Speak with an expert: 801-405-9888

The Ultimate Guide to Credit Card Processing

Whether you own a brick-and-mortar business that wants to venture into online sales or are considering opening an e-commerce business, you’ll want to know how you accept payments online. Online retailers and brick-and-mortar companies that take credit cards do so thanks to credit card processing. 

The credit card processer your company works with will significantly impact your business costs and the quality of service you can offer your customers. With the right credit card processor, you can automate the payment process, speed up transactions and improve your company’s cash flow. If you’re in a high-risk industry, choosing the right credit card processor becomes even more critical, as you want to work with a company that understands and accepts the risks that are inherent to your business.

We put together this complete guide to credit card processing to help you better grasp what happens when a customer swipes or types in their credit card number and how it affects your business overall.

The History of Credit Cards

As a payment method, the credit card isn’t very old, although the concept of credit is. People have been lending money or some form of currency to each other for almost as long as humans have been around. Some historians trace the use of credit back to the Mesopotamians. The ancient civilization left behind clay tablets that might provide a clue about how it managed trade with others. 

Several thousand years later, in the American West, settlers developed a system of credit based on tokens or coins. Merchants would let farmers charge purchases using the tokens. When the harvest came in and the farmers sold their crops, they could repay the merchants. 

Outside of the American West, other stores would often let customers run a tab. The customers would purchase and use products from the store, and the owner would record the cost. The customer was then expected to pay off their tab, although there wasn’t an established due date. 

The First Credit Cards

Eventually, the system of using coins or recording customers’ purchases evolved into metal cards, the earliest form of credit cards. Western Union introduced a product called “metal money” in 1914. The metal cards let certain people charge purchases at certain stores. They were considerably more limited than today’s plastic cards. However, like some types of credit cards today, only certain people could access them. 

One of the issues with metal money and other early forms of credit cards was limited use at a single retailer. That started to change in the 1940s, with the introduction of the Air Travel Card. The Air Travel Card let customers purchase plane tickets from several different airlines. Another early example of the modern credit card was the “Charg-It” card.

The “Charg-It” card had a very limited customer base. Only people who had an account with Flatbush National Bank in Brooklyn could use the card. Those customers could only utilize their Charg-It card at businesses within a two-block radius of the bank. Merchants that accepted the card would visit the bank to drop off their sales slips and collect payment.

The Diner’s Club Card is another example of a very early credit card. At first, the card was available only to certain men and could only be used for payment at a few restaurants. Eventually, the card grew from its beginnings in the late ’40s, and the number of people who had access to it increased. At the start, just 200 customers had a Diner’s Club card. Within two years, the number of Diner’s Club members had risen to more than 42,000.

Restaurants that accepted the Diner’s Club card agreed to a few terms. They paid a fee of about 7% and had an agreement with the card company. The earliest form of the Diner’s Club Card was more of a charge card than a credit card. Cardholders were expected to pay the entire balance on the card at the end of the billing cycle. There wasn’t the option to let the balance roll over or pay a minimum amount.

The Evolution of Credit Cards

The Diner’s Club Card popularity encouraged other companies to get in on the act. The card that saw the first wide acceptance across the United States and allowed customers to carry a balance was the BankAmericard. A few years after its founding, BankAmericard partnered with other credit card companies to create Visa, the first payment processor. 

Over time, how credit cards work and their format evolved, too. The magnetic stripe was created in the late 1960s and became widespread in the 1980s. At the time, the magnetic stripe was revolutionary, as it contained information about the card, including the account owner’s name and the card’s number. The strip was more secure than earlier methods of sharing credit card information but not as secure as it could be.

Today, most credit cards contain a tiny computer chip, known as an EMV chip. The chips are encrypted, making it difficult for a bad actor to intercept credit card data. The chips also create a code that’s only valid for a single transaction. If someone manages to steal the EMV chip’s information, they wouldn’t be able to do much with it. The EMV chip was first widely adopted in Europe. It only came into widespread use in the U.S. in the 21st century. 

It’s also common for today’s cards to allow for contactless payment, meaning a customer paying in person simply needs to tap or wave their card near a card reader. 

