Credit Card Processing: How it Works and What To Look For


Credit card processing is essential for any business. Regardless of size, businesses need to accept credit cards to accommodate a wider range of customers. Allowing credit cards, instead of just cash or checks, can contribute to a boost in sales. Making a choice about a credit card processing vendor isn’t something to be taken lightly. You should know how credit card processing works and your available budget before signing a contract, especially if you’re small business on a tight budget.

How It Works

Credit card processing tends to follow a pattern. A business signs up with a third-party vendor that specializes in processing credit cards. The business then agrees to pay a small monthly fee, a portion of each transaction that is processed, and often an installation fee. When a sale takes place, information from the transaction follows a certain path.

  1. The merchant submits the information about a credit card transaction to the credit card gateway for the customer.

  2. The payment gateway processes the transaction information by sending it to the merchant’s bank processor using a secure connection.

  3. The merchant’s bank then submits the transaction to the credit card network, which routes the transaction to the customer’s issuing bank.

  4. The issuing bank will either accept or decline the transaction depending on whether the funds are available. They then pass the information back to the credit card network and then to the merchant bank’s processor.

  5. Transaction results are then sent to the credit card gateway. The funds are transferred via the credit card network to the merchant’s bank account in what is known as the settlement process.

While the initial steps are usually completed in a matter of seconds, the actual settlement process takes usually between two and four business days.

What to Look For

Before choosing a vendor or a contract, keep a few things in mind. What cards do you need to accept and how much are you willing to pay per transaction? Knowing your goals and expectations going in can benefit you in the long run. Compare credit card processing prices and vendors before making a decision.

  • Is accepting Visa and MasterCard enough? If 25 percent or more of your business will come from Discover or American Express card holders, make sure you choose a credit card processing system that accepts these cards directly.

  • Most companies charge a small fee per transaction. Aim for a provider who offers a 2-2.5% transaction rate to give your business more flexibility when it comes to credit card processing expenses.

  • Pay attention to any differences between transaction fees for debit cards and credit cards. Some processing vendors charge a higher rate for one over the other. Some businesses notify customers of convenience fees, which can cover these costs.

  • Security is always important. Make sure your credit card processing company limits card information on receipts and runs the card verification value (CVV) checks on credit card transactions.

  • Look at the fees. Beyond the transaction rate and a monthly payment, fees can arise from the acceptance of various cards, necessary equipment, and more. Establish what you’ll be charged and when to avoid overpaying in the future.

Shopping for the right credit card processing company doesn’t have to be daunting. You can make an informed decision by laying out your goals, budget and expectations before comparing the contracts and options of vendors. Once you know how the process and your business can work together, you can easily choose the credit card processor that is the best fit.

About the Author

Erica Bell

Erica Bell is a small business writer for Though she writes on a variety of industries, there is a focus on topics such as online marketing, business buying, phone services and social media trends.

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