Whether it's buying a coffee on the go or snagging that last-minute online deal, a complex chain of events happens behind the scenes of each card transaction to ensure every penny finds its way to where it’s meant to be.
Over 11.6 million card transactions are made every day, so that’s a lot of steps that must be carried out to keep your customers happy – and your business running.
Without a proper credit card payment processing system, your customers could be at risk of payment fraud, and you may not get the money you’re due for each transaction. But what exactly is credit card processing, and how does it happen?
Keep reading as we break it down and explain everything you need to know for your small business.
Credit card processing is a series of events that enables the electronic transfer of funds from a customer's credit card to your merchant account.
While it might seem like the simple tap of a card from the outside, it actually involves multiple steps and participants to ensure every transaction is secure, accurate, and, most importantly, compliant with financial regulations.
For small businesses, understanding the ins and outs of credit card processing is essential for knowing what tools or software you need to accept card payments, the fees you have to pay, and what to do when things go wrong.
Several parties are involved in each credit card transaction, and each participant is responsible for looking after a particular step. They must work together to complete each transaction smoothly and securely.
Here’s an overview of the required parties:
To accept credit card payments, you'll need a combination of hardware and software to receive and transmit all the information involved in processing.
Hardware sounds technical, but it simply refers to any physical equipment needed to accept card payments. Not all merchants accept the same types of card payments, so the hardware required can vary based on needs and requirements.
For in-person transactions at brick-and-mortar stores, you might need a full-scale POS terminal that can process cash, card, mail order and telephone order (MOTO) payments. If you run a market stall that only handles card transactions, you’ll probably need a mobile card machine that doesn’t rely on a fixed internet or power connection.
The right hardware for your business depends on what you need it for and which types of transactions you accept.
Software is any application or program involved in card processing.
Suppose you use a POS system at your brick-and-mortar store. In that case, the POS machine likely runs off software that not only enables card payments but may also let you manage inventory, send email receipts, and offer reporting and analytics.
For online sales, your primary software will be a payment gateway, which securely connects your e-commerce platform to the payment processing network. It encrypts sensitive cardholder information, so the data is transmitted securely between the customer, the merchant, and the banks involved.
So now you know the players, it’s time to dive into how everything works.
In essence, there are two main steps involved in processing: authorisation and settlement. Put briefly:
Here’s the process in more detail:
The transaction journey begins the moment a customer decides to make a purchase with their credit card. This could be by inserting their card for chip and PIN transactions, tapping their card or smart device for contactless payments, or entering their card details online.
Once the card details are entered and the transaction has started, the software transmits the cardholder’s information and transaction details to the credit card processor. The processor forwards the details and an authorisation request through the appropriate card network and to the issuing bank.
When the issuing bank receives the request, it reviews the transaction details to verify the cardholder’s account, check for sufficient funds, and review any security issues. After completing all these checks, the issuing bank will either approve or decline the transaction.
This decision is then relayed back through the card network to the processor. The card processor then displays the response on the merchant’s POS system or payment gateway, letting the merchant and customer know if the transaction has been approved or denied.
If the transaction has been approved, the next stage is settlement or batching. This is when businesses submit batches of approved transactions, often at the end of the day when trading is complete, to the payment processor. The transaction details are forwarded to the card networks, which liaise with the issuing and merchant banks to begin the process of actually transferring the funds.
After settlement, the issuing banks transfer the transaction amount into the merchant's account via card networks, minus any processing fees.
The settlement and funding steps usually take 1-3 days to complete after the transaction, but this can vary as some banks and processors may provide next-day or faster settlement times.
For small business owners, understanding the timing of each step can be crucial for managing cash flow. You might come across the term ‘processing day’, which is the next available banking day for transactions taken outside of this period. Transactions taken outside of banking days are combined to be settled together on the next available processing day.
The time it takes for a credit card payment to process can vary, but typically, the authorisation stage is completed within seconds. Settlement and funding, when the money is transferred to the merchant's bank, usually happens within 1-3 business days.
In addition to paying to use the hardware and software needed to accept card transactions, there are also several fees that must be paid to the various players in the payment process.
These fees are billed to the merchant, so knowing exactly what costs you need to pay – and how much you’ll have to pay – can help you choose the right processing partner.
Fees can make up roughly 1.5-3.5% of each transaction, but these vary depending on the parties involved. Here’s an overview of three of the main fees you might encounter:
Other fees you’ll have to consider:
Understanding credit card processing isn't just about knowing what goes on each time your customer taps their card. Nailing down a credit card processing system that works for your business can be beneficial because it can:
Now, more than ever, customers expect seamless and flexible payment options. Our own research found that contactless and mobile payments are favoured above cash, so facilitating these payment options means you can cater to customers’ preferences.
This improves the checkout process and enhances the overall customer experience, encouraging repeat business and fostering loyalty.
Accepting credit cards can also directly influence your sales and revenue. This is because Dun & Bradstreet’s famously cited study found people spend up to 18% more when using credit cards instead of cash.
Plus, being able to process credit cards opens your business to online sales, broadening your market reach and providing opportunities for growth beyond your physical location.
Security is a growing concern for both merchants and consumers, with people across the UK losing £258.9m to card fraud in the first half of 2023. Credit card processors use encryption technology and follow PCI DSS security measures to protect sensitive data, which can significantly reduce the risk of data breaches and fraud.
For online transactions, Transmission Control Protocol (TCP) is a communications standard that allows applications and programs to communicate and exchange data over a network. So, when a customer enters their credit card information on your website, TCP helps deliver their data securely to the payment gateway and processor, minimising the risk of data breaches.
Having a complaint credit card processing strategy in place protects your business and your customers, building trust and your reputation.
Whether a portable, countertop, or mobile device, our card machines for small businesses can help make payments more manageable.
To find out more about any of our payment solutions or discuss your options in more detail, contact our dedicated experts today.