The Credit Card System Today

Today, millions of people worldwide use credit cards, and numerous companies issue credit cards. Credit card use has been steadily increasing over time. In 2019, people used credit cards to pay for 23% of all transactions, rising 2% from 2017.

There are several reasons why credit cards have become one of the most popular methods of payment:


  • They are more secure: Credit cards tend to be a more secure payment option, whether used online or in person. If credit card information gets stolen, the cardholder often has zero liability. 
  • They offer benefits: Many credit cards are also rewards cards, meaning the cardholder earns points or cash back whenever they pay with the card. 
  • They help people build credit: Credit cards play a significant role in helping people establish a credit history and build their credit. With responsible credit card use, a person can raise their credit score, allowing them to reach other financial goals.

Payment Processing Terms to Know

Whenever a company accepts a card payment, a cast of characters is involved in the process. Here’s a quick look at who’s who when it comes to paying with and accepting a credit card:


  • Cardholder: The cardholder is the person or entity that owns the credit card account. The cardholder can be a private individual or a company. In some cases, the account might be in one person’s or one company’s name, and they might add one or more authorized users. Generally speaking, the name of the person making the purchase should match the name on the credit card.
  • Merchant: The merchant is the company accepting the card as payment. It can be an online retailer, a brick-and-mortar retailer, a company that sells subscriptions or pretty much anything else. 
  • Acquiring bank: The acquiring bank works on behalf of the merchant. It accepts the payment from the card after the transaction goes through.
  • Payment processor: The payment processor is the company that acts as the mediator between the merchant and the banks involved in card payments. In some cases, the payment processor can be the same entity as the acquiring bank. A payment processor might also provide the merchant with the equipment to accept card payments, such as chip readers or magnetic stripe readers. 
  • Payment gateway: A payment gateway is the technology that allows a credit card transaction to take place. It connects the merchant’s website or point-of-sale system to the payment processor. The payment gateway plays a significant role in ensuring a transaction is secure. It might encrypt the account number or otherwise make it difficult for a third party to intercept confidential credit card data.
  • Card network: There are four well-known credit card networks — American Express, Visa, Mastercard and Discover. The card networks help facilitate payments between card issuers and merchants and have a say in where cards are accepted and what fees get charged. For example, a merchant might decide to accept cards from all four networks or might only take cards from one or two networks.
  • Issuing bank: Also known as the card issuers, the issuing bank is the institution that approves customers for a credit card and provides them with the card. The issuing bank can be the same as the card network. For example, American Express and Discover are both card networks and card issuers. In other cases, the issuing bank might be a local or national bank or credit union partnered with a card network.

Payment Processor vs. Gateway

It can be easy to confuse a payment processor with a payment gateway, but the two are distinct entities in the process of accepting credit and other types of payment cards. The payment processor is the entity that facilitates the credit card transaction. The processor sends transaction data from the merchant to the right bank. In some cases, the processor might provide equipment to the merchant to help it collect credit card information more easily.

A payment gateway is a tool that a merchant uses to send the credit card data to the processer during a transaction. Payment gateways are often used during online transactions or when a customer’s card isn’t physically presented, such as if a person places a phone order. 

In some cases, the payment processor can offer a payment gateway. In others, a merchant might need to work with a separate payment gateway provider.

Credit Card Transaction Lifecycle

When a customer gives a merchant their credit card at the end of a purchase or types in their credit card data when shopping online, everything seems to move at the speed of light. The purchase is usually approved or declined within a few seconds. 

The speed at which credit card transactions take place conceals the fact that many steps occur along the way. From the minute a customer provides their credit card details, here’s what happens:

1. Authorization

Once the customer provides their credit card information, the acquiring bank reaches out to the card network to request authorization. The card information is sent to the network through a payment gateway. The transaction data also gets sent to the customer’s issuing bank to authorize the purchase. 

The issuing bank will review the transaction details, including the amount and the card information, and decide whether to approve or decline it. The card issuer might decline a purchase because something about the card data is wrong, such as an incorrect PIN, expiration date or card verification value (CVV) number. If the cardholder doesn’t have enough left in their credit limit to make the purchase, the card issuer might also decline the transaction.

