Credit Card Processing: How Does It Work?


Hello Friends, do you know how credit card processing works? If you are a small business owner or just someone who uses a credit card, you may have wondered how those tiny plastic cards are processed when you swipe, dip or tap them at a store. In this article, we will explain the basics of credit card processing, including the players involved, the process flow, and the fees charged.

The Players Involved

When you use your credit card to buy something, several parties are involved in making that transaction happen. Here are the players:

  • The Cardholder: that’s you, the person who owns the credit card.
  • The Merchant: that’s the business or store where you are shopping.
  • The Acquiring Bank: that’s the bank that the merchant uses to process credit card transactions.
  • The Card Issuing Bank: that’s the bank that issued the credit card to the cardholder.
  • The Card Associations: that’s either Visa, Mastercard, Discover or American Express, which are the networks that process credit card transactions and set the rules and fees for their use.

The Process Flow

Now let’s look at the process flow involved in credit card processing:

  1. The cardholder selects the goods or services they wish to buy, and the merchant rings up the sale.
  2. The merchant swipes, dips, or taps the card through a card reader or enters the card information into a terminal.
  3. The card information is transmitted to the acquiring bank, which sends it to the card associations.
  4. The card associations verify the account information and send an authorization code back to the acquiring bank.
  5. The acquiring bank sends the authorization code back to the merchant, allowing the sale to proceed.
  6. The acquiring bank deposits the funds from the transaction into the merchant’s account, minus the payment processing fees.
  7. The card issuing bank sends a bill to the cardholder for the amount charged on the credit card, and the cardholder pays it off later.

The Fees Charged

Finally, let’s talk about the fees charged in credit card processing. There are several types of fees that may be charged, and they vary depending on the type of card, the merchant, and the acquiring bank. Here are the most common fees:

Fee Type Description
Interchange Fee A fee charged by the card associations to compensate the card issuing banks for the risk and cost of issuing credit.
Assessment Fee A fee charged by the card associations to cover their operations costs and investment in technology.
Payment Processor Fee A fee charged by the acquiring bank or a third-party payment processor to process the transaction and provide the merchant with a payment gateway or terminal.
Chargeback Fee A fee charged to the merchant by the acquiring bank if a customer disputes a charge or claims fraud.

The Evolution of Credit Card Processing

Over the years, credit card processing has evolved from manual imprinters and carbon-copy receipts to online payment gateways and mobile point-of-sale systems. Here are some of the key milestones in the history of credit card processing:

  1. 1950s: Diners Club introduces the first universal credit card, which requires a manual imprint of the card on a sales slip.
  2. 1960s: Bank of America launches the BankAmericard, which later became Visa, and Mastercard and American Express emerge as competitors.
  3. 1970s: Magnetic stripes are added to credit cards, making them easier to swipe and process.
  4. 1990s: Online payment gateways like PayPal and Authorize.net allow merchants to accept credit card payments over the internet.
  5. 2010s: Mobile point-of-sale systems like Square and PayPal Here let merchants process credit card transactions on smartphones and tablets.


In conclusion, credit card processing is a complex and essential part of the modern economy, allowing consumers to buy goods and services without carrying cash and merchants to accept payments securely and efficiently. Understanding how credit card processing works and the fees involved can help you save money and avoid fraud. We hope you found this article helpful and informative. Thank you for reading!

So long, and enjoy other interesting articles!

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