Every time a customer pays your business by card, a chain of companies works together in a few seconds to approve the payment, then over the next day or two to move the money into your bank account. Understanding how payment processing works helps you choose the right provider, read your statements and avoid declined payments.
Payment processing in one sentence
Payment processing is the series of steps that moves money from a customer’s card or bank account to your business bank account: the payment is authorized in seconds, then cleared and settled between banks, and finally deposited into your account, usually within one to two business days.
Who is involved in a card payment?
- Cardholder: your customer, who pays with a credit or debit card.
- Merchant: your business, which needs a merchant account to accept cards.
- Payment gateway: the technology that securely captures card details online or in a virtual terminal and sends them for approval. See payment gateways.
- Payment processor: the company that routes the transaction between your gateway, the card networks and the banks.
- Acquiring bank: the bank behind your merchant account, which receives the funds on your behalf.
- Card network: Visa, Mastercard, Discover or American Express, which set the rules and connect the banks.
- Issuing bank: the customer’s bank, which issued the card and approves or declines the payment.
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How payment processing works, step by step
1. The customer pays
The customer enters their card details at your online checkout, or your team keys them into a virtual terminal for a phone order.
2. The gateway secures the data
The payment gateway encrypts the card details and replaces them with a token, so sensitive card data is not stored on your systems.
3. The processor routes the request
The processor sends the authorization request through the card network to the customer’s issuing bank.
4. The issuing bank approves or declines
The issuing bank checks available funds or credit, fraud signals and verification results such as the address (AVS) and security code (CVV), then sends back an approval or decline.
5. You get a response in seconds
The response travels back the same way, and your checkout shows the payment as approved or declined, typically within a few seconds.
6. Clearing and settlement
Approved transactions are grouped into a batch, usually at the end of the day. The batch is submitted for clearing, and the issuing banks transfer the funds through the card networks to your acquiring bank.
7. Funding
Your acquiring bank deposits the money into your business checking account, usually within one to two business days, with processing fees deducted daily or billed monthly depending on your provider.
Where payment processing fees come from
Each card payment carries three main costs:
- Interchange: paid to the customer’s issuing bank. It varies by card type and how the card is processed.
- Assessments: small fees paid to the card network.
- Processor markup: the provider’s percentage and per-transaction fee.
With interchange-plus pricing, you see these costs separately. See a worked example on our merchant account fees and pricing page.
Card-present vs card-not-present payments
Payments where the card is physically present usually cost less, because they are harder to fake. Online, phone and invoice payments are card-not-present transactions. They carry more fraud risk, so they typically cost more and rely on tools like AVS, CVV checks and tokenization.
How ACH payments are processed differently
ACH and eCheck payments pull money directly from a customer’s bank account through the ACH network instead of the card networks. They usually cost less but take a few business days to settle, and they can be returned for reasons such as insufficient funds. Compare the two in our guide to ACH vs credit card processing.
Why payments get declined
- Insufficient funds or credit limit reached.
- Incorrect card number, expiration date, CVV or billing address.
- The issuing bank’s fraud filters flag an unusual purchase.
- Expired or canceled cards on file for recurring billing.
Even after approval, a customer can later dispute a charge. Learn how disputes work in our guide to chargeback management.
What your business needs to process payments
- A merchant account to receive card payments.
- A payment gateway such as NMI or Authorize.net for online checkout.
- A virtual terminal if you take payments by phone or invoice.
Our step-by-step guide explains how to get a merchant account.
For a broader view of how money moves between U.S. banks, the Federal Reserve publishes an overview of payment systems.
Frequently asked questions
How long does payment processing take?
Authorization takes a few seconds. Settlement and funding usually take one to two business days for card payments and a few business days for ACH payments.
What is the difference between a payment processor and a payment gateway?
The gateway securely captures and transmits card details from your checkout. The processor routes the transaction between the banks and card networks. Read more in merchant account vs payment gateway.
Who pays payment processing fees?
The business accepting the payment pays the fees. In some cases, businesses may add a surcharge to credit card payments, subject to card network rules and state laws.
Ready to accept payments? Apply for a merchant account or talk to a specialist.
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