How Credit Card Transactions Work for Merchants

A credit card transaction is an electronic payment process that moves funds from a customer’s account to a business’s bank account through a payment network. Credit card transactions are approved in seconds, and the next thing you know, digital and physical goods are being shipped all around the globe.

There’s a lot that goes on in those few seconds and in the day or two that follow. If you’re a business owner planning to accept credit card payments on your website, staying informed is key. Knowing how a credit card transaction works will help you get the most from your system and avoid extra fines and fees.

The Parties Involved in a Credit Card Transaction

Every credit card transaction involves up to six parties, depending on the card brand: the cardholder, the merchant, the payment processor, the acquiring bank, the credit card network, and the issuing bank.

Role	Key Function and Definition
Cardholder	The owner of the credit card account. Their name is on the card or digital account, if using avirtual credit card. They’re the individual making the purchases.
Merchant	The e-commerce or retail business owner who charges the cardholder for goods or services.
Payment Processor	A third-party company that connects the merchant to the acquiring bank. This role includes merchant aggregators like PayPal and dedicated account providers like Unicorn Group, which offers credit card processing in Europe and worldwide.
Acquiring Bank	The acquiring bank, also called the merchant bank, processes card transactions for the merchant. It works behind the scenes and is distinct from the merchant’s standard business bank account.
Credit Card Network	The global networks (Visa, MasterCard, American Express, Discover) that facilitate transactions. Visa and MasterCard work with issuing banks, acquiring banks, and processors. American Express and Discover handle their own card payments directly.
Issuing Bank	The bank that provides the customer with their credit card. They represent the customer’s interests in the case of a disputed charge.

The Credit Card Transaction Lifecycle

The credit card transaction lifecycle involves an authorisation request, authentication, batch processing, clearance and settlement with the acquiring bank, merchant settlement, credit card repayment, and chargebacks and returns, when applicable.

1. Authorisation Request: This is the first step of a credit card transaction. The cardholder submits their credit card details to the merchant, and the sale is either approved or declined.
2. Authentication: This step includes background security checks by the merchant. Systems match billing addresses and card verification values (CVV). They also check IP addresses and perform reverse lookups. If these fail, the transaction is blocked.
3. Batch Processing: This is the merchant’s daily task of sending approved transactions to their payment processor or acquiring bank for clearance and settlement.
4. Clearance and Settlement With the Acquiring Bank: The acquiring bank checks and clears the approved transactions. It then requests payment from the issuing bank, which transfers the funds to the acquiring bank.
5. Merchant Settlement or Funding: The acquiring bank transfers the funds to the merchant’s business bank account, minus transaction fees.
6. Repayment: The customer repays their issuing bank for credit card purchases based on their card agreement.
7. Chargebacks and Returns: If a customer has a problem with a charge or a product, they can request a refund or force a chargeback through the issuing bank. Stores typically offer a 30-day refund window, but chargebacks can occur up to 120 days after a purchase.

How Credit Card Transactions Work in Detail

The payment process for merchants involves two key phases: (Phase 1) authorisation, authentication, and capture, and (Phase 2) settlement.

Authorisation Request and Authentication

1. Card Submission: The customer enters their credit card payment details on an online checkout form (for e-commerce) or swipes, inserts, or taps their card at a store terminal (for in-person sales).
2. Fraud Screening: In e-commerce, the payment gateway screens the purchase. Fraud checks are critical as risk continues to grow. According to the Nilson Report, global card fraud losses hit $33.41 billion in 2024 and are projected to reach $41.06 billion by 2030.
   The gateway blocks or flags transactions if any security rules are triggered, such as:a. The billing and shipping address don’t match.
   b. The card is an international card that has not been pre-approved.
   c. IP address checks and reverse lookups point to possible identity theft.
   d. The card number has been used for multiple purchases in a short timeframe.
3. Gateway Forwarding: If the request passes these fraud filters (or uses an in-store POS system without them), the payment gateway sends the authorisation request to the merchant’s acquiring bank through the payment processor.
4. Network Routing: The acquiring bank sends the authorisation request to the correct credit card network. The major routing networks are VisaNet (for Visa) and BankNet (for MasterCard).
5. Issuer Validation: The credit card issuer receives the request and checks that:a. The card is active and valid.
   b. The card has not been reported lost or stolen.
   c. The account has enough funds or credit line to cover the purchase.
   d. The billing address matches the address on file if the merchant uses address verification service (AVS) for credit card processing.
6. Response Routing: The cardholder’s issuing bank sends an “approved” or “declined” message back through the same path in reverse: Issuing Bank → Card Network → Acquiring Bank → Payment Processor → Merchant. If requested, it includes an AVS code to help the merchant finalise the sale.
7. Final Confirmation: Approved sales prompt a success message and place funds on pending status. Declined sales notify the customer to contact their bank.

Batch Processing (Capture)

At the end of each day, the merchant submits all approved transactions in a single batch for processing.

• Reviewing Holds: If any transactions are on hold or flagged (such as an AVS check), the merchant chooses whether to approve or cancel them before submitting the batch.
• Daily Cut-Off Times: Acquiring banks set strict daily cut-off times for batch processing. Transactions sent after that time are processed on the next business day. Understanding how long online payment processing takes helps merchants optimise batch timing and avoid payout delays.

