Credit Card Processing Services: How it Works

Credit Card Processing Services: How it Works
  • Opening Intro -

    If you accept credit cards, you're working with a processing service to ensure that the consumer or client's account is charged and that you receive your payment.


It seems like a pretty straightforward process, but there are four parties involved with the credit card transaction. Understanding how credit card processing services work is important, including discovering how you can save money.

Four Parties

The four parties involving in credit card processing services include the merchant that receives the payment, the merchant’s bank used for processing the payment, the issuing bank that provided the credit card to the customer, and the customer.

As the merchant, you make contact with the client who determines to buy your product. You may offer a variety of ways to accept payments including cash, check, debit cards and credit cards.

Lending Money

The two banks in the process act as lenders in the transaction. The issuing bank effectively lends money to the customer who has about 30 days to make payment. The consumer can avoid interest charges by paying his bill in full each month.

The merchant’s bank or acquiring bank pays the merchant for the purchased item minus a fee. Also, the issuing bank charges a fee (the merchant pays it), further reducing what the merchant makes on the transaction.

Fees Charged

This service includes the two fees as mentioned earlier with the issuing bank’s fee known as the interchange fee and the acquiring bank’s fee called the discount rate. Notwithstanding the discount rate, other fees may also be charged.

Both fees are assessed as a percentage of the transaction. Some banks also charge a small fee on top of that cost. Thus, your cost might be 2.9 percent plus 30 cents per transaction. Essentially, the added fee ensures that a base amount is always collected. Notably, if a card is present at a transaction, the fee is lower than when the card is not present such as for telephone orders.

Type of Business

The type of business you run can also affect your interchange rates. For instance, a passenger transport company may be charged 1.75 percent plus a 10 cent per transaction fee by MasterCard. That same MasterCard may charge as little as 1.35 percent for certain convenience purchases to 2 percent for a charity.

So, before you complete your part of the process you should determine how your business is categorized. Moreover, you will pay more if transactions are conducted over the phone or online, an added cost that should be understood.

Credit Card Processing Services

You will always find yourself dealing with an acquiring bank — there is no way to escape this. And that bank is composed of two parts — a merchant service provider and the processing company.

The merchant service provider deals directly with you and is your contact liaison in the process. Another entity, a processing company, transmits the sales information between the banks and the merchant. This is where the transaction is scrutinized, approved and the payment process started.

Saving Money

Clearly, it pays to shop around when seeking credit card processing services. Fees can vary and the types of fees charged can also vary. If you take in over $1 million in transactions per year, those fees can quickly add up. And if you compare costs between providers you stand to save thousands of dollars per year by carefully shopping around.

See AlsoMitigate the Risk of an Online Merchant Account


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Categories: Business Services

About Author

Matthew C. Keegan

Matt Keegan is a freelance writer and editor as well as publisher of "Matt's Musings", his personal blog. Matt covers campus, consumer, business and financial topics on various websites and blogs, and has been published in the "Houston Chronicle", "Sam's Club Magazine" and "Wisconsin Golfer".