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Updated Apr 04, 2024

What Is Credit Card Processing? The Complete Guide to Credit Card Payments

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Jennifer Dublino, Contributing Writer

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Getting paid for your products and services is an essential part of owning a business. If your business doesn’t currently accept credit cards, offering them as a payment option can significantly improve your bottom line. However, the process of accepting credit cards can seem overwhelming and confusing for many small businesses. This guide will explain how credit cards benefit your business, how the process works, what features to look for and how to start taking credit cards.

Editor’s note: Looking for the right credit card processor for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

What is credit card processing?

Credit card processing allows you to accept credit card payments. It includes everything that happens behind the scenes, from when a customer hands you a card until you receive the money in your account. This process applies to brick-and-mortar and e-commerce sales, as well as purchases made over the phone or by mail. 

To accept credit cards, your business must partner with one or more providers. You’ll pay providers on a per-transaction basis; you may also pay them a monthly fee. You’ll need software and, for in-person sales, card processing hardware.

How does credit card processing work?

Here’s a breakdown of how credit card processing works, including the entities involved and the steps merchants must take 

Who is involved in credit card processing?

There are more entities involved in credit card processing than you might think, including the following:

  • Consumers: Consumers include the cardholder, who is typically the purchaser.
  • Merchants: Merchants are the individuals or businesses selling the products and services the consumer buys.
  • Credit card processors: Credit card processors are companies that handle communication between the merchant, the credit card network and the cardholder’s bank. They ultimately deposit the money into the merchant’s bank account. Some credit card processors have their own payment gateway, while others use third-party gateways (see below).
  • Payment gateways: “Payment gateway” refers to the technology that encrypts credit card information and sends it from the merchant to the credit card processor. It is usually a stand-alone product for online credit card transactions and other purchases where the card is not physically present. For card-present transactions, this technology is integrated into card reader hardware.
  • Card networks: Card networks refer to credit card brands, including Visa, Mastercard, American Express and Discover. These major brands set the interchange and assessment fees and create the security standards for PCI compliance.
  • Issuing banks: The issuing bank is the cardholder’s bank, which may or may not be the same bank they use for their checking account. It’s the bank that issues the credit card to the consumer; it’s responsible for letting the payment gateway or credit card processor know whether the consumer’s account has enough available credit to cover the transaction.
  • Acquiring banks: The acquiring bank is where the merchant has their bank account. Once the transaction is complete, the money goes into the merchant’s account at the acquiring bank.
  • Merchant account services provider: The best merchant account service providers give you a temporary account that holds the funds until they are deposited in your account at the acquiring bank. Some credit card processors have their own merchant account; with others, you’d need a third-party provider. Typically, you need a separate merchant account only if you exclusively use a payment gateway.
  • Credit card facilitator: A credit card facilitator is a company that does credit card processing for merchants under its own merchant account and payment gateway instead of assigning each merchant its own merchant account and gateway, like a credit card processor. Credit card facilitators charge one fee for all card transactions, no matter which card network. 
TipBottom line

If you have an online store exclusively, you may be able to keep costs down by using just a merchant account and a payment gateway.

What steps are involved in credit card processing?

The following steps occur in credit card transactions:

  1. A consumer buys a product or service from a merchant and provides a credit card as payment.
  2. The merchant accepts the credit card in person using a credit card reader. Alternatively, it may accept it online, by phone or by mail via a payment gateway, point-of-sale (POS) software or proprietary credit card processing software.
  3. The payment information is sent to the credit card processor or facilitator through the software or hardware.
  4. The credit card processor or facilitator passes the payment information to the card network.
  5. The card network sends the payment information to the issuing bank.
  6. The issuing bank verifies that the cardholder has enough money or credit in the account to complete the transaction. It runs a security protocol to verify that the purchase is legitimate and approves or declines the transaction. 
  7. If the transaction is approved, the issuing bank starts the settlement – the release of funds from the consumer’s account to the merchant’s account.
  8. The approval or denial notification is communicated back to the merchant.
  9. The settlement is completed (this may take several days, depending on the card network involved), and the money for the sale is transferred into the merchant’s bank account, minus processing fees. Most credit card processors gather individual transactions and deposit them in a batch at the end of each day.

Credit card processing security and PCI

Merchants, credit card facilitators and credit card processors are responsible for adhering to specific security protocols called the Payment Card Industry Data Security Standard, or PCI DSS. These requirements protect cardholder data from internal misuse and data breaches. It includes computer safeguards, like firewalls and encryption, and personnel policies, like assigning a unique ID to everyone with computer access and restricting access to cardholder data to only those who need it for business processes.

PCI compliance is necessary; a noncompliant company could face hefty fees. If you have a traditional merchant account with a bank or independent company, you will usually be responsible for your own PCI compliance. Credit card processors provide PCI compliance by charging for it separately or bundling it into their monthly fee. They offer this compliance at no extra charge but have somewhat higher transaction fees to cover this cost, among other things. 

