Credit card processing: How it works and what it costs your business

Every time a customer taps a phone, swipes a debit card, or completes an online payment, a payment processing system moves money across multiple financial institutions in seconds. The transaction may feel instant at checkout, but it passes through card networks, issuing banks, acquiring banks, and service providers before it reaches your bank account.

For small business owners, understanding how credit card processing works is essential to managing processing costs, transaction fees, and cash flow. Hidden monthly fees, delayed payouts, and unclear pricing models can quietly drain margins across ecommerce and brick-and-mortar operations.

Before choosing a payment processor or evaluating payment solutions, it helps to understand how credit card transactions actually move from the point-of-sale to settlement. This guide explains how the processing system works and what it really costs your business per transaction.

How does credit card processing work?

Credit card transactions move through a four-party processing system that connects the cardholder, the merchant account, and the banks that authorize and settle the payment. Whether a customer swipes a debit card in-store or completes an online payment in an ecommerce checkout, the same payment gateway logic applies. Understanding this flow helps business owners diagnose chargebacks, identify processing costs, and choose the right payment processor.

Here is how a standard credit card processing workflow operates from checkout to payouts.

Step 1: Card data capture

At the point-of-sale or virtual terminal, the customer provides their card information by swipe, tap, or mobile payment such as Apple Pay. The POS or payment gateway encrypts the cardholder’s customer data to meet PCI DSS and PCI-compliant standards before it leaves your device. This step applies to both in-person payments and online store checkout flows.

Step 2: Routing through the payment processor

Your payment processor receives the encrypted transaction and forwards it through the appropriate card network, such as Visa, Mastercard, or American Express. The card network identifies the issuing bank and sends the authorization request onward. At this stage, fraud prevention rules, transaction volume thresholds, and payment methods are evaluated automatically.

Step 3: Authorization by the issuing bank

The issuing bank reviews the credit card transaction, checking the cardholder’s available balance, spending behavior, and fraud signals. The issuing bank then approves or declines the payment and sends the response back through the same processing system to your POS or payment gateway in seconds.

Step 4: Settlement by the acquiring bank

Once approved, the acquiring bank, also called the merchant bank, requests funds from the issuing bank. After interchange fees, transaction fees, and processing costs are deducted, the net amount is transferred to your merchant account. With traditional merchant services, this step can take one to three business days.

Modern mobile payment solutions shorten this settlement window. JIM, for example, provides instant payouts per transaction, allowing business owners to access funds immediately through their JIM Visa prepaid card instead of waiting several business days.

The hidden players: who takes a cut?

Every credit card payment moves through a network of financial institutions and service providers. Each participant in the processing system collects a small portion of the transaction, which is why processing costs are rarely limited to a single flat fee.

• Payment processor: Connects your point-of-sale or virtual terminal to the card networks and your merchant account. The payment processor manages transaction routing, fraud prevention tools, PCI DSS compliance, and customer support across in-person payments and online payment flows.
  
  
• Card networks: Visa, Mastercard, and American Express operate the global rails that carry credit card transactions between banks. These card networks define interchange fees, dispute rules, and security requirements for all credit card processing companies.
  
  
• Issuing bank: The cardholder’s bank that approves or declines each transaction. The issuing bank releases funds, monitors fraud activity, and absorbs financial risk when unauthorized credit card payments occur.
• Acquiring bank (merchant bank): Your merchant bank that settles approved payments into your bank account. It deducts transaction fees and interchange fees before issuing payouts, often within one to three business days for traditional merchant services.

Credit card processing fees: what you actually pay

Most business owners see a single percentage rate but never the full pricing model behind it. In reality, credit card processing fees are built from multiple cost layers that vary by transaction type, payment methods, and risk profile.

• Interchange fees: Set by card networks and paid to the issuing bank for every debit card or credit card transaction. These fees vary based on card type, ecommerce versus in-store checkout, and whether the card information was swiped, tapped, or keyed.
  
  
• Processor markup: The payment processor’s margin added on top of interchange fees. This covers the processing system, payment gateway infrastructure, fraud prevention tools, and ongoing PCI compliance obligations.
  
  
• Per-transaction fees: Flat transaction fees charged per transaction regardless of sale size. These are especially noticeable for small-ticket ecommerce or mobile payment businesses with high transaction volume.
  
  
• Monthly and hidden fees: Many merchant services providers charge monthly fees for account maintenance, PCI DSS programs, chargeback handling, or ACH reporting. These hidden fees often appear only after onboarding and inflate long-term processing costs.

Traditional vs. modern payment processing

Businesses today generally choose between legacy merchant services and newer mobile payment solutions. The differences affect everything from cash flow timing to the hardware required at checkout.

Traditional credit card processing

This setup relies on a dedicated merchant account, physical POS systems, and long-term service contracts. It is still common for brick-and-mortar stores with high transaction volume and complex POS needs.

• Requires separate merchant accounts with underwriting by financial institutions.
• Depends on physical POS systems and card reader hardware for in-store checkout.
• Uses interchange-plus or tiered pricing models that change with card networks and payment methods.
• Delivers payouts to your bank account in one to three business days.
• Often includes monthly fees, PCI compliance charges, and hidden fees that raise processing costs.

Modern mobile and online processing

Mobile-first payment processing solutions combine point-of-sale, payment gateway, and virtual terminal functionality into a single app.

• Allows business owners to accept credit card payments without a card reader using contactless payments such as Apple Pay.
• Supports ecommerce, online store checkout, and in-person payments within one processing system.
• Uses flat rate pricing models that simplify budgeting and pricing transparency.
• Provides faster payouts, improving cash flow for small business operations.
• Reduces reliance on traditional merchant services contracts and complex merchant account setups.

How to choose the right credit card processor

Choosing a payment processor affects your processing costs, customer experience, and exposure to fraud and chargebacks. Before committing to any credit card processing company, evaluate your business needs across volume, risk, and payment options.

• Look at pricing structure: Compare flat rate versus interchange-plus pricing models and review all transaction fees per transaction, including hidden monthly fees that inflate long-term processing costs.
• Estimate your transaction volume: Calculate your average ticket size, monthly credit card transactions, and expected growth across ecommerce and in-store checkout.
• Verify security and PCI compliance: Ensure the provider meets PCI DSS and payment card industry data security standard requirements to protect cardholder and customer data.
• Assess fraud and chargeback protection: Review fraud prevention tools, chargeback handling workflows, and chargeback fees, especially if your business is classified as high-risk.
• Confirm payout speed and customer support: Check how many business days it takes for payouts to reach your bank account and whether customer support is accessible when payment processing issues arise.

Take control of your credit card processing and protect your cash flow

Credit card processing touches every part of your business, from checkout speed to transaction fees, chargebacks, and how long payouts take to reach your bank account. Understanding how the processing system works helps business owners reduce processing costs and make informed decisions about payment solutions.

JIM simplifies the way small businesses accept credit card payments by turning your iPhone into a point-of-sale without requiring a card reader or complex merchant services setup. With flat-rate pricing, built-in PCI-compliant security, and instant payouts per transaction, it removes many of the delays and hidden fees found in traditional credit card processors. That means stronger cash flow and fewer surprises on your monthly statements.

Want to see how easy modern payment processing can be? Explore JIM and start accepting contactless payments in minutes.