How Credit Card Processing Works: An Essential Guide for Merchants

Credit Cards

Being a merchant means that you receive payment from customers. These payments could be in the form of cash, check, or credit/debit card.

Credit cards are a popular choice for many customers because they offer some protection to the consumer in case a product does not show up as promised. Here is an essential guide on how credit card processing works.

What are Credit Cards?

Credit cards are a type of payment that lets customers buy things online or in stores without using cash. It works by giving the consumer an account with limits on how much money is available for purchase. When someone purchases something, they have the amount of their purchase removed from this balance. The credit card company will then send you monthly statements telling you how much has been charged to your card and how much remains. This information refers to what is called an authorization request or “auth code”. This code verifies whether your customer’s credit card can be used to pay for the items they want to buy at the time they make their purchase. If there isn’t enough money left in the account, it will be declined.

What is credit card processing?

Credit card processing is the process of using a merchant account and payment gateway to sell and receive money for your products. This is only ever done through an electronic channel like your website or mobile app. This is not something that can happen by simply swiping someone’s credit card in-person at your boutique, restaurant, café, etc.

How does it work?

The first step of this process involves creating a connection between the system that runs your website (called a shopping cart) and your merchant account, so you can actually accept payments online. Next comes capturing the necessary information from each customer, which varies depending on whether they are new or returning. Once this is finished, the transaction will be securely processed and logged into your account as a record. Lastly, the customer will receive a confirmation that their transaction has been completed, along with any additional information you’ve included about your company or their purchase.


As we mentioned earlier, credit card processing fees vary depending on whom you’re doing business with and why. One of the main factors that play into these rates is called “interchange.” This is a fee that your merchant service provider pays to card-issuing banks and financial institutions for each transaction made by customers using their cards. There is also interchange plus current rates, and there are different percentages that can be less or more money. Then there’s another cost known as “merchant account” which covers how much money it costs to maintain your merchant account (including software, equipment, and support). What happens next depends on what kind of pricing model you agree upon—whether it be tiered, flat rate, or otherwise. If you receive a percentage of each total purchase instead of a fixed amount per transaction, this would fall under tiered pricing.

What are the benefits of credit card processing?

There are many reasons why customers prefer to use credit cards instead of cash or checks. One major benefit is that it allows for purchases both large and small without having to carry around large sums of cash or worry about writing out personal checks every time they make a purchase. The other main benefit is protection against fraud because each payment processed must be authorized by the financial institution used to obtain an account before being placed into your merchant account—hence why it’s also good to have this process in place even when dealing with in-person transactions that take place in your store.

Does credit card processing cost you anything?

The short answer is yes, but only if you accept payments through a traditional retail point-of-sale or using an online payment gateway. The reason is that outside companies that specialize in transactions between businesses and customers (called “merchant services”) usually charge fees to cover the costs associated with processing these credit cards, which usually include: transaction rates and interchange fees. These rates and fees vary depending on whom you’re doing business with, along with what types of cards are being used, as well as their country of origin. Since they are different for every merchant account provider, it’s important that you take time to compare offers from three providers before making any decisions regarding accepting credit cards.

Credit card processing is a useful tool for businesses and merchants alike. When properly set up and used, it allows you to accept several types of payments without having to manage cash or write personal checks.  Not only that, but it also protects your company against fraud and gives customers a sense of security knowing their information will be protected.