The Ultimate Credit Card Processing Guide for Merchants
The use of credit or debit cards to process payments and complete transactions has been a conventional practice around the world for decades. Recent studies indicate a radical surge in the global total card payments, with the consumers’ purchase preferences inclining towards debit and credit cards. Therefore, as the world progresses into a cashless economy, businesses must embrace credit card processing as a fundamental component of their payment systems.
Here is a guide to understanding how credit card processing works.
What is Credit Card Processing?
Credit card processing refers to a chain of procedures necessary to facilitate payments to a business using a credit card, debit card, or over the internet. The process acts as a guide for the transmission of the payment data from the cardholder to the merchant account. Generally, credit card processing is initiated every time a buyer uses a credit card to make payment for a product.
Different players are involved in verifying the validity of the transaction and accepting or declining the purchase. This capacity to aid card-based transactions has introduced more payment processing options to the modern business environment. Today, buyers and business owners can rely on online credit card processing for all their digital payment solutions.
The various parties involved in credit card processing include;
- Cardholder – This is the customer in possession of the debit or credit card and ready to use it to purchase a product or service.
- Merchant – This is the company or small business selling products in exchange for the cardholder’s money.
- Issuing Bank – This is the financial institution responsible for approving and issuing a credit card to the cardholder.
- Credit Card Processor – Also known as the credit card processing company. It refers to the party responsible for the transmission of payment data between the cardholder and the merchant.
- Acquirer – The acquiring bank houses the merchant’s bank account. Generally, the acquirer represents the merchant in processing all card-based payments.
- Card Network – Also known as a Credit Card Association. Refers to the organization in charge of expediting card transactions between the issuing and acquiring banks.

How Credit Card Processing Works?
Ideally, completing a transaction and processing a payment using your card takes place in a fraction of seconds. However, card processing involves a series of complex actions and tasks in the background. Here is a highlight of the procedures followed every time a cardholder decides to make payments using a debit or credit card.
Step 1: Purchase Confirmation
The process begins with the customer presenting their credit card at the Point of Sale (POS) terminal for card payment.
Step 2: Transaction Initiation
Card processing is initiated when the customer swipes a credit card on a POS system. This is applicable for a point of sale transaction where the merchant’s POS system reads the cardholder’s card details. In the case of online payments, the cardholder submits their card details in the merchant’s payment gateway.
Step 3: Data Transmission
The underlying transaction information is transmitted to the payment processor in an encrypted format. Credit card processors are designed to pass the encrypted data to the credit card network from which the issuing bank sources the transaction details.
Step 4: Payment Verification
The issuing bank verifies the transaction by checking the availability of money and the legality of the payment. The bank then submits a decline or approved notification to the credit card network.
Step 5: Payment Authorization and Processing
The credit card network authorizes the purchase, prompting the merchant to deliver the products to the cardholder. Consequently, the merchant presents the credit card payment to the acquiring bank, which settles the payments.

Typical Credit Card Processing Fees and Rates
Credit card processing fees come in varying formats depending on the pricing model applied by the various credit card processors. There are also notable variations between monthly and transactional charges. Also, there are specific components of card processing that may be an underlying factor for the processing fees. However, regardless of the intimidating nature of these fees and rates, card processing should be your ultimate goal as a business.
This list outlines the typical credit card processing fees and rates.
Interchange Rate
Interchange rate is the rate determined by a card payment network. Interchange rates do not vary regardless of the credit card processing company offering the service. This means that every time a cardholder swipes a credit card, an interchange fee is collected by the underlying payment network. Such networks include American Express Card, Discover, Mastercard, and Visa. Typically, interchange rates are calculated as a percentage of the transaction. Factors influencing interchange rates include the type of card used and whether the credit card has been swiped or keyed in for processing.
Assessment Fee
Generally, interchange fees consist of both the interchange rate and assessment fee. In this case, the assessment fee refers to charges incurred by a merchant every time a credit card transaction is processed. Like interchange fees, assessment fees are fixed for all credit card processors. However, in some instances, you may get a different assessment fee offer from a credit card processing company based on its pricing model. For example, the bundled pricing tier allows merchant services to charge interface fees in different tiers. As a result, the assessment fee is determined by the pricing bundle you choose.
Markup Fee
This is the price per transaction paid to the credit card processing companies on top of the interchange plus charges. Mark-up fees vary with each credit card processor based on specific variables. As a result, merchant services must evaluate such charges when signing up with various service providers. While these costs may be minimal compared with other card processing fees, mark-up fees can significantly lower business profits in the long term.
Flat Fees
Flat fees are the charges you incur for using the platforms offered by credit card processing companies. Generally, service providers charge flat rate fees on a monthly or yearly basis. Such charges include chargeback fees, PCI compliance fees, equipment leasing charges, monthly fee, payment gateway fees, and batch rates.
Here is a brief description of the various types of flat fees.

