Credit Card Processing: How it All Works

This is an article published over 5 years ago, but still very relevant today on how credit card processing actually works for you…the merchant.

If you have questions about the ever-changing landscape of the credit card industry, please CONTACT US to meet with one of our consultants.

Credit Card Processing: How It All Works

APRIL 1, 2006 •

The credit card processing system is confusing. The players are numerous and the process is complex. To understand how it all works, it helps to grasp the types of companies that are involved, and how much money they typically charge for processing a transaction.

David Schwartz is director of marketing at a leading payment gateway, Authorize.Net. He says, “This is by far the most complex industry I have ever been associated with. I always tell new employees to give themselves six to nine months to become comfortable with the lingo and to understand how the payment processing system works.” Diagrams of the process can also help. Schwartz continues, “We added a detailed ‘how it works’ diagram to our new corporate website in March 2005. It has since become one of the most visited pages, proving that people want to better understand how a payment is processed.”

To understand the payment process, Schwartz suggests a working knowledge of the participants and the services they provide along the way. He also suggests tracking a hypothetical transaction through the entire payment processing system. In that way, Schwartz says, ecommerce operators can understand not only what services these participating firms provide, but also what fees they charge for processing a transaction.

The Participants

For a typical ecommerce credit card transaction, a number of participants play key roles in the process. Those players include:

  • the customer,
  • the merchant,
  • the payment gateway,
  • the acquiring bank’s processor,
  • the credit card interchange,
  • the customer’s credit card issuer, and
  • the merchant’s acquiring bank.

Seven participants, in other words, normally interact with each credit card transaction. Notes Schwartz, “With all of these companies involved in the process, it takes, amazingly, just 2- 3 seconds on average for a transaction to be approved.”

Follow the Money

Let’s say you are a $100 credit card purchase. The moment the customer hits the buy button on the ecommerce merchant’s website, you are zooming across cyberspace on a multi-stop journey, during which you will shed, typically, nearly three dollars as companies that you interact with assess varying fees for their service. (Actual fees vary based upon a number of variables, including merchant type, card type and risk factors.)

Your first destination is the payment gateway (-.10¢), which routes you to the appropriate processor (-.08¢). The processor immediately submits you to what is known as the credit card interchange (-.09¢). After you’ve cleared the interchange, your next leg takes you to the issuing bank (-1.93¢), which verifies the available funds in the customer’s credit card account. Whether you are approved or declined, you now begin the journey back to the customer. However, if you’re approved, you and your authorization results are soon to part after speeding by each stop you made on the way. Your detour is through your merchant account at the acquiring bank (-.65¢) to, ultimately, the merchant’s bank account, where you will be deposited; that is, the $97.15 of you that remains