A Guide to Credit Card Processing – How Does It Work?

Consumer borrowing on credit cards jumped to its highest level in more than a year in November, pushing all forms of household unsecured credit to £1.2bn, according to the latest Bank of England data.

Credit card payments are convenient for merchants and customers.

Though it is not a must for merchants to deeply understand how the banking system works, it is advisable to have some knowledge of credit card payment processing.

Understanding the basics allows merchants to know why they incur the fees and at which stage of the transaction they apply. Basically, bank card networks carry billions of transactions between merchant accounts, processors, and banks. This article will look at this payment processing process in detail.

Key Players in Credit Card Processing and How They Work

In a matter of seconds, a payment terminal relays transaction information to a processor, then to the issuing bank through the card network seeking approval. Afterward, the bank issues authorization to the processor through the card ending at the merchant’s software or terminal.

Notably, transaction authorization is the first step. It must also be settled before depositing sales into the merchants’ bank accounts. The two stages in credit card processing, authorization, and settlement, must occur, and there are fees in each stage. A failure at any stage can lead to more costs for the merchant.

The involved players in this transaction are the card associations (Visa and MasterCard), Issuing bank (cardholder’s bank), the merchant or the business, and the acquiring bank (the business’s bank.)

The Merchant

It refers to any business selling goods or services. In this case, it is those businesses that accept card payments. These businesses keep a merchant account which helps them accept customer debit or credit card payments.


The other key player in understanding credit card processing is the cardholder. It refers to a person who receives a card, credit or debit, from a card-issuing bank. They can then use the card when making payments.

Issuing Bank (Cardholder Bank)

The other important term is the issuing bank. It issues cards to customers/ cardholders. It is part of the card associations (Visa or Mastercard). This bank pays the acquiring bank when cardholders make a purchase.

Acquiring Bank

Acquiring bank is also a member of the card associations. It is also often known as a merchant bank. They contract with merchants creating and maintaining accounts allowing businesses to accept debit and credit card payments. Banks can often use third parties such as Prospay.co to provide membership and conduct day-to-day monitoring activities of merchant accounts.

The acquiring bank offers equipment and software for businesses to accept payments. These include a point-of-sale system, an online payment processing gateway, and others. They can also provide customer services handling any credit card processing queries that arise.

Card Associations

MasterCard and Visa are not banks that issue credit cards. Instead, they serve as custodians. They are organizations that control the acceptance and use of cards. Others in this area include Discover and American Express. They mostly control entities that can issue cards under their brand and define business rules for efficient operations.

These business rules include interchange fees and qualification guidelines. They can also assist in arbitration between the issuing and acquiring banks.

How Credit Card Transactions Work

After understanding the key players in credit card processing, a merchant can know how transactions work. They do so in several stages. These are authorization, authentication, and settlement.


For this stage, the cardholder or the customer initiates the payment. They can do so through an online payment processing gateway or when visiting a store for in-person shopping. The merchant’s payment gateway collects the credit card data and creates a request for funds. Once this happens, the merchant’s system sends the transaction information, which includes the amount, the account number, and the cardholder’s name to a payment processor, which kicks in the second step.


Once payment is authorized, the payment processor verifies the transaction’s legitimacy. For this, the system receives the information and identifies the card type. It then sends the information to the appropriate card network. The card network then determines the bank issuing the card, sending a request to the bank for funds. The issuing bank then checks the bank accounts internally to determine the availability of funds where it sends an approval.


During this stage, the business’s system gets the approval message and finalizes the transaction. At this time, the funds are temporarily held in the customer’s bank account the transaction amount. Afterward, there is communication between the acquiring and issuing bank for the funds to be deposited into the merchant’s bank account within two to three business days.


Increasing payment methods such as credit cards and online payment processing in a business leads to more growth. As a merchant, understanding credit card processing is a crucial step. It helps in knowing all the charges and the steps to take to offer quality services and avoid costly mistakes.