Credit card payment processing explained

You may have heard the terms ‘card transaction lifecycle’, ‘transaction processing’ or ‘payment lifecycle’. These terms all describe what goes on behind the scenes in the milliseconds before a credit card payment is approved.

There are more than 22.8 billion credit cards in circulation worldwide and by 2025 this number is set to increase to 30.6 billion. If you accept payments online, you need to accept credit cards. Learning what happens when a customer pays using a credit card will demystify the process giving you more control. Ultimately, more control will allow you to increase your card approval rates and your conversions.

In this article, we explain:

• What is credit card processing?
• How credit card processing works
• How credit card processing differs to debit card processing
• Costs associated with credit card processing
• How to optimize your checkout

What is credit card processing?

When we refer to credit card processing we are referring to the steps necessary to make a payment with a credit card. In the digital economy, these transactions are increasingly happening online, but they can also take place in person.

What is the role of a credit card processing company?

A credit card processing company is a business that facilitates the transfer of funds between a merchant and a customer's credit card issuer. When a customer uses their credit card for an on or offline purchase, their details are sent to the credit card processing company. The processing company then sends the information to the credit card issuer, who verifies the identity of the cardholder, and then decides whether or not to authorize or decline the transaction. If the transaction is authorized, the processing company sends the funds to the merchant.

For businesses, credit card processing companies are a vital component in the payments ecosystem, without which they would not be able to take payments, keep customer data safe, and prevent fraud.

How does credit card processing work?

There are various parties involved in credit card payment processing, but the four main ones are:

• The merchant accepts cards in order to make a sale.
• The acquirer enables a merchant to accept a payment.
• The cardholder is the consumer that uses the card to make a purchase.
• The issuer provides consumers with their cards.

Because there are four main players in the process, the term ‘four-party’ or ‘four-corner’ model is often used. Card schemes such as Visa and MasterCard use this model and sit at the center of their networks by connecting issuers and acquirers.

When the credit card holder enters their card details into the online checkout page and clicks ‘pay’, what happens next?

First, this information goes to the merchant’s acquirer or merchant’s bank. Then, the acquirer forwards this message to the relevant card scheme. The card scheme passes this to the cardholder’s issuer, who has two important questions to answer.

1. Is the cardholder who they say they are? (authentication)
2. Are they good for the money? (authorization)

If the cardholder is legitimate and funds are available, the issuer confirms this to the card scheme, who passes the approval response to the acquirer.

Finally, the acquirer passes this message on to the merchant, who confirms a successful payment to their customer, dispatches the goods or provides the service.

Read more: What is an ARN (Acquirer Reference Number)?

How long does a credit card payment take to process?

In general, it takes between one and two business days for a credit card payment to process, though this can be affected by the processing company used, whether the payment is made online, in-person, or over the phone, and whether the merchant uses a third-party payment processor.

However, there may be some cases where it takes longer. For example, if a payment is made on a weekend or holiday, it may not be processed until the next business day. Additionally, if a payment is flagged for fraud or security reasons, it may take longer to process.

How does credit card processing differ to debit card processing?

Debit card processing works in a very similar way to credit card processing. The principles are the same, however the execution may differ locally.

Some domestic debit cards are co-badged with international card schemes, which enables the cards to be used outside their home market. In these instances, they are generally processed via their domestic card networks for purchases at home. And via the international card networks for purchases abroad or for ecommerce purchases when the merchant is in a different country to the cardholder.

Another difference is that credit cards may be blocked by country or sector. UK credit cards are not allowed to be used for gambling, for example. Card issuers and local law determine how and where cards are blocked.

Generally speaking, though, cards, both credit and debit, allow businesses to sell to anyone, safe in the knowledge that they’ll be paid, provided they’ve done things right.

Learn more: Credit card authorization explained

How much are credit card processing fees?

In general, credit card processing fees range from 1.5% to 3.5% of the transaction amount. They vary depending on the type of card used, the merchant's business sector, and the merchant's volume of transactions. 

The overall cost of processing credit card payments consists of:

• Interchange fees - the interchange fee is between 0.3% and 2% + a fixed amount of every transaction, depending on the card network and the location of the merchant, and covers the cost of processing the payment
• Assessment fees - a fee of around 0.15% of the transaction charged by credit card providers to cover the cost of operating the credit card system 
• Terminal fees - if you accept in-person payments, you’ll need a chip-and-pin, or PDQ, machine, the terminal that the customer uses to swipe, tap, or insert their card. These can cost anything between $20 and $200 depending on the features and functions you require. They are also available to rent for a monthly fee

Merchants may also be charged additional fees for chargebacks, processing refunds, and international transactions. 

How to reduce credit card processing fees

Merchants don’t just have to accept whatever processing fees are dictated by the card networks and processors. In fact, it’s essential to reduce them in any way you can, because while they’re only a small percentage of each transaction, over time, they can really add up and put a dent in your margins. 

Follow these steps to reduce your credit card processing fees:

Negotiate with your payment processor

Merchants can often negotiate lower fees with their payment processors by agreeing to a long-term contract or by processing a high volume of transactions.

Shop around

There are a number of different credit card processing companies, and their rates can vary significantly. Alongside other factors, you should compare rates from several different companies before choosing the one that represents the best deal for your business. 

Accept alternative payment methods

There have never been more ways for merchants to accept payments from their customers, and many have lower processing fees than credit cards. For example, investigate whether digital wallets, PayPal, or bank transfers could work for your business.  

Reduce card fraud

Higher-risk payments incur higher processing fees because of the increased threat of loss. You can take steps to reduce fraud by investing in a fraud detection system, which identifies and blocks suspicious transactions; and implementing robust security measures like multi-factor authentication, which uses procedures like biometrics and one-time passwords to verify the cardholder's identity. 

Capture more data

If you can supply your card network with more data, you might be able to qualify for level 2 or level 3 processing fees, which can be significantly lower than standard fees. However, you will only be able to do this if you meet the eligibility requirements, which stipulate a certain number of annual transactions. 

Learn more: Credit card processing guide for small businesses

How can you optimize credit card processing with Checkout.com?

Offering credit card payments is only one part of giving your customers the best possible experience. Ensuring that customers are able to checkout successfully is the other part.

Online merchants in the US, UK, Germany and France lose a staggering $20.3 billion at the checkout each year due to false declines. Optimizing your credit card processing requires taking practical steps to block fraudsters, not customers.

Benchmark your authorization rates and fraud ratios to put your performance in context. How do these KPIs compare with industry peers? Your payments provider should be a great source of insights into what those with solid performance are doing that you’re not.

You should also take action by analyzing failed transactions grouped by rejection reason. You can then explore each group to see whether the systems have correctly rejected the transactions. If they have, you can start to make the tweaks required to minimize false declines and A/B test repeatedly to drive continuous improvement.

Optimizing credit card processing will also mean optimizing the checkout process. Sixty-five percent of shoppers abandon their carts when shopping online. The choices that you make when setting up your checkout can influence customers’ behavior and help to avoid cart abandonment. For example, removing unnecessary steps in the process and offering a guest checkout option.

To find out more, contact our team of payment experts.