Card Processing, What is it

Card Processing: How Does It Work?

In modern business, there is nothing so prevalent as the appearance of debit and credit cards. While some businesses thrive with just cash, most need to be able to accept credit cards to truly compete. Accepting credit cards also gives companies the ability to accept online payments – which is vital to becoming competitive.

Credit card processing is the process of making a card transaction. It might sound simple but there is a lot that happens after a customer swipes his or her card from a merchant’s viewpoint.


It all starts with authorization. When a customer swipes his credit card or inserts her chip card, the company who issued the card lends the money to cover the transaction to the merchant. On the customer’s side, his account could be debited immediately in the case of a debit card or it would be added to the monthly statement if she used a credit card. That swiping or inserting authorizes the issuing bank to release the funds under whatever terms to which the customer has already agreed.


Next, the bank that issued the card authenticates the transaction. This works in a couple different ways. It tries to protect the consumer by making sure there are enough funds in the account or credit limit, that the transaction makes sense for where the customer shops, and so on. Card security codes and address verification systems are part of this step in card processing.

Account Settlement

Every day, merchants settle their accounts by sending a list of all the transactions approved to a payment processor. Also called a batch, the processor forwards each transaction to its respective issuing bank. The issuing bank then pays the money to the merchant’s processor, minus an interchange fee. The processor then takes its cut – the merchant discount rate – before sending the remainder to the merchant. The process can take a couple of days.

Card Processing Fees

Card processing fees can be significant depending on the industry and the size of the merchant. This is why some places will charge a fee for credit card processing or provide a discount when a person pays in cash.

Interchange Fees

The issuing bank charges an interchange fee, which could be a percentage, a fixed price or both. While interchange fees are published, they can be very different depending on the merchant’s industry and tier. For instance, online businesses pay a higher interchange fee because the payment card is never present, which exposes the merchant to more risk of a fraudulent transaction.

Merchant Discount Rate

The merchant’s bank or the acquiring bank also charges a percentage or a fixed price for its role in the transaction.


Merchants must also deal with chargebacks. A chargeback occurs when a customer disputes a charge with the issuing bank. It’s like a refund and usually happens in the event of an error or an unhappy customer. In either case, the issuing bank essentially asks for the customer’s money back.

Getting Started

The cost of getting started in card processing is minimal. Modern card processing terminals work almost as soon as they are turned on and most POS systems have a plug-in for payment processing. Merchants just need to purchase or rent the equipment and decide on a payment processing service. In most cases, the entire process takes mere days.