Chargeback Fees
A chargeback fee is initiated every time a customer disputes a charge on their transaction report or account statement. Generally, your credit card processor will calculate this charge per transaction or occurrence. The initiation of a chargeback fee can be done by the issuing bank or the merchant. Typically, the provisions of a chargeback fee are stipulated in your account agreement, which you should evaluate when choosing a payment processor.
PCI Compliance Fees
PCI Compliance fees are the extra charges imposed on the merchant account by a credit card processor to validate their compliance with data security requirements. Popularly known as the Payment Card Industry Data Security Standard, PCI Compliance is typically surcharged on any business accepting credit card payments. Lack of this compliance may result in a penalty monthly fee on the merchant account. Therefore, it is essential to check out the PCI compliance and non-compliance charges when working with a credit card processor, for any credit card payment services.
Monthly Fee
The monthly fee, also known as the monthly minimum, refers to the additional amount merchants pay the processor for not achieving a minimum amount on their total transaction costs per month. The Monthly fee varies from one service provider to another. However, merchant accounts that have transactions that go above the monthly threshold rarely have the monthly fee imposed on their businesses.
Equipment Leasing Fees
Most processors will require merchants to rent or lease terminal equipment upfront, especially if you are not in the capacity to purchase it. Leasing and renting terminal equipment attract a periodic charge known as the equipment leasing fee. However, leasing terminal equipment may eventually become more costly than the total cost of procuring it. The good news is that you can always negotiate to have some equipment made available to your business for free.
Batch Fees
Usually, the total sales of a merchant’s business day are accumulated into batches, through which overall deposits are made into the business owner’s account. For every batch deposit, you will be charged a fee calculated as a percentage of every transaction. Batch fees vary with different processors, which is why you should look into each provider’s pricing bundles before initiating business with them. For example, some processors will charge you the maximum batch fee per day regardless of the pricing tier in which your transactional amount falls.
Payment Gateway Fee
Payment gateway fees are the costs you incur for using the payment infrastructure provided by a payment processor. Ideally, this kind of payment should help you access payment data, including transaction details, authorization by the issuing bank, and facilitation of deposits to your account. Gateway payment fees are created to cover the costs of processing each transaction.

Pricing Models
Various credit card processing companies provide merchants with different pricing plans tailored to meet varying business needs. Each pricing plan works differently, which is why you should take time to analyze all the available options. Here is a highlight of the most common pricing plans.
Flat Rate Pricing
This is a pricing plan designed to offer a single subscription monthly or yearly for full access to the various or all features of card processing. The flat-rate pricing bundle is best suited for merchants that operate with low transaction volumes. Ideally, flat-rate cost or pricing will require you to process payment for each transaction for the same fixed fee over a given period.
The idea is to make it easy and straightforward to monitor the cost of each transaction. The advantage of subscribing to flat-rate costs or pricing is that merchants can enjoy card processing services at lower monthly rates. However, in the long term, a flat rate cost or pricing plan tends to be more costly than all the other price models.
Cost-Plus Pricing
Cost-plus pricing is considered to be the most stable and fair model due to its transparency. Also known as interchange-plus pricing, the cost-plus model applies a fixed markup on the interchange plus rates as published by the various payment networks. With this model, you can see the markup imposed on each transaction and the money allocated to credit card associations and issuing banks. The cost-plus pricing model is more cost-effective when you have more completed transactions every month. However, on the downside, statements generated through the interchange-plus pricing model can be quite complex to read. You will require basic accounting knowledge to assess the interchange plus statements.
Tiered Pricing
Tiered pricing is the most complex yet the most common pricing method available in the market today. The model classifies processing rates into three tiers, including the non-qualified, qualified, and mid-qualified tiers. A transaction is categorized on either of these tiers based on various criteria, such as card-available versus card-not-available and the time it takes to process a transaction. On the upside, tiered pricing simplifies multiple variables, making it easy to understand the numbers for accounting. However, unlike the interchange-plus model, tiered pricing does not allow you to see the money going to such parties as credit card associations, issuing banks, and your account provider. As a result, transparency is lost in the payment process.