Otherwise, the issuing bank will approve or authorize the transaction if everything checks out. 

2. Batching and Clearing

Once a purchase is authorized, the issuing bank puts the amount of the transaction on reserve. It doesn’t send the merchant the money immediately. As the day goes on and multiple transactions occur, the number of authorizations increases. By the end of the day, the merchant might have had 100 transactions, each with its own authorization code. 


At the close of business for the day or on another schedule, such as every eight hours if the company is open around the clock, the payment processor will send the credit card authorization codes to the merchant’s acquiring bank. The acquiring bank will then batch the authorization codes, sending them to each issuing bank. The issuing bank then pays the acquiring bank. 

3. Funding or Settlement

After the acquiring bank receives the payment from the card issuers, it still has to pay the merchant. It does that by depositing the money into the merchant’s account. When funding occurs depends on the agreement the merchant has with its bank.


A merchant account operates similarly to a line of credit. Once the funds are cleared in the account, the merchant can access them. But there is a chance that the acquiring bank will need to withdraw the funds again. For example, if a customer has an issue with the purchase and requests a chargeback, the card issuer will refund their money. The issuing bank will then expect the merchant to pay for the refund.

What Are Credit Card Fees for Businesses?

Credit card fees are part of the cost of doing business in the modern world. If you want to accept online orders, you need to accept card payments. How much your company pays in fees depends on several factors. Different card networks charge various rates, and within a single card network, there might be different rates based on the type of card a customer presents. 

Payment processors might also charge customers more or less depending on the industry. Companies that fall into a “high-risk” category often have to pay more for card processing than lower-risk companies. 

Take a look at some of the fees your company might have to pay to accept credit cards. 

Interchange Fees

Credit card issuers charge merchants an interchange fee every time a customer uses a credit card. The fee usually consists of a flat rate plus a percentage of the sale, often between 1%-3%. 

The card networks typically determine the interchange fee, using multiple conditions to determine how much to charge. The degree of risk involved in the transaction often affects the fee rate. For example, if a customer makes a purchase without physically presenting their card, there is a higher risk of fraud or theft. Some networks charge more for “card not present” transactions to minimize the effects of theft or fraud. 

Whether there are rewards connected to the card also affects the fee charged. Reward cards usually have higher prices, as the extra fees help fund the cards’ rewards programs. Interchange fees also help cover some of the other perks credit card companies offer their customers, such as rental car insurance or purchase protection.

Some merchants refuse to accept certain types of cards or require minimum purchase amounts to minimize the impact of high interchange fees. American Express has had some of the highest costs for merchants, so some businesses don’t accept its cards. Similarly, a merchant might require a customer to purchase at least $5 or $10 worth of products to make accepting the card payment worthwhile.

Assessment Fee

The credit card network also charges an assessment fee. The assessment fee is based on a merchant’s total sales volume for the month. While the assessment fee is often combined with interchange fees, it’s important to remember that the two aren’t the same.

Payment Processor Fee

The company that facilitates credit card payments for merchants often charges a fee, too. The fee might be based on a percentage of the merchant’s sales, or it might be a flat rate. Some processors use a combination of methods, charging a flat rate plus a percentage of sales. 

A merchant might have to pay an assortment of other fees based on the payment processor it works with and the type of equipment it uses. Some additional fees include:


  • Chargeback fees: If a customer disputes a purchase and gets their money back, the merchant might have to pay for the refund, plus a fee.
  • Batch fees: Some banks charge customers every time they batch a payment.
  • Payment gateway fees: If a merchant uses a payment gateway from their payment processor, they might also need to pay a fee for it.
  • Equipment leasing fees: Some payment processors also charge merchants to lease equipment such as point-of-sale systems and card readers.
  • Monthly minimum fees: In some cases, a payment processor might charge a merchant a fee if the merchant doesn’t reach a minimum sales amount during a period.

