How Credit Card Processing Works


Hello Friends! Have you ever wondered how your credit card transactions are processed? Perhaps not, since it’s usually a simple and speedy process that you don’t think about. However, behind the scenes, credit card processing is a complex and intricate system that involves multiple parties, networks, and steps. In this article, we will explain how credit card processing works in detail, from authorization to settlement. So, grab your favorite drink, sit back, and let’s explore the world of credit card processing.


The first step in credit card processing is authorization. This happens when a customer makes a purchase using their credit card. The merchant, or the business that is selling the product or service, initiates the authorization process by sending a request to the acquiring bank, which is the bank that processes credit card transactions on behalf of the merchant.

The acquiring bank then sends the request to the issuing bank, which is the bank that issued the customer’s credit card. The issuing bank then validates the request and checks whether the customer has sufficient credit to make the purchase. If the customer has enough credit and the request is valid, the issuing bank sends an authorization code back to the acquiring bank, which approves the transaction.

If the customer does not have enough credit or the request is invalid, the issuing bank will decline the transaction and send a decline code to the acquiring bank. The acquiring bank will then inform the merchant, who will notify the customer that the transaction has been declined.


Once the authorization has been approved, the transaction enters the batching process. This is where the acquiring bank collects all the authorized transactions made by the merchant throughout the day and sends them to the processing network for settlement.

The processing network, which is typically Visa or Mastercard, then sends the batch to the issuing bank for settlement. Settlement is the process of transferring the funds from the issuing bank to the acquiring bank. This happens overnight, and the funds will usually appear in the merchant’s account within two to three business days.


Now that we have explained the basic process of credit card processing, let’s talk about fees. Credit card processing fees are the fees that merchants pay to accept credit card payments. These fees are charged by the acquiring bank and the processing network, and they typically include interchange fees, assessment fees, and processing fees.

Interchange fees are the fees that the issuing bank charges the acquiring bank for the authorization and settlement of the transaction. These fees are set by the processing networks and vary depending on the type of card used and the size of the transaction.

Assessment fees are the fees that the processing network charges the acquiring bank for the use of their network. These fees are set by Visa and Mastercard and are usually a flat fee or a percentage of the transaction amount.

Processing fees are the fees that the acquiring bank charges the merchant for processing their credit card transactions. These fees are negotiable and can vary depending on the size of the merchant and the volume of transactions processed.


One of the most important aspects of credit card processing is security. Credit card transactions are vulnerable to fraud and cyber attacks, which can result in the loss of sensitive customer information and financial losses for merchants and banks.

To prevent fraud and protect customer data, credit card processing systems use a variety of security measures, including encryption, tokenization, and fraud monitoring. Encryption is the process of encoding data so that it can only be read by authorized parties. Tokenization is the process of replacing sensitive data with a token, which is a random string of characters that can be used to represent the data without exposing it. Fraud monitoring is the process of analyzing transaction data to identify suspicious activity and prevent fraudulent transactions from being authorized.


Credit card processing is a fundamental component of modern commerce, allowing businesses to accept payment for their products and services quickly and securely. While the process may seem simple on the surface, it involves a complex network of parties, systems, and procedures that work together to ensure that transactions are authorized, settled, and secured. We hope that you have enjoyed learning about how credit card processing works and that you have a greater appreciation for the technology that powers our financial transactions. Until next time!

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