and approves or declines the transaction.
- Authorization response: The issuer sends an approval or decline code (auth code) to the card network, which passes it to the acquirer, who then routes it to the processor and, ultimately, to the payment terminal, POS system, or e-commerce platform.
- Transaction completion: The card payment system responds to the authorization code by approving or denying the transaction.
- Batch settlement: The merchant submits a group of authorized transactions to the payment processor, which forwards them to the acquiring bank. Acquirers reconcile transactions and pass them to the correct card networks.
- Clearing and settlement: The card association confirms transaction records, calculates fees, and sends data to the issuing bank. Issuers cross-check information and coordinate with card networks to transfer funds to acquirers.
- Funds transfer and merchant deposit: The acquirer receives card payments in a merchant account. Generally, the acquiring bank deposits funds, minus fees, into the company’s regular bank account within one to five days.
Processing a credit card transaction takes seconds, but getting funds in your bank account can take days. Settlement timing depends on your payment processor, acquirer, and card issuer.
How long credit card payments take to reach your bank account
Most small businesses receive credit card payments within one to five business days, depending on the processor’s funding schedule. Some providers offer faster deposit options for an additional fee.
Here’s what affects merchant account funding times:
- Processor cutoff times: If your business batches credit card transactions after your processor’s daily cutoff time, settlement may not begin until the next business day.
- Weekends and bank holidays: Transactions processed outside normal banking days often settle on the next business day.
- Funding speed options: Many payment processors offer next-day or same-day funding, shortening deposit times for an extra fee.
- Bank posting schedules: Even after settlement, your bank’s internal posting times can affect when money appears in your account.
- Merchant account risk reviews: New businesses or unusual transactions may trigger temporary holds while the processor verifies activity.
Small business credit card processing fees and pricing
Credit card processing fees are the costs small businesses pay to accept card payments. They include transactional, flat, and incidental fees. Payment processors may charge different rates for invoicing, QR codes, and recurring transactions.
Per-transaction rates typically range from 1.5% to 3.5%. However, costs can reach 5%, and debit card payments may cost less than credit card transactions.
Standard transaction fees and payment processing rates
Each credit card transaction incurs standard fees. The funds are dispersed to card networks, banks, and payment processors.
The three types of credit card transaction processing fees are:
- Interchange fees: Card brand networks set interchange fees. A percentage of each transaction plus a fixed fee goes to the cardholder’s issuing bank.
- Assessment fees: Card associations charge a small percentage to cover infrastructure and operating costs. These fees go to the card network (Visa, Mastercard, etc.).
- Processor markup (merchant service fees): Credit card processors and merchant service providers charge percentage, per-transaction, or monthly fees for their role in payment processing.
In addition to standard credit card transaction fees, merchants may pay for verification services or payment card industry data security standard (PCI DSS) compliance. To see what fees you currently pay or compare card processing companies, request a sample merchant statement.
How to read a credit card processing statement
Payment processors provide merchant statements monthly. The document summarizes sales activity and revenue. It also lists all fees you paid for credit card processing. The breakdown of fees will differ based on the processor’s pricing model. Interchange-plus pricing usually shows fees by card brand and type, while flat-rate pricing bundles costs and displays a single fee percentage or amount.
Review the following credit card terms in these sections of your merchant processing statement:
- Card processing summary: This high-level overview displays the number of sales (broken down by card type if using interchange-plus pricing), the dollar value of transactions, any refunds or chargebacks, net sales (amount processed after credits or refunds), and average ticket value.
- Deposits: Depending on how your merchant account is set up, you may pay processing fees daily or monthly. This section shows the actual amount processed, the discount (fees taken from the deposit), and the settled amount (the net deposit transferred to your bank account).
- Interchange rates and authorizations: You can find the authorization fee (auth fee) for each transaction, including refunds, void payments, and chargebacks. An interchange-plus pricing plan also lists the interchange rate for each transaction.
- Pass-through fees: Any fees charged to your merchant service provider show up here because the MSP passes them to you. These include dues and assessments from card networks, payment gateway fees, and the credit card processor markup per transaction.
Your credit card processing statement may list other charges, such as PCI noncompliance or equipment lease fees. To calculate your effective rate, add all fees and divide by total sales volume. Use current statements or sample documents to see how costs differ between processing pricing models.
There are slight differences in the credit card transaction flow depending on where the customer pays and which card they use. But the overall processing stages are similar.
Types of credit card processing pricing models
The pricing model affects how much your company pays per transaction. Small businesses often compare rates between providers using interchange-plus and flat-rate models, but processing companies also offer subscription and tiered structures.
Let’s compare pricing models for credit card processing:
- Interchange-plus pricing: You pay the exact interchange fee set by the card networks plus a fixed processor markup. Costs vary but are typically lower than flat rates for established businesses. This model is common among merchant account providers, like Helcim.
- Flat-rate pricing: With this structure, you pay a fixed percentage per transaction. Pricing is predictable, making this model a favorite of startups and small businesses. Payment processing providers like Square and Stripe use this structure.
- Subscription pricing: In this model, you pay a monthly membership fee plus a small per-transaction cost. If you process high volumes or large transactions, the membership model could save you money. Stax offers subscription pricing.
- Tiered pricing: This setup categorizes card transactions into risk-based tiers, such as qualified, mid-qualified, and nonqualified. It’s less transparent than other pricing models and is offered by traditional MSPs and large processing companies.
Credit card processing companies may offer surcharging programs, which help reduce processing fees. This lets you pass part of the credit card processing fee to customers, where permitted by law.
Hidden fees and contract terms to watch for
On top of standard transaction rates, small businesses may pay merchant service fees to payment processing providers. While payment gateway and equipment leasing fees are typical, not all credit card processors charge for monthly merchant statements or batch settlements.