Merchant Services Pricing Models Explained

Your payment processor will most likely offer you the choice of one of several pricing models. A payment processor’s pricing model also influences how much you pay for your merchant services. The three models most often used are: 

1. Tiered Pricing

With a tiered pricing model, a payment processor charges you a flat rate, plus a percentage of your company’s monthly sales. The rate you pay is based on the type of card a customer uses:


  • Qualified cards: Credit cards that don’t have a rewards program or many perks and debit cards fall under the “qualified” categories. These cards have the lowest fees for merchants.
  • Mid-qualified cards: Mid-qualified cards include some types of reward credit cards. They have higher rates than qualified cards.
  • Non-qualified cards: Non-qualified cards include corporate credit cards and cards with very generous rewards programs. Non-qualified cards are the most expensive for merchants to accept. 

Tiered pricing can be complicated, but it has benefits, such as the option of being customizable. It can be less expensive than other pricing models.

2. Flat-Rate Pricing

Many payment processors, such as PayPal and Square, use a flat-rate pricing model. You pay the same percentage for every transaction with flat-rate pricing, such as 2.5%. The rate includes the interchange fee. You also pay a set rate per transaction, such as 10 or 15 cents, in addition to the percentage. 

Flat-rate pricing can take some of the guesswork out of paying for credit card processing, as you know what you’ll pay no matter what type of card a customer uses. It can be more expensive than a tiered pricing model, though.

3. Interchange-Plus or Cost-Plus Pricing

Interchange-plus or cost-plus pricing tends to be the least expensive of the three pricing models, but it has the greatest variability. With interchange-plus pricing, how much you pay is based on the following:


  • Card network: Different networks charge different interchange and assessment fees.
  • Card type: Rewards cards and business cards typically have higher fees than non-rewards cards.
  • Payment method: If a card isn’t present during the transaction, you can expect to pay a higher fee. In-person transactions tend to cost less for merchants.

How to Save Money on Credit Card Processing

Some merchants prefer to save money on credit card processing by not accepting card payments. As the world moves online and the demand for cashless and contactless payments increases, refusing card payments is becoming a less viable option for businesses. Fortunately, there are steps you can take to cut the cost of card processing:


  • Have a minimum purchase amount: Depending on what you sell, it might be a good option to require a minimum purchase for credit cards. If you have to pay a flat fee plus a percentage of the sale each time a customer uses a credit card, you might lose money if customers regularly charge purchases of less than $5. The rules for purchase minimums can vary by state, so make sure your state allows them. 
  • Add the fee to transactions: Another way to save money on payment processing is to pass the costs on to your customers. You can do this in a few ways. You can build the extra cost into the prices you charge or add the cost of the credit card fee to their purchase. 
  • Choose the right pricing model: How much you pay can vary based on the pricing model you use. For example, it might be more cost-effective to switch to an interchange-plus or tiered pricing model from a flat-rate model. 
  • Negotiate with your payment processor: If you’ve been with your payment processor for a while, it might be willing to negotiate with you based on your relationship. A payment processor might be particularly willing to negotiate a lower rate with a merchant that has a strong sales history.
  • Increase payment security: How you accept cards can affect the fees you pay. If you take cards for in-person transactions, ask the customer to present their card to the reader rather than keying in the number. Using an EMV chip reader might also cost you less than a magnetic stripe reader, as EMV is more secure. Online credit card processing requires as much information as possible from the cardholder, such as the CVV and the zip code.
  • Choose the right payment processor: It’s also a good idea to shop around if you aren’t working with a payment processor yet, especially in a high-risk industry. Some processors charge high-risk merchants, such as subscription services or travel companies, more than other businesses. If you are high-risk, look for a processor that specializes in high-risk industries, as it will understand your unique needs without charging you as much as standard processors would.

How to Protect Credit Card Data as a Business

A certain amount of trust is required when customers use a credit card during a transaction. They trust that your company will use the card honestly and won’t charge more than the transaction amount. They also trust that their card and personal information will be kept secure. As a company, it’s up to you to make sure your customer’s credit card data is safe and that it doesn’t fall into the wrong hands. 

One way to ensure the protection and security of credit card data is to follow the Payment Card Industry Data Security Standards (PCI DSS) and become PCI compliant. 

What Is PCI Compliance?

