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How a Credit Card Processor Works

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The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedJan 20222 min read

It’s important to cater for the preferences of your customer base. A recent survey found that just over half (51%) of UK customers preferred paying by card when shopping online. If you want to accept debit and credit card payments, you’ll need to use the services of a credit card processor. How does this work behind the scenes? Here’s what to expect from a credit card processor for small business.

What is a credit card processor?

You already know that a sale involves the seller (your business) and the buyer (your customer). A credit card processor is the third party that facilitates this sale via a number of actions. As soon as your customer swipes their card or enters their details online, the transaction goes through a set process. There are several parties involved with payment processing apart from the credit card processor:

Cardholder – the customer obtains a credit or debit card from a credit card company or issuing bank
Merchant – the business agrees to accept credit or debit card payments
Merchant bank – the bank where deposits from credit and debit card payments are held
Issuing bank – the bank or financial institution that issues cards to cardholders
Card associations – the networks like Visa, Mastercard, American Express, and Discover

A credit card processor connects merchants, merchant banks, and card associations to facilitate transactions.

How does credit card processing work?

A credit card processor company facilitates transactions through three processes:

Authorisation
Settlement
Funding

During the authorisation process, the cardholder puts everything into motion by presenting their card to the merchant as payment.

The merchant sends a payment authorisation request to the credit card processor company. The processor submits transactions for approval from the issuing bank and card association. It’s up to the issuing bank to ensure that all card details match their records and that the cardholder has sufficient funds. They will approve or deny the transaction, submitting this response back to the card association, merchant bank, and finally on to the merchant.

With the transaction approved, the credit card processor moves onto settlement and funding. Merchants batch together authorised transactions and submit them to the credit card processor. The payment processor transmits these to the card associations, who passes them on to the issuing banks.

At this stage, the issuing banks charge the cardholders’ accounts, withdrawing the transaction balance minus any interchange fees. This is transferred to the merchant bank and deposited into the merchant account.

While authorisation is completed within seconds, settlement and funding can take a day or more.

How much are UK credit card processor fees?

Business credit card charges can vary widely. The bulk of these processing fees stem from a merchant service charge (MSC). This is a transaction fee taken from each sale, usually charged as a percentage. Currently, average merchant service charges fall between 0.25% and 0.6% for debit cards and 0.3% and 0.9% for credit cards.

In addition to the MSC, you’ll also need to pay authorisation and administrative fees. You can find a breakdown of these various processor charges in our guide to merchant fees. It’s important to shop around and compare UK credit card processors carefully to find the best rates.

How to choose the best credit card processor

Cost is one factor to consider when searching for a credit card processor for small businesses. However, the best credit card processor won’t necessarily be the cheapest. In addition to looking carefully at per-transaction fees and other costs, you should also think about compatibility. How well will the processor work with your existing ecommerce setup? Security is also important. You’ll need to choose a PCI-compliant payment processor to ensure you’re following all the rules related to storing and transmitting cardholder information.

It’s worth considering additional types of online payments. Providing greater variety when it comes to payment methods puts more choice in the hands of your customers. If your business already accepts payments online, pull-based payments that move money directly from account to account are an excellent solution. GoCardless is perfectly suited to receiving invoice and recurring payments, plus our new Instant Bank Pay allows you to request same day payments easily via paylink.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.