Card-present transactions are the most secure because the card reader hardware handles much of the verification process, especially with chip readers and debit transactions where customers enter PINs. 

Bottom LineBottom line

Transaction fees for card-present transactions tend to be the lowest. When a credit card is not physically present, there is a higher incidence of credit card fraud, resulting in higher fees.

Credit card processing rates and fees

Since so many organizations are involved in credit card processing, various credit card processing rates and fees exist. Rates are transaction-based and include a percentage of the overall purchase amount and sometimes a flat per-transaction amount. Fees are charged either monthly or when specific events occur, like chargebacks.

Some rates and fees are paid to the card network, some to the credit card processor or facilitator, some to the issuing bank, and, if you have a payment gateway, some to the gateway provider. 

Credit card processing rates

Credit card processing rates usually include a percentage of the sale amount and sometimes a per-transaction fee. 

A credit card processing rate breaks down into three components: 

  • Interchange rate: The interchange rate is set by an organization of card networks and is paid to the cardholder’s issuing bank. The amount depends on the card brand, whether it is credit or debit, and if it offers rewards. The interchange rate is non-negotiable.
  • Assessment rate: Also set by the card networks, this amount goes to the card brand used for the transaction. Like the interchange rate, it is non-negotiable.
  • Processor’s markup: The remainder goes to the credit card processor and accounts for the differing rates among processors. Since this rate can depend on various factors, such as monthly processing volume, average ticket size, and merchant history, it is negotiable.

Credit card processing fees 

Some credit card processors charge monthly fees in addition to processing rates. This fee may be a bundled fee that includes various services, or it may be a separate charge for each service used. Standard fees include the following: 

Fee type


Monthly fee

This covers preparing your monthly statement and providing customer service. It may also include some of the services listed below. 

PCI compliance fee

This provides the required security measures to protect cardholder data.

Batch fee

This is charged whenever you receive a batch of transaction money.

Merchant account fee

This is a monthly charge for your merchant account if you use a third-party provider.

Payment gateway fee

This is a monthly charge if you use a third-party payment gateway; otherwise, it is usually included in the monthly fee.

In addition to these regular fees, credit card processors may charge incidental fees when certain events occur.

  • PCI noncompliance fee: If you fail to implement specific security measures, you may incur a monthly fine until the issue is fixed.
  • Chargeback fee: When customers want their money back, the entire credit card processing process happens in reverse and often results in a fee.
  • Nonsufficient funds fee: You will be charged this fee if your bank account does not have enough funds to pay owed fees to the credit card processor. 

Credit card processing hardware and software

At a minimum, you need specialized software to process credit card transactions. The credit card processor will provide you with this software. If you accept credit cards in person, you will also need credit card processing hardware, which the card processor usually sells. The type of software and hardware you need depends on how you do business.

Credit card software

You may deal with several types of software:

  • Basic software: The most basic software is provided with a payment gateway for strictly online transactions. It is web-based and has a dashboard to display all transactions. You can search for specific transactions and use the data to create sales reports. You can also go into individual transactions to issue refunds or take other actions.
  • Feature-full software: More sophisticated credit card processing software, like that provided by major credit card processors, includes more reporting capabilities and the ability to account for promotions and discounts, add subscription or membership recurring purchases, and schedule appointments. This software is typically compatible with mobile phones, tablets, computers and POS hardware. 
  • POS software: POS software, often used with POS hardware, has the most functionality. Businesses in industries like restaurants and retail can benefit the most from a POS system. The best POS systems provide business owners with robust business management tools, including cloud-based POS software that handles inventory management and ordering, customer management, marketing, and employee management. POS systems also account for multiple business locations and have a more intuitive interface to make in-person checkout faster and more efficient.
  • Industry-specific POS software: Some credit card processors also provide industry-specific POS software. For example, POS restaurant software facilitates coordination between servers and the kitchen, provides seating plans, and fulfills other restaurant-related needs. 
Did You Know?Did you know

The best credit card processors for restaurants provide POS software that supports online ordering, multiple payment methods, third-party integrations and robust security.

Credit card processing hardware

You won’t need credit card processing hardware for strictly e-commerce transactions. Your e-commerce website will connect to the payment gateway through its code. You can also forgo credit card hardware if you accept card payments primarily by phone or mail; if you have occasional in-person transactions, you can manually enter the customer’s card information into your gateway.

However, if you have a significant number of in-person transactions, you will benefit from credit card processing hardware. Card-present (swiped, inserted or tapped) transactions incur lower processing rates and are faster, more convenient and less error-prone than manually entering cardholder data. 

Standard credit card processing hardware includes the following: 

  • Wired card reader: These card readers are hardwired to cash registers or POS hardware. Some accept only swiped (magnetic stripe) and inserted (chip) cards, while others also accept contactless NFC mobile payments or tapped cards. Some readers also allow purchasers to input their PIN for debit cards.
  • Mobile card readers: These are the same as wired readers, but they connect to mobile devices by plugging into them or via Bluetooth. These devices allow merchants to make sales on the go.
  • POS hardware: POS hardware includes tablets or similar devices that allow cashiers to display and select product and customer information. Some have built-in card readers; others connect to an external card reader.
  • Accessories: The accessories you use depend on your needs. Accessories include a stand for the POS hardware (although some have an integrated stand), receipt printers, cash drawers and chargers for mobile card readers.