Clearance and Settlement (Acquiring Bank)

This is the stage where money actually moves between financial institutions:

1. Requesting Funds: The acquiring bank checks the transaction details and requests settlement from the cardholder’s issuing bank.
2. Transferring Money: The cardholder’s issuing bank sends the money to the acquiring bank, minus interchange fees and card network assessment fees.
3. Updating Balances: The purchase amount officially moves from pending to a posted charge on the customer’s statement. This adds to their credit card balance and reduces their available credit limit.

Settlement (Merchant)

After a short holding period (usually one business day), the acquiring bank releases the funds to the payment processor. The processor deducts their markup fee and deposits the remaining funds into the merchant’s business bank account.

Credit Card Repayment

The customer repays their issuing bank for credit card purchases based on their cardholder agreement. These payments are typically made monthly when the customer receives their credit card bill. If the balance is not paid in full by the due date, the bank charges interest and late fees.

Chargebacks and Returns

Ideally, all purchases would be final. However, customers occasionally request a refund or dispute a charge for several common reasons:

• The customer was a victim of credit card or identity theft.
• The product never arrived or arrived damaged.
• The wrong product was shipped or was not as advertised.
• A clothing item didn’t fit.
• The customer changed their mind.
• The customer is committing friendly fraud (disputing a valid purchase).

These are handled in one of two ways:

1. Refund Request: The merchant instructs the acquiring bank to return money to the customer’s credit card.
2. Chargeback: The customer’s issuing bank forcibly reverses the transaction and reclaims the money from the acquiring bank.

In both cases, the refund or chargeback amount, plus any chargeback fees and penalties, is deducted from the merchant’s next payout. This covers the costs incurred by the acquiring bank.

Fees Charged for Credit Card Transactions

All credit card transactions come with processing fees, which are paid by the merchant. Three different parties charge these fees: the issuing bank, the card network, and the payment processing company.

Card networks set assessment fees, and issuing banks set interchange fees to cover transaction costs and risk. These two fees are generally fixed. Merchants can negotiate the markup charged by their payment processor.

Common Pricing Structures

Payment processors typically offer four main pricing models:

1. Interchange-Plus: Base card network rates plus a fixed markup
2. Tiered Pricing: Transactions grouped into fee tiers based on card type and risk
3. Fixed Transaction Fees: A simple flat rate for every sale
4. Interchange-Plus With Subscription-Based Pricing: Base rates plus a flat monthly membership fee

High-Risk Merchant Fees and Reserves

Credit card processors often charge higher fees for high-risk merchants due to the increased threat of fraud and disputes. Often times, they will require a rolling reserve, which is a temporary hold on a percentage of your daily sales. This reserve acts as a safety net if your business cannot repay money owed for chargebacks or refunds.

High-risk processing fees are higher, but they keep your checkout open. For many businesses, accepting card payments is well worth the extra cost.

How to Reduce Credit Card Processing Fees

If you want to save money on processing fees, there are several things you can do:

• Work with the right provider: Choose robustmerchant services that offer competitive rates and built-in security features.
• Analyse your monthly merchant statement: Review your statements regularly to see exactly what fees you are paying each month.
• Negotiate with your payment processor: Ask your payment provider for better rates. For example, ask them to switch you from tiered pricing to interchange-plus or agree to lower their markup as your sales volume grows.
• Reduce your chargebacks: Improve your order processes, offer a clear returns policy, and learn how to prevent credit card chargebacks using dedicated payment provider tools.
• Upgrade your account: Closely follow the terms of your high-risk merchant account (if applicable). Then ask to move to a lower-cost, standard merchant account as soon as possible.

Credit Card Processing Best Practices

Follow these habits to lower card processing costs and protect your money:

• Settle batches daily: Submit transactions before your bank’s cut-off time to avoid higher fee rates and payout delays.
• Enable 3D Secure: Add 3DS payment verification at checkout to shift fraud liability away from your business and onto the card issuer.
• Use clear business names: Make sure your trading name appears clearly on customer statements to stop accidental chargebacks.
• Match gateway settings: Set up your AVS, CVV, and Merchant Category Code (MCC) fields correctly to avoid automatic processor fee penalties.
• Track your effective rate: Divide total monthly fees by total card sales quarterly to quickly spot hidden rate hikes and extra fees.

Why Credit Card Processing Is Essential for Businesses

The four main benefits of accepting credit card payments on your website are higher order values, global sales, automated revenue, and lower cart abandonment rates.

Benefit	How It Drives Revenue
Higher Order Value	Customers spend more per purchase on credit than cash or debit.
Global Sales	Accepts international currencies automatically without manual overhead.
Automated Revenue	Uses tokenisation for hands-free subscription and recurring billing.
Lower Cart Abandonment	Tailored credit card processing for e-commerce builds buyer trust.

Sell More Efficiently With Credit Card Transactions

Knowing how credit card processing works helps you prevent fraud and avoid chargebacks. It also enables you to get paid out faster and significantly reduce your processing fees.

If you think you’re paying too much or waiting too long for settlement, it’s worth looking around for a different merchant account provider. The savings over time will be significant.

Published: September 19, 2022
Last updated: August 14, 2026