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Account management

How does a credit card transaction work?

From beginning to end, find out what goes on behind the scenes once you swipe your card

Summary

Follow the process that occurs once you pay for something with a credit card. Learn what roles everyone from you to your issuing bank play in a credit card transaction.  

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You go into a store. You buy something. You swipe or insert your credit card in the payment terminal and you’re done.

But did you ever wonder what goes on behind the curtain once you swipe or insert your card?

There’s a whole process that goes on behind the scenes, involving you, the merchant, the payment processor, the acquirer and the issuing bank.

Keep reading to find out exactly how a credit card transaction works.

See related: Best credit cards of 2021

What is a credit card transaction?

A credit card transaction occurs when a creditor – or borrower – promises a lender to pay for any goods or services it supplies in the future with interest.

How does a credit card transaction work?

There are many steps involved in a credit card transaction. See what roles the consumer, merchant, payment processor, acquirer and issuing bank play in the process below.

Consumer 

Your role in the credit card transaction process is simple: You just swipe – or insert if your card has a chip, or tap if the contactless option is available – your card in the point-of-sale terminal, get approval, sign on the dotted line and leave with your purchase.

Merchant 

Once you tap, swipe or insert your credit card in the payment terminal the merchant bank is contacted for approval on the purchase.

Next, the merchant bank gets authorization for your purchase from your credit card network, such as Visa or Mastercard.

Note: If your network is American Express or Discover, they serve as both the issuer and the payment network and do their own approvals.

The payment network then communicates electronically with the card issuer to ensure the card is valid and there’s enough available credit on it to cover your purchase.

If all is good and you have enough available credit, the merchant will receive an authorization code from the issuer. But if things go south, your card will be declined.

If your purchase is approved, you’ll sign a receipt and you’re good to go, but keep in mind that the merchant hasn’t actually been paid yet.

When the store closes, the merchant sends a list to its bank showing all of the day’s credit card transactions – known as batch processing – and then the bank directs the transactions to the correct payment processor so they can get paid.

See related: How to open a merchant account

Payment processor

Think of credit card payment processors as the liaison between the merchants and the financial institutions.

The payment processor not only authorizes credit card transactions, it actually pays the merchant by transferring the funds.

See related: Best small business credit card payment processing companies

Acquirer 

The acquirer is another name for the merchant’s bank, and it arranges for credit card transaction payments to go into the merchant’s account.

Note: Sometimes, you’ll find that the acquirer is the same as the payment processor.

Issuing bank

The bank that issues your credit card is in charge of sending the merchant an authorization code for your transaction.

In order to approve the purchase, the issuing bank receives your credit card number and expiration date, your billing address, your card’s CVV code and the amount of the payment.

The bank either approves or declines your purchase.

If your purchase is approved, the issuing bank will take an interchange fee, which it shares with the credit card network. Next, it transfers the funds, typically within one to three days, according to CreditCardProcessing.com.

Note: If your card is declined, the merchant won’t be able to tell you why, so it’s important you contact your issuer immediately to find out why it happened.

How long does it take for a credit card transaction to go through?

As you now know, when you sign for your purchase and leave the store, the merchant hasn’t actually been paid yet – the payment for your purchase was only authorized.

Often, if you look online, the purchase might not show up on your credit card right away – it could take a few days.

But if your issuer has a state-of-the-art reporting system, the authorized purchase might show up as a pending charge and be deducted from your available credit.

Can a pending transaction be declined?

Once a charge is pending on your account, it might stay there for a few days, just in case the merchant cancels or modifies it.

But for all intents and purposes, a bank can’t decline a pending transaction unless the merchant sends it a release saying it will not be collecting the pending funds.

See related: Can you cancel a pending credit card transaction?

Credit card processing fees

Merchants must pay for accepting credit card payments – and the fees vary.

These fees include a merchant discount fee, which typically runs between 2% and 3% of the total purchase price of the transaction.

The merchant’s fee also includes an interchange fee or a percentage that’s deducted from each card transaction and paid to the issuing bank, and an assessment fee – or “swipe fee” – which consists of a percentage of each credit card brand’s total monthly sales and goes to the issuers.

The interchange and assessment fees make up approximately between 75% and 80% of the processing costs.

The rest of the processing fees include about 20% to 25% in markup costs, which acquiring banks and processors typically charge to cover the transaction cost and make a profit.

See related: Best small business credit card payment processing companies

Bottom line

You now have a working knowledge of what happens each time you swipe your card – and the fees associated with it.

You certainly don’t need to be an expert regarding how credit card transactions work.

But knowing the basics will make you a better user because you will be aware of the process and understand all the fees that go into the price you end up paying at checkout.

Editorial Disclaimer

The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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