To become PCI compliant, a business needs to follow 12 requirements:


  • Use a firewall: A firewall is often the first line of defense against bad actors and unauthorized access to data.
  • Use secure, unique passwords: Require passwords on all equipment and accounts. The passwords should be strong and changed from those that came with the equipment.
  • Encrypt cardholder data: Cardholder data, including account numbers and PINs, should be encrypted when input into the system.
  • Encrypt transmitted data: Any data in transit needs to be encrypted so it can’t be deciphered if it’s intercepted, especially across public networks.
  • Use antivirus software: Antivirus software should be installed on any devices or equipment.
  • Update software: The software needs to be kept up to date. Updating your software lets you monitor and manage your vulnerabilities.
  • Restrict access to data: Only authorized individuals should access cardholder data. Keep the list of authorized individuals up to date and remove names and permissions as employees leave the company.
  • Assign unique IDs: Every individual with access should have a unique username and password.
  • Secure physical data: Physical data, such as receipts or customer logs, should be kept safe, such as in a locked cabinet or an off-site location with restricted access.
  • Monitor access logs: Keep tabs on who’s accessing private data. Maintain records that show when data is accessed and by whom.
  • Test systems: Test your systems regularly to see how they hold up to attacks or detect any vulnerabilities. 
  • Have a documented policy: To be PCI compliant, you need a documented security policy. The policy should be written and updated regularly and serves to address employees and contractors.

How to Choose the Best Credit Card Processor for Your Business

Not all credit card processors are the same. They vary in terms of the fees they charge, the type of support they offer and the industries they serve. While some processors try to present themselves as “one-size-fits-all” and ideal for any merchant, the reality is that some companies are better served by working with a processor that specializes in specific industries.

When choosing a payment processor, pay attention to the following qualities.


Get an idea of the rates the credit card processor will charge before you agree to work with it. Ask what type of pricing model it uses and see a breakdown of the fees you can expect to pay monthly. The processor should be upfront with you about its costs and how it determines who pays what. 

It can also be worthwhile to find out if the payment processor changes its rates occasionally or if you will pay the same amount for the entire time you have the account. 


Ideally, getting up and running with the payment processor will be simple. Any delays in the process can affect your company’s ability to accept payments and complete transactions, so you want the transition to be seamless. 

Ask the company what is involved in setting up the new system and whether you’ll keep using specific equipment or software. Once you know how long the processor thinks it will take to get the system up and running, pay attention to how long the process takes. If the payment processor gets you set up within the time predicted or even earlier, that’s a good sign that it will follow through on other promises it makes you.

Industry Experience

It’s also ideal if the payment processor you partner with has experience working with companies in your industry, particularly if you’re in a high-risk industry. Several features can cause a company to fall into the high-risk category, such as:


  • High risk of chargebacks
  • Subscription service model
  • Bad credit history
  • Controversial products

A payment processor specializing in high-risk industries will be familiar with the particular challenges the industries face and will be more likely to have policies to accommodate the companies it works with.

Customer Support

If there’s a problem with your payment system or you suddenly find yourself locked out of your merchant account, how easy will it be for you to connect with someone at the company and get the help you need? Look for a payment processor that has a good customer service reputation. 

Choose a company with representatives available around the clock, especially if you operate online. If customers order from you 24 hours a day, seven days a week, you want to be able to connect with your payment processor 24/7, too.


The payment processor should be PCI compliant and should go above and beyond to keep your customer’s confidential information confidential. The company should ensure all merchants it works with are PCI DSS compliant, as well.

Find out what type of equipment the processor offers if you’ll be accepting cards in person. You’ll want an EMV reader at the minimum, as it’s more secure than older magnetic stripe readers. 


Finally, choose a flexible payment processor. Your company might accept a broad range of payments, including mobile payments, credit cards and cash. You might want to accept in-person and online payments. The best payment processor will offer omnichannel options to help your company streamline its payment collection methods. 

Start Accepting Credit Cards With Zen Payments Today

With a better understanding of what goes into accepting card payments online or in person, you can see why it’s vital to work with a payment processor you can trust. Zen Payments specializes in working with companies in high-risk industries. We offer chargeback protection and fraud protection, and we are PCI compliant. Contact us today to learn more about our processing services for card-present and e-commerce transactions.


Table of Contents