Payment Processing
How Credit Card / Debit Card Processing Works


There are a number of entities involved each time a credit or debit card transaction is processed. They are:
- The customer presenting the card for payment.
- The business accepting the card for payment.
- The credit or debit card network.
- The card issuing bank.
- The acquirer (sometimes referred to as the processor).

1.    A transaction is processed at a processing terminal, POS station, online website or online “virtual terminal.” To facilitate transmission of the transaction to the network, an API (Application Program Interface) either built into the terminal or into the website directs the information to a gateway that facilitates sending the information through the network.
2.    Information is sent through the appropriate network Visa, MasterCard or Interac to the card issuing bank;
3.    The card issuing bank authorizes the transaction and communicates the authorization to the terminal, POS station, website or online virtual terminal.
4.    The card issuing bank puts a hold on the funds and notes a “pending” transaction on the customer’s account.
5.    The transaction remains on hold until the terminal, POS station, online website or virtual terminal settles the batch containing the transaction.
6.    The acquirer confirms the transaction to the card issuing bank and requests payment.
7.    The card issuing bank then converts the transaction from pending to firm.
8.    Funds are transferred to the business’s bank account.
9.    Funds are transferred from the card issuing bank to the acquirer.

Note: Should the batch not be settled within 72 hours of the transaction being authorized, the card issuing bank removes it from the customer’s account until it is settled. Should the customer’s credit limit be reached before the batch is settled, the transaction will not be authorized. BL

SmallBizAssist is a small business consultant specializing in payment processing. For more information, contact Rick Smith at 905.714.1487, 1.800.946.2367, 905.317.5560 or visit