Look for the following charges and hidden fees:
- Long-term contracts and early termination fees: Some processors require one- to three-year agreements and charge penalties if you cancel early.
- Terminal and equipment leasing fees: Leasing credit card readers or POS terminals can cost more over time than purchasing equipment outright.
- PCI compliance fees: Payment processors may charge monthly compliance fees or penalties if your business fails to meet PCI DSS requirements.
- Batch settlement fees: Some providers charge a fee each time you submit a batch of transactions for processing.
- Chargeback fees: If a customer disputes a transaction, many credit card processing companies debit a chargeback fee from the merchant.
- Monthly minimum fees: Businesses may owe more if processing volume falls below a required threshold.
- Payment gateway fees: Online businesses may pay monthly fees to use a payment gateway for e-commerce transactions.
Chargebacks and payment disputes
A chargeback occurs when a customer disputes a credit card transaction with their card provider (the issuing bank). Too many chargebacks can result in payment holds, higher credit card processing rates, or termination of the merchant account.
To successfully reverse a chargeback, you must prove the transaction is legitimate. This involves submitting convincing evidence, like a signed purchase receipt or proof of delivery, during the chargeback representment process. You must contest chargebacks within a specified time frame, which differs by card network and payment processor. For example, PayPal allows 10 days, while Square gives seven days.
The cost of chargebacks
After the customer’s bank files a chargeback request, your credit card processor debits the purchase amount from your account and may charge a chargeback fee of $10 to $35 per disputed transaction. The funds are held until the chargeback representment process finishes, which can take up to 90 days.
If you win a chargeback appeal, the issuing bank reverses the customer’s payment. Not all processing companies reimburse chargeback fees. For instance, Stripe charges a fee when your customer disputes a payment and another fee when you counter it. Only the first fee is refunded if you win, while Helcim charges one fee and returns it to you after a chargeback reversal. Win or lose, you don’t get back the costs of processing the initial transaction.
How to prevent and respond to chargebacks
Payment disputes cost your business time and money. Reduce risks by proactively preventing credit card scams and responding quickly during chargeback representment.
Follow these tips and best practices to prevent and respond to chargebacks:
- Monitor your merchant account dashboard: Some card issuers give pre-dispute notifications. For example, American Express and Discover use a retrieval request process before issuing a chargeback. If you don’t reply to the inquiry, you may lose the opportunity to counter the chargeback.
- Reach out to customers: If you get a chargeback, Helcim suggests contacting the customer. This can help resolve simple mix-ups faster. Confusion often occurs when billing terms or labels are unclear or when customers forget they subscribed to a service.
- Choose payment processors that offer dispute management services: Some processing companies can identify evidence and assist with the dispute resolution process. Others act only as intermediaries, passing the information you supply to card issuers.
- Use tools to prevent fraud: Process cards through EMV (Europay, Mastercard, and Visa) terminals and confirm CVV (card verification value) codes for phone and online purchases. Also consider vendor solutions. For example, Helcim’s fraud detection tools assess risk for each transaction, and Stripe’s free Radar service reduces fraud disputes by an average of 38%.
- Check your billing descriptor: If your doing business as (DBA) name, which is what customers recognize, is different from what’s listed on the client’s statement (the billing descriptor), consider changing it or adding additional information, such as your website and phone number.
- Clarify terms and policies: Manage expectations through transparency. Include information about recurring payments and policies on your website, invoices, emails, and order confirmation pages.
Choosing a credit card processing company
Once you're ready to accept credit cards, it's time to find the right payment processor. Choose processing and merchant account services that integrate with your hardware and software and support your customers’ payment methods. A secure credit card payment system can streamline the checkout experience and reduce fraud.
Other considerations include the following:
- Are the majority of your payments via an online store or in-person transactions?
- Will your credit card processing work with your POS and e-commerce software?
- Does the provider charge monthly fees for payment gateways or credit card readers?
- Can you accept payments from digital wallets, like Apple Pay and Google Pay?
- Is the company willing to negotiate credit card processing fees?
- Can you reach your credit card processor 24/7 if your system goes down?
- Does the merchant services provider offer a demo account portal?
- Does it offer industry-specific features, like tip adjustments for restaurants?
Popular credit card processors for small businesses
When it comes to payment processing for small businesses, the best credit card merchant services for one company might be the worst solution for another. It’s essential to compare your options when accepting electronic payments and revisit them after you have more transaction data.
Reputable credit card processing companies include:
- Helcim: All Helcim accounts come with value-added features. The pay-as-you-go interchange-plus pricing model gives business users access to a virtual terminal, POS, subscription manager, payment pages, invoicing tools, and online checkout.
- Square: Retailers, service professionals, and restaurant owners often pick Square for its convenience and integration with other Square products, including the free website and POS. It has flat-rate pricing but charges additional fees for order pickup and delivery.
- Stripe: This popular payment platform is a favorite among tech-savvy business owners. You can program the Stripe terminal with an existing POS system, and Stripe offers many ways to accept payments online.
- Clover: Shop and restaurant owners or service professionals get the most from Clover, as it’s an all-in-one POS and payment solution. The full-featured software provides industry-specific tools, including analytics. It offers a lower in-store rate than rivals but has a much higher online fee.
- Paysafe: As a Clover and SwipeSimple reseller, Paysafe creates accounts based on your business needs and budget. It serves industries other payment processors won’t work with, such as cryptocurrency, direct marketing, and gas stations.
- Stax: If your processing volume is growing rapidly, Stax could be an excellent option. While it has a pricey monthly subscription fee, you only pay cents per transaction plus the interchange rate. Stax provides tons of analytics and reporting tools for monitoring your cash flow.
Dawn Allcot contributed to this article.
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