What to Look for When Choosing the Best Credit Card Processing Merchant
Here are some of the factors to consider when identifying the best credit card processing merchant.
Pricing Transparency
It is fundamental to invest in a card processing company that has pricing transparency at the top of business priorities. While looking for a pricing plan best suited for your business needs is essential, you do not want to go for a service provider tacked in unexpected and hidden fees. Some mobile credit card processing providers have their rates integrated with complex tier structures that are complicated to decipher. Small business owners with merchant account must carefully read through contracts and agreements presented by processing companies. Otherwise, you may have to live with the surprise of extra costs and charges every month.
Credit Card Fraud Protection and Security
In the recent past, small businesses and start-ups have experienced significant attacks from cybercriminals and hackers. Credit card processing is probably the most prone operation, with credit card fraud taking place in all sorts of ways today. While you can fully prevent card fraud and crime, you can incorporate security features and strategies that make it harder for cybercriminals to break into your finances. Consequently, you want to invest in a credit card processing company that adopts security practices that protect your business and clients. Look for the company’s use of tools and resources that detect, assess, and fight fraud at every phase of the payment process.

Merchant Services
When setting up your merchant account, you might want to evaluate the services that come with specified account types. It would be best if you identified a company with unlimited customization options, stable payment solutions, and one that facilitates all transactions within your network. Also, invest in a provider that makes it possible to accept non-cash payments offline and online using stable POS infrastructure and digital transfers, respectively. However, it is important to know that a merchant’s creditworthiness is critical to accessing merchant services, including account setup.
Reliable Customer Service
Having an inefficient payment processing system can adversely affect your business. This is why you must choose a card processing company offering ample customer service throughout your business time. For instance, a company with reliable customer service should make timely communication when there are issues affecting payment processing. The more sophisticated your business operations and customer needs are, the higher the level of customer service you should acquire. Consider service providers with a 24/7 work policy, an in-house help desk, and a fully functional website for information referencing.
Features and Integrations
Competitive card processing companies will offer you more than just payment processing. Consider providers that offer your business such integrations as inventory management, payment data, customer insights, and invoicing. While some processors only provide you with e-Commerce, mobile payment, and POS systems individually, the best providers will offer omnichannel solutions for all your needs. Also, it can be quite frustrating and costly to experience slow transaction speeds when processing payments. This is why you should choose companies with highly reliable e-commerce platforms and payment gateways.

PCI Compliance
The only way the cardholder’s data is assured of protection is by having merchants comply with the Payment Card Industry Data Security Standard (PCI DSS). Generally, PCI Compliance comes in various levels depending on the type of business you run. For example, merchants that work with a third-party processor have a lesser compliance burden than businesses relying on merchant account providers for data protection. However, regardless of the level at which your business falls, you should always partner with a processing company that helps you with this kind of compliance.
Conclusion
Credit card processing is quite a complex process. However, understanding how it works will give you a hand in identifying ideal payment processing solutions. Notably, finding the right card processing provider can significantly impact your business in terms of cost-effectiveness, interchange optimization, and automation of payments. There is no better way to leverage the surge in the cashless economy than integrating card processing in your business operations.