This guide explains everything you need to know about credit card processing. It covers what credit card processing is, how transactions move from approval to payout, what drives fees, and how to choose a partner that fits the way you sell.
What is credit card processing?
Credit card processing is the secure process that moves payment information and funds from a customer’s bank account, to the business’s bank account, when a purchase is made.
It typically includes authorization, where the customer’s bank approves or declines the transaction. It also includes clearing and settlement, where the transaction is finalized through the card network, and funds are transferred to your merchant account.
After settlement, the funds are deposited into your business bank account.
Who is involved in credit card processing?
Every transaction includes a few core participants.
- The cardholder is the customer who initiates the purchase
- The merchant, who sells and delivers the goods or services
- The issuing bank is the customer’s bank that issued the credit card and decides whether to approve a transaction
- The acquiring bank is the financial institution that provides the merchant account, handles the actual funds, takes on transaction risk, and deposits money into the business's bank
- Card networks (such as Visa, Mastercard, American Express, etc.) operate the rails that carry authorization and settlement messages between issuers and acquirers
The role of a merchant service provider in credit card processing
A merchant service provider (MSP) is an intermediary or partner (sometimes the acquiring bank itself, sometimes not) that offers a bundled package of payment services and acts as the primary point of contact to simplify the merchant's access to the complex payment ecosystem.
As part of the bundled package, the merchant service provider often provides the necessary technology and equipment for the transactions.
- The payment gateway, which is the layer that securely transmits payment data
- The hardware used to capture payment details, calculate totals, and produce receipts.
There are also two common operating models.
- A payment service provider, sometimes called an aggregator, lets merchants start quickly under a shared or pooled bundled account
- A dedicated merchant account gives a specific merchant identification tied to a business and can offer more control, but usually requires deeper underwriting
Do you need a merchant service provider to process credit cards?
Not necessarily. You can apply for a merchant account directly with an acquiring bank, but the onboarding process is often more complex and time-consuming.
A merchant services provider simplifies acceptance by combining processing with access to a merchant account, ecommerce gateways, POS tools, reporting, customer support, and security features.
An acquiring bank may supply the acquiring relationship, but you may still need to source and integrate separate technology and support, which can add operational burden.
How credit card processing works step by step
The process of accepting credit and debit card payments is a complex, near-instant process involving an intricate web of providers and governmental bodies.
In layman’s terms: the merchant checks to see if the customer has the available funds to pay for the goods or services via the payment network. Once the funds are confirmed, a hold is placed for the transaction amount, and the merchant provides the customer with the goods or services.
Then later, the merchant “cashes in” on the held funds, and they are removed from the customer’s account and deposited into the merchant’s account.
It starts when the merchant takes the buyer’s credit card information. The payment gateway transmits the encrypted data to the acquiring bank (which may be the merchant service provider).
The acquiring bank makes an authorization request by sending the transaction details to the correct payment network (VISA, Mastercard, etc). The payment network routes the transaction details to the issuing bank for verification and authorization.
During authorization, the parties exchange only what is needed to evaluate the payment, which can include the card number or a token, transaction amount, merchant and terminal identifiers, and card-not-present verification data like AVS and CVV when applicable.
The issuing bank sends an authorization response to the acquiring bank via the payment network and either approves or declines the transaction.
If what they find is acceptable and if there are sufficient funds to support the purchase, the transaction amount is authorized, and a hold is placed for the transaction amount. If fraud is suspected or if there are insufficient funds, the transaction will be declined, and a declined code will be sent.
The acquiring bank relays this decision to the payment gateway, which in turn, relays it to the merchant that initiated the request. If approved, the merchant then provides the goods or services to the customer and adds the transaction to their batch of approved transactions that are awaiting settlement.
Generally, the merchant will settle all their transactions in one batch once per day by sending them for clearing. The acquiring bank requests the funds for the approved transactions from the issuing bank via the payment network.
When the issuing bank releases the funds, they are sent to the acquiring bank. Following the payout schedule, the acquiring bank finally deposits the funds into the merchant’s account.
