Skip to main content

Credit card processing explained


You may have heard the terms ‘card transaction lifecycle’, ‘transaction processing’ or ‘payment lifecycle’. These terms all describe what goes on behind the scenes in the milliseconds before a card payment is approved.

There are more than 22.8 billion credit cards in circulation worldwide and by 2025 this number is set to increase to 30.6 billion. If you accept payments online, you need to accept credit cards. Learning what happens when a customer pays using a credit card will demystify the process giving you more control. Ultimately, more control will allow you to increase your card approval rates and your conversions.

In this article, we explain:

  • What is credit card processing?
  • How credit card processing works
  • How credit card processing differs to debit card processing
  • Costs associated with credit card processing
  • How to optimize your checkout

What is credit card processing?

When we refer to credit card processing we are referring to the steps necessary to make a payment with a credit card. In the digital economy, these transactions are increasingly happening online, but they can also take place in person.

How does credit card processing work?

There are various parties involved in credit card payment processing, but the four main ones are:

  • The merchant accepts cards in order to make a sale.

  • The acquirer enables a merchant to accept a payment.

  • The cardholder is the consumer that uses the card to make a purchase.

  • The issuer provides consumers with their cards.

Because there are four main players in the process, the term ‘four-party’ or ‘four-corner’ model is often used. Card schemes such as Visa and MasterCard use this model and sit at the center of their networks by connecting issuers and acquirers

When the credit card holder enters their card details into the online checkout page and clicks ‘pay’, what happens next?

First, this information goes to the merchant’s acquirer or merchant’s bank. Then, the acquirer forwards this message to the relevant card scheme. The card scheme passes this to the cardholder’s issuer, who has two important questions to answer.

  1. Is the cardholder who they say they are? (authentication)
  2. Are they good for the money? (authorization)

If the cardholder is legitimate and funds are available, the issuer confirms this to the card scheme, who passes the approval response to the acquirer.

Finally, the acquirer passes this message on to the merchant, who confirms a successful payment to their customer, dispatches the goods or provides the service.

Read more: What is an ARN (Acquirer Reference Number)?

How does credit card processing differ to debit card processing?

Debit card processing works in a very similar way to credit card processing. The principles are the same, however the execution may differ locally. 

Some domestic debit cards are co-badged with international card schemes, which enables the cards to be used outside their home market. In these instances, they are generally processed via their domestic card networks for purchases at home. And via the international card networks for purchases abroad or for ecommerce purchases when the merchant is in a different country to the cardholder.

Another difference is that credit cards may be blocked by country or sector. UK credit cards are not allowed to be used for gambling, for example. Card issuers and local law determine how and where cards are blocked.

Generally speaking, though, cards, both credit and debit, allow businesses to sell to anyone, safe in the knowledge that they’ll be paid, provided they’ve done things right.

How do digital wallets work?

Digital wallets, such as Apple Pay, Google Pay and PayPal, are becoming increasingly popular ways for consumers to initiate credit card transactions — especially with smartphones or other mobile devices. Our research finds that 50% of European consumers used a digital wallet at least once last year. And 80% said they planned to use one in the next 12 months – with 40% suggesting that they planned to do so regularly.

What does credit card processing cost?

The most notable cost when it comes to card payments is known as the 'interchange fee' This is a fee that merchants pay to issuing banks. They pay this fee on each transaction made by a customer with a credit or debit card. 

Other costs include an assessment or service fee charged by the card network. And a processing fee charged by the payment processor.

How can you optimize credit card processing?

Offering credit card payments is only one part of giving your customers the best possible experience. Ensuring that customers are able to successfully checkout is the other part.

Online merchants in the US, UK, Germany and France lose a staggering $20.3 billion at the checkout each year due to false declines. Optimizing your credit card processing requires taking practical steps to block fraudsters, not customers.

Benchmark your authorization rates and fraud ratios to put your performance in context. How do these KPIs compare with industry peers? Your payments provider should be a great source of insights into what those with solid performance are doing that you’re not.

You should also take action by analyzing failed transactions grouped by rejection reason. You can then explore each group to see whether the systems have correctly rejected the transactions. If they have, you can start to make the tweaks required to minimize false declines and A/B test repeatedly to drive continuous improvement. 

Optimizing credit card processing will also mean optimizing the checkout process. Sixty-five percent of shoppers abandon their carts when shopping online. The choices that you make when setting up your checkout can influence customers’ behavior and help to avoid cart abandonment. For example, removing unnecessary steps in the process and offering a guest checkout option.