How card processing works

When a customer pays for products or services with a credit card, the card information is recorded—either by manual entry, a card imprinter, point-of-sale (POS) terminal, or virtual terminal—and then verified so that the merchant can receive payment for the transaction. This process involves the following parties:

Cardholder: The owner of the card used to make a purchase.
Merchant: The business accepting credit card payments for products or services sold to the cardholder.
Acquirer: The financial institution or other organization that provides card processing services to the merchant.
Card association: A network such as VISA® or MasterCard® (and others) that acts as a gateway between the acquirer and issuer for authorizing and funding transactions.
Issuer: The financial institution or other organization that issued the credit card to the cardholder.

The flow of information and money between these parties—always through the card associations—is known as the interchange, and it consists of a few steps:

1. Authorization
The cardholder pays for the purchase and the merchant submits the transaction to the acquirer. The acquirer verifies with the issuer—almost instantly—that the card number and transaction amount are both valid, and then processes the transaction for the cardholder.
2. Batching
After the transaction is authorized it is then stored in a batch, which the merchant sends to the acquirer later to receive payment (usually at the end of the day).
3. Clearing and settlement
The acquirer sends the transactions in the batch through the card association, which debits the issuers for payment and credits the acquirer. In effect, the issuers pay the acquirer for the transactions.
4. Funding
Once the acquirer has been paid, the merchant receives payment. The amount the merchant receives is equal to the transaction amount minus the discount rate, which is the fee the merchant pays the acquirer for processing the transaction. The entire process, from authorization to funding, usually takes about 3 days. In the event of a chargeback (when there’s an error in processing the transaction or the cardholder disputes the transaction), the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it.

What you need to get started

The right card processing solution for your business depends on the nature and volume of your transactions. To get your business set up to process credit card transactions, there are a few things you’ll need: POS terminal, card processing PC software, or virtual terminal. (If your business processes 10 or fewer transactions per week, all you need is a telephone).

Merchant account: This is the contract you establish with the acquirer that provides your card processing service.
Business bank account: To receive deposits for transaction payments.

If you want to process card transactions online, you will also need a web site, shopping cart software and a hosting service with a secure server and certification. Many e-commerce service providers offer packages which contain all the components you'll need.

How card processing benefits your business

Regardless of your business’s size or industry, there are many benefits in having the ability to process credit card transactions. By accepting multiple forms of payment, you give your customers options and improve their experiences. You also introduce a new audience of customers to grow your business organically. In addition, card processing is an efficient, convenient payment solution that helps you improve cash flow by ensuring timely, automatic deposits to your account. Value-added services—like gift card and prepaid card programs—can provide a new channel for generating profits and increasing your revenue. Check protection services can help you limit your risk from bad checks.