How card-present (in-person) transactions work
In-person payments start when the customer taps, inserts, or swipes, and EMV chip or contactless transactions create dynamic cryptographic data designed to reduce counterfeit fraud. The authorization request goes to the issuing bank for risk checks and available funds, and the issuing bank returns an approval or decline code.
Once approved, the transaction is typically captured and added to the merchant’s daily batch. The payment processor or acquirer submits that batch for clearing, then settlement occurs through the network. Funding is the final step where proceeds are deposited into the merchant account, then moved to the business bank account according to the payout schedule.
How card-not-present (online, app, mail, or telephone) works
Card-not-present payments start at checkout when payment details are entered, and a gateway or similar integration encrypts and transmits data. The raw card numbers are replaced with tokens for storage and future charges.
Depending on your region and setup, authentication steps like 3-D Secure can be used to verify the cardholder for certain transactions. Authorization then runs with card-not-present checks such as AVS and CVV, and you may capture immediately or capture later if you ship after purchase.
After capture, the transaction follows the same clearing, settlement, and funding sequence as in-person payments.
The main difference is that card-not-present transactions can be more likely to trigger risk holds for fraud if patterns suggest unusual volume or incomplete business documentation. This can influence authorization checks, dispute rates, and pricing.
Credit card processing fees explained
The total processing cost typically comes from three layers.
Interchange fees (set by card networks)
Interchange fees are fixed charges collected by issuing banks for every credit card transaction you process. Card networks set these rates, and they apply consistently across providers.
Several factors determine the interchange amount. The primary component is the swipe fee, which is usually a percentage of the transaction plus a flat amount. This rate varies based on the type of card used and whether the transaction is swiped, tapped, or manually entered.
In addition, assessment fees are calculated on your total monthly sales volume for each card brand. These fees are paid directly to the card networks and are separate from interchange.
Debit and credit transactions are priced differently. In the United States, certain debit interchange rates for covered issuers are regulated under Federal Reserve Regulation II, with exemptions that may apply. As a result, your debit transaction mix can influence your overall processing costs.
Payment processor fees
Payment processors charge additional fees to cover operating costs and risk management. These typically are per-transaction fees.
Some processors may also charge a flat monthly platform or POS fee. Some agreements include minimum processing requirements, and a monthly fee may apply if your volume falls below that threshold.
Batch fees can be charged each time transactions are settled. Equipment-related costs may also apply if you lease your POS system or peripherals rather than purchasing them outright. In some cases, there may be an additional charge for using a third-party payment gateway.
There are three main pricing models that dictate what you will pay to your payment processing company.
Tiered pricing
Under a tiered pricing model, each transaction is categorized as qualified, mid-qualified, or non-qualified, with each tier carrying a different rate. The classification depends on factors such as card type, how the card is accepted, and transaction data completeness.
While this structure can be tailored to certain business profiles, it is often difficult to interpret. Because the criteria for each tier are not always clear, costs can be unpredictable and hard to reconcile.
Flat-rate pricing
Flat-rate pricing applies the same fixed rate to every transaction, with interchange included. This simplicity makes it appealing for businesses with lower credit card volume or those that want predictable billing without detailed analysis.
Although monthly platform fees are typically modest, the per-transaction rate is usually higher than with other pricing models. Over time, this can result in higher overall costs as processing volume increases.
Cost-plus pricing
Also known as interchange-plus pricing, this model provides a transparent, itemized breakdown of every fee. You pay the actual interchange rate set by the card networks plus a clearly defined processor markup.
Some providers may also charge a monthly subscription or account fee. As transaction volume grows, this model often becomes more cost-effective, since you are not paying bundled rates and benefit directly from lower interchange costs on qualifying transactions.
Customer-related fees
Any business that accepts credit cards will encounter chargebacks. A chargeback occurs when a customer disputes a transaction directly with their bank instead of contacting the merchant first.
While occasional chargebacks are expected, excessive disputes increase operational costs and put additional strain on the payment processor. High chargeback levels can result in additional monitoring fees, penalty programs, or account restrictions. In severe cases, processing privileges may be suspended or terminated.
How to choose a credit card processing provider
A strong credit card processing provider should be evaluated on measurable criteria, not just the advertised rate.
