Credit Card Processing: How It All Works

Understanding how credit card processing works is no small feat. It's almost like you need some sort of advanced engineering degree to wrap your mind around it. Still, it's important to know the gist of what happens when a credit or debit card is accepted for payment. Here's a helpful little diagram to get us started:

Photo credit: feeseeker.com

This is a really simplified version, but these are the steps that happen behind the scenes during that quick payment transaction. What a lot of new business owners don't know is that in order to be able to accept credit cards from their customers, they need to get a merchant account with a payment processing company. The payment processing company provides the business with a terminal to swipe the cards through. Not every business needs a terminal, however. If you are an online store, there is an extra step in the process above, known as a payment gateway:

Photo credit: merchantmaverick.com

The payment gateway in online transactions take the place of a credit card terminal, since online shoppers aren't able to swipe their credit card; they must type their card information on the payment page. The payment gateway transmits the card information to the card issuing bank for approval or denial and then payment gateway then relays the decision back to the website.

It's important to note that payment gateways and merchant accounts are two separate things, but you cannot get a payment gateway without having a merchant account. Again, payment gateways are only necessary when you are accepting credit cards online.