May 27

How Does Credit Card Processing Work?

More and more customers choose to pay via card. So, how does credit card processing work? Click here to find out.

Credit card transactions are processed everywhere — like brick-and-mortar stores, e-commerce sites, mobile devices, and wireless transfers. Credit cards have steadily grown as a popular payment choice, consistently increasing in share of payments since 2016. But with the pandemic expediting the adoption of cashless and contactless payment methods, there’s now an expectation for businesses to accommodate different transaction methods, particularly processing credit card payments. Based on a study conducted by the Federal Reserve, 27% of customers preferred to pay with credit cards, a considerable difference from the 19% who opted for cash.

While the whole transaction takes place within a few seconds, multiple actions make up the entire credit card processing, which leads to either being “approved” or “declined.”

If you’re a business owner, it’s beneficial to have an understanding of how credit card processing works. Let’s explore!

The Key Players in Credit Card Processing

Before we can understand how credit card processing works, let’s first look at the participants involved.


Individuals who obtain a card from an issuing bank. They use this to pay for goods or services by way of swiping, inserting a chip, tapping the card, or entering the card number into a portal.


Businesses that accept card payments from cardholders in exchange for goods and services. They handle the credit card processes and fees, send the card information, and request payment authorization from the issuing bank.

A merchant processing a customer’s credit card payment

Acquiring Bank

Also known as the merchant’s bank. This entity receives payment authorization requests from the merchant, sends them to the issuing bank, and informs the merchant of the response. It also provides the merchant with the equipment for credit card processing and an account to receive funds.

Issuing Bank

Issues the debit or credit card to the cardholder through card networks. It receives the payment authorization request and approves or declines the transaction. It also authorizes card details, pays the merchant’s bank, and charges the cardholder for the transaction through a monthly statement.

Card Networks

Associations (like American Express, Mastercard, and Visa) that liaise between the acquiring and issuing banks. During credit card processing transactions, they receive the payment details from the acquiring bank, forward the request to the issuing bank, and send back the response to the acquirer. They also set fees, rates, and guidelines.

Payment Processor

These third-party companies are responsible for debit and credit card processing worldwide and govern fees. They connect the merchants, merchants’ banks, and card networks to enable payments.

How Does Credit Card Processing Work?

Credit card processing can be divided into three stages: authorization, authentication, and clearing and settlement.


In this stage, the merchant obtains approval for the cardholder’s payment from the issuing bank. Within seconds, they find out if the credit card process is approved or denied based on the message on the machine.

First, the customer pays the merchant for a purchase via a credit card. After the transaction, the customer’s credit card details are sent to the acquiring bank through online or phone lines.

Next, the acquiring bank forwards the details to the credit card network. Finally, the credit card clears the payment after verifying the following details:

  • Credit card number.
  • Expiration date.
  • Credit security code (CVV).
  • Payment amount.
  • Billing address.


During this stage of the credit card processing, the issuing bank verifies the validity of the card using tools like the Address Verification Service (AVS) and security codes like the CVV. The bank also validates the credit card number, and the amount of available funds, and matches the billing address with the registered one.

Then, the issuing bank approves or declines the transaction and sends the response to the merchant through the credit card network, acquiring bank, or processor. Once the merchant receives the authorization, the issuing bank will place a hold on the amount on the cardholder’s account. The merchant’s POS system then collects all approved authorizations for “batch” credit card processing at the end of the day.

Lastly, the merchant issues a sales receipt to the customer to complete the sale.

Customer handing a cashier their credit card

Clearing and Settlement

In this stage, the transaction is posted to the cardholder’s monthly credit card billing statement and the merchant’s statement. This occurs together with the settlement stage.

When the merchant sends the batch of approved authorization to the acquiring bank or processor, these get routed to the appropriate credit card network for settlement. The network then sends the approved transaction to the appropriate issuing bank.

Within a day or two after the transaction, the issuing bank will transfer the funds less the fees that they split with the credit card network.

In the final step, the credit card network pays the acquiring bank and the processor their percentages from the remaining funds. The acquiring bank charges the merchant for cardholder purchases, minus a “merchant discount rate.” The issuing bank posts the transaction details to the cardholder’s account, which is reflected in the statement that needs to be paid.

The Bottom Line

While cardholders and merchants don’t have to memorize the whole credit card processing steps, it’s helpful to understand how it works, the purchase guidelines, and how it can affect them respectively. It may appear like a straightforward process, but the back-end work is incredibly complex and intricate.

True POS is the one-stop hub for all your POS and payment processing needs. Delivering top-of-the-line technology and excellent customer service, we help you set up and scale up as quickly as possible, taking the stress out of the process. Get started with a free quote today!

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