Start with pricing transparency. Ask for clear contract terms, how fees are presented on statements, and how rate changes are communicated. Confirm payout timing, funding reliability, and how weekends and holidays affect deposits.
Review risk policies before signing. Understand when reserves or rolling holds apply, what triggers underwriting reviews, and what documentation is needed to avoid avoidable delays. Align feature needs with your operating model, including recurring billing, invoicing, a virtual terminal for phone payments, ecommerce integrations, reporting, and any business-to-business data requirements.
Security posture matters because it affects operational risk and PCI scope. Look for tokenization, encryption approaches such as point-to-point encryption, and support for 3-D Secure where relevant.
Hardware and integrations should match how you sell, including point of sale options for in-person transactions and API or platform integrations for ecommerce.
Support quality is a practical differentiator. Ask about support hours, dispute support, and escalation paths for funding or outage issues.
How to start accepting credit card payments
Step 1: Apply for a merchant account
Using a merchant services provider like North simplifies the process. Gather your business formation details, EIN, bank account information, and any prior processing history.
Confirm your typical ticket size, refund policy, and fulfillment timelines so your risk profile is clear.
Step 2: Get approved
During the underwriting process, respond quickly to document requests and keep your public business information consistent, including your website, contact details, and product descriptions.
North aims for fast approvals, with some merchants seeing near-instant (within minutes) approvals. Standard underwriting can take less than a business day, with even high-risk accounts often approved within 1-2 days, which is much faster than industry norms.
The actual time depends on your business type and the completeness of documents, but we focus on streamlining the process for quick setup, even offering immediate payment acceptance with funding limits.
Step 3: Select and configure your hardware
For card-present businesses, select EMV and contactless readers. Configure your point of sale tax and tip settings, and run end-to-end test transactions so receipts and descriptors match what customers expect.
For card-not-present setup, choose your integration pattern, which could be hosted checkout, tokenization through a gateway, or server-to-server payments. Then test decline handling, refunds, and email receipts.
Step 4: Accepting payments
Before going live, confirm daily batch cutoffs, set reconciliation routines, and train staff on refunds, voids, and dispute documentation so operational habits are in place from day one.
FAQs about credit card processing
How long do payouts take and what affects settlement timing?
Many merchants see payouts 1 to 2 business days after the transaction date. Cutoff times, weekends, holidays, and risk reviews can affect timing.
Do I need a merchant account or can I use a payment aggregator or PSP to process credit cards?
Both can work. Aggregators can simplify onboarding and speed setup. Dedicated merchant accounts can provide more control over underwriting and account structure, and the better fit depends on your volume, risk profile, and operational needs.
What is PCI DSS and which SAQ applies to me?
PCI DSS is a data security standard for cardholder data environments. Your SAQ (Self-Assessment Questionnaire) depends on how much of the payment flow touches your system. Hosted payments typically reduce scope compared with direct ecommerce handling.
What is EMV and do I need chip and contactless acceptance?
EMV is the chip standard used in card-present payments, and it is designed to reduce counterfeit fraud. Chip-capable acceptance is widely adopted because network rules generally place more responsibility on the party using less secure acceptance methods for certain counterfeit scenarios.
Can I pass payment processing fees on to customers?
Rules vary by state, country, and card network, and requirements can include specific disclosures and signage. Review card network rules and consult qualified counsel before implementing any fee program.
How do refunds and voids work, and how long until customers see funds?
A void cancels an unsettled authorization or capture, while a refund reverses a settled transaction. Customers often see refunds within three to 10 business days. Timing depends on the issuing bank’s posting practices and transaction status.
What is the difference between processing credit vs. debit cards?
Debit and credit can route differently, and pricing can differ by network, card type, and transaction method. In the U.S., certain debit interchange for covered issuers follows Federal Reserve Regulation II standards, which can influence your debit effective rate depending on your customer mix.
North is a leading financial technology company that builds innovative, frictionless end-to-end payment solutions designed to simplify and grow businesses of all sizes. From the front door, to the back office, the developer world, and partnerships that expand the payments landscape, North offers proactive, comprehensive merchant services, in-house processing, and more.