Types of credit card processing companies

Credit card processors and credit card facilitators can both process credit card transactions. They offer many of the same services but with some key differences.

Credit card processors

  • How credit card processors work: Credit card processors handle the flow of transaction information from the consumer to the merchant, through the card networks to the issuing bank and, eventually, back to the merchant’s bank. They set up a merchant account for each merchant, provide software, provide PCI compliance (included or for an extra fee) and sell credit card hardware to merchants. Stax and Merchant One are examples of credit card processors.
  • Credit card processors’ approval process: Businesses apply for an account with a credit card processor; they may be approved or denied based on criteria like business size, monthly transaction volume, processing history and business type. 
  • Credit card processor fees: Payment processors may have cheaper rates, especially if a merchant accepts only lower-rate card brands. For example, a retailer may decide to keep costs down by not accepting American Express, which has higher rates than Visa, Discover or Mastercard. 

Credit card facilitators

  • How credit card facilitators work: Credit card facilitators have one master merchant account. Each merchant is treated as a sub-merchant under that umbrella. The facilitator contracts with a credit card processor, which processes the transactions for all sub-merchants. Credit card facilitators often provide various services, making them a one-stop shop. PayPal and Stripe are examples of credit card facilitators.
  • Credit card facilitators’ approval process. Credit card facilitators approve nearly every type of business, regardless of size, history or volume. They’re a great choice for startups and other very small or new businesses. 
  • Credit card facilitators’ fees. Credit card facilitators charge a flat rate for all transactions, regardless of card brand. So, a transaction paid for with a Visa is charged the same rate as one paid for with an American Express. Debit cards are charged a slightly lower rate.

Factors to consider when choosing a credit card processor

The best credit card processor for your business depends on several variables. Any processor you work with should provide competitive rates and fees; knowledgeable and available customer service; fast, secure and reliable hardware; and easy-to-use software that meets your business needs. 

Additionally, weigh the following considerations: 

  • How and where will you accept credit cards? Will you make e-commerce sales only, fixed in-person sales, mobile in-person sales or a combination of all three?
  • What is your expected monthly volume? Some processors give lower rates to high-volume merchants, which can be good or bad for you, depending on your current sales volume. Some charge merchants a fee when their transaction volume falls below a specific threshold.
  • What is your business’s size and history? Some processors are more willing than others to take on new or smaller merchants.
  • What is your industry? Some processors are reluctant to approve merchants in certain industries considered high-risk, such as CBD stores, credit repair and online gambling. Other processors don’t have a problem with these companies.
FYIDid you know

If you must find a credit card processor for a high-risk industry, you may face higher fees. Still, your high-risk business may be profitable enough to offset the costs.

Best credit card processing companies

Consider the following excellent options for your credit card processing needs.


Key points



A one-stop shop for small businesses, offering excellent POS software and hardware with competitive card processing rates

Clover review

Merchant One

Willing to approve small businesses that have been turned down elsewhere; offers a comprehensive selection of services and equipment

Merchant One review


Uses interchange-plus pricing with a per-transaction fee in addition to the interchange fee

Stax review

Payment Depot

Membership pricing with wholesale rates; includes a merchant account and dedicated account rep

Payment Depot review

Benefits of accepting credit cards at your business

You may wonder whether accepting credit cards is worthwhile. After all, much setup is involved, and it costs you money when a customer pays with a card instead of cash. However, there are many benefits of accepting credit cards, including the following:

  • Accepting credit cards helps you accommodate most customers. Since more and more people are eschewing cash, accepting credit cards opens your business to the vast majority of consumers interested in your products and services.
  • Accepting credit cards means accepting digital wallets. Accepting credit cards will also open your business to younger consumers, who tend to prefer paying with digital wallets like Apple Pay, Google Pay and Samsung Pay. Most credit card processors allow merchants to accept these digital payment methods via their credit card processing system along with traditional credit cards.
  • Accepting credit cards increases sales. Credit cards facilitate spur-of-the-moment purchases, boosting your bottom line. Since paying with a credit card is convenient for consumers, they often use them for impulse purchases – and they also buy more when paying by card.
  • Accepting credit cards opens up e-commerce business options. If you want to extend your in-person sales to e-commerce, accepting credit cards is your first step. Your processor can help you set up your online sales, and customers can seamlessly pay for their goods. 
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Jennifer Dublino, Contributing Writer
Jennifer Dublino is a prolific researcher, writer, and editor, specializing in topical, engaging, and informative content. She has written numerous e-books, slideshows, websites, landing pages, sales pages, email campaigns, blog posts, press releases and thought leadership articles. Topics include consumer financial services, home buying and finance, general business topics, health and wellness, neuroscience and neuromarketing, and B2B industrial products.
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