How Credit Card Transaction Processing Works: Complete Guide

Understanding Credit Card Transaction Processing

Xerxes Bhathena Posted on September 10, 2025

Overview

Credit card transaction processing involves a series of steps that ensure a payment made via card reaches the merchant’s account securely and efficiently. It connects the cardholder, the merchant, and the banks involved in the transaction, enabling the exchange of funds.

This seamless process is vital for both businesses and consumers, as it facilitates daily transactions in the digital age. Understanding the steps behind credit card processing helps demystify how the system works and why fees are involved.

Steps Involved in Credit Card Transaction Processing

Credit card payment processing involves multiple stages, each crucial to ensuring the transaction is completed smoothly. These stages are designed to verify, authorise, and transfer funds securely. Below are the key steps:

Step 1: Cardholder Initiates the Transaction

The process begins when the cardholder makes a purchase by swiping their card or entering card details online. This step involves the cardholder initiating the transaction either physically at a point of sale (POS) or digitally on an e-commerce platform.

By doing so, the cardholder authorises the merchant to charge their account for the transaction amount. The merchant then sends the payment request to their bank, which starts the credit card payment processing.

Step 2: Merchant's Bank Receives the Transaction Request

Once the cardholder initiates the transaction, the merchant's bank, also known as the acquirer, receives the payment request. The acquirer bank ensures that the transaction details are transmitted securely and checks that the merchant’s account can accept the payment.

The acquirer then forwards the request to the relevant payment gateway, which directs it to the issuing bank for further verification. This step is crucial as it helps prevent fraud and ensures the transaction request is legitimate.

Step 3: Payment Gateway Sends Information to the Issuing Bank

After the merchant’s bank receives the transaction request, the information is forwarded to a payment gateway. The payment gateway plays a key role in securely transmitting the transaction details to the cardholder’s issuing bank.

This involves securely sending encrypted data, ensuring that the cardholder's personal and financial information is protected. The gateway acts as a bridge between the merchant and the banks, ensuring the transaction proceeds smoothly.

Step 4: The Issuing Bank Authorises or Declines the Transaction

The issuing bank now verifies the transaction based on several factors, including the available credit in the cardholder’s account, fraud detection mechanisms, and security checks. If the cardholder has sufficient credit and the transaction appears legitimate, the bank will authorise the payment.

If not, the transaction may be declined. This step is essential for protecting both the cardholder and the merchant from potential fraud and ensuring that only valid transactions are approved.

Step 5: Transaction Settlement and Funds Transfer

Once the transaction is authorised, the final step involves settling the payment. The issuing bank transfers the approved amount to the merchant’s bank account. This is known as the settlement process.

While credit card transactions generally go through quickly (the authorisation happens almost instantly), the settlement process can take a few days, depending on the payment gateway and the financial institutions involved.

The funds are transferred from the cardholder’s account to the merchant’s account, completing the credit card processing.

Credit Card Processing Fees: What Are They and Who Pays Them

Credit card processing involves fees that are typically borne by the merchant, though some may be passed on to the cardholder. These fees vary depending on the card type, the payment gateway, and the terms agreed upon between the merchant and their bank.

Common credit card processing fees include a percentage of the transaction value, a flat fee per transaction, and sometimes additional fees for chargebacks or refunds. Understanding these fees is crucial for both businesses and consumers, as they directly impact transaction costs.

How Card Processing Networks (Visa, Mastercard, etc.) Fit into the Process

Card processing networks, such as Visa, Mastercard, and others, play a critical role in facilitating transactions between the cardholder’s bank and the merchant’s bank.

These networks act as intermediaries that securely route payment information, ensuring the transaction reaches the correct bank for verification and settlement.

They also ensure that security protocols, like encryption, are followed. Without these networks, card payments would not be as seamless or secure. They essentially help streamline and enable card processing on a global scale.

Security Measures in Credit Card Processing: How Is Your Information Protected

Credit card processing includes several security protocols to protect sensitive cardholder data. One such method is encryption, which secures the transaction details during transmission between the cardholder, merchant, and the banks.

Tokenisation is another key security feature, replacing sensitive card data with a unique identifier that can’t be used elsewhere. Additionally, multi-factor authentication (MFA) is increasingly used to further secure online transactions. These measures help ensure that cardholders' financial data remains safe throughout the entire processing journey.