How Does Credit Card Processing Work? A Walkthrough

POS management software doesn’t just process payments. It combines payment processing with inventory levels, customer relationship management (CRM), and reporting dashboards. The most effective POS systems can auto-generate reorder requests, allocate transactions to the proper customer cards, and determine profit margins after expenses for payment processing^[2]. For ecommerce merchants and omnichannel retailers, POS systems connect not only to brick-and-mortar solutions but also to online shopping carts and mobile payment systems, meaning all transactions live in one location.

With security a major concern in the present day, the transmission of credit card data should be encrypted (SSL, TLS), and future systems should adhere to the Payment Card Industry Data Security Standard (PCI DSS)^[3]. Merchants should also entertain tokenization and point-to-point encryption (P2PE). Many POS management software applications already have built-in necessities for compliance, decreasing the merchant’s risk of liability and fraud.

Card issuing banks, card networks, acquiring banks, and your payment processor all get a piece of the pie every time a transaction occurs. These fees are called interchange fees, assessment fees, and processor markups. For example, merchants who use POS management software can have integrated reporting help them analyze where these fees fall and flag any transaction fees that appear too high. Furthermore, understanding how to structure the fees helps merchants minimize costs and select processors.

At the end of the day, submitting one’s batch of accepted transactions is standard. Merchants can settle with processors as their transactions occur between an approved transaction, allowing money to transfer from the issuing bank to the merchant’s bank. Merchants with POS management software will have their batches automatically submitted via integration to the accounting department. The POS management software easily syncs with common accounting programs so that reconciliation is simple, and it ensures all processing fees are accounted for. Daily, humans make mistakes, but when batch processing occurs, integrated reporting for fees occurs, and time saved avoiding excessive end-of-day billing reconciliation is minimized.

The first place any customer ever experiences anything is at the payment terminal. Whether it’s a card, a smartphone, or a tap-to-pay EMV chip, if a transaction takes too long, it not only impacts payment processing but also customer satisfaction. If there’s a lag due to outdated processing technology or resolution on the merchant’s end that takes too long due to poor programming, customers may be frustrated by what is ultimately a mistake on the business operations’ part. By switching to higher-quality hardware integrated with POS management software that responds quickly to various needs, merchants can avoid redundancies at the checkout and enhance customer satisfaction.

Payment gateways are the digital highways that relay payment information from one entity to the next. They enable encryption, tokenization, and fraud detection in mere moments. For ecommerce businesses, choosing a payment gateway is as integral to uptime and reliability as anything else. Gateways that integrate natively with POS management software keep data location centralized and ultimately provide better visibility across all reporting channels^[4].

The issuing bank is the bank that holds the credit available to the customer. When your credit card processor authorizes a transaction, it sends it to the issuing bank for approval as the last step of assessment. Fraud detection programs, available financial balances, and established user patterns give the issuing bank the information it needs to approve or deny a transaction immediately. If you find that too many transactions are declined, it may be an issue related to your credit card processor, how you’re setting up transactions, or a payment gateway. Many POS management software options come with decline code reporting to analyze such issues.

The acquiring bank is the establishment that provides your merchant account—the account where all funds are deposited. This bank is also responsible for its own risk assessments and chargebacks; chargebacks in higher-risk industries require different acquiring banks. When POS management software integrates with these processors, it allows for sales data to match deposits and decrease human error from manual miscalculations.

Knowing how long it takes to get paid after a transaction is critical for understanding cash flow. Even though the standard amount of time is within 1–3 business days to settle transactions, it can vary based on your merchant processor at the end of any given day. POS management software features real-time batch reporting and approvals for what transactions were processed at any given time to estimate what’s owed and reign in confusion about payment for quicker access to funds if issues arise.

Failure to comply with PCI standards can result in industry fines, vulnerabilities to data breaches, and a tarnished reputation with customers. The good news is that many modern POS management software options are PCI-compliant as-is, but include the necessary features for user role access, data tokenization and protection, and regular updates to ensure open vulnerabilities are closed. The systems most appropriate for stores that typically have high volume and frequent data-entry with customer credit card considerations should have in-software compliance audits and extensive compliance documentation.

Your system should do more than accept payment for your products or services. It should become a part of the integrated flow of your business. Fully integrated POS management software systems can have sales communicate to inventory, productivity, employee assessments, marketing, and any customer retention efforts. The more of a 360-degree view you have across your operation, the more effective decision-making can be with less administrative time for busy employees. Before deciding on systems, determine which elements share an API or other integration so you’re not wasting time looking for fractured information^[5].

Merchants unaware of their own flows are more susceptible to hidden fees, fraudulent activity, or creating an experience for customers they’d rather not participate in. Transparent reporting and integration with POS management software allow you to see where your money goes, where you have holes that can be plugged, and what action steps might help you become more successful. Ultimately, it starts with clear expectations from the beginning, and transparency holds the key to success.

Q: How does credit card processing work from start to finish?

A: The steps are authorization, authentication, approval, settlement and funding. They all take place within seconds with the involvement of the POS, payment processor, acquiring bank and card issuer.

Q: What is a payment processor? Does it impact how a transaction goes?

A: A payment processor is the intermediary processor between the merchant and the acquiring bank that accepts card payments on behalf of the merchant. It impacts how a transaction goes because the payment processor must approve the transaction.

Q: Do POS management systems impact how processing happens?

A: Yes. POS management systems create automated transactions and batch settlements with simultaneous tracking and reconciling of everything. Therefore, there’s less human error, better reporting and a consistently held standard for compliance with regulations.

Q: Is there consistency in processing fees for every transaction?

A: No. Processing fees differ based on card type, transaction risk, and processor. An interchange-plus pricing model provides a method that’s transparent to merchants, while a flat-rate pricing model holds certain fees, but may not be transparent, which merchants should find out for themselves.

Q: What is PCI compliance and should I care?

A: PCI compliance is adherence to data security standards for accepting credit card payments. Yes, you should care because if you accept credit cards, you need to be PCI compliant, and a PCI-compliant POS management software system can facilitate the process.

Q: Can I negotiate credit card processing fees?

A: Most of the time, yes. For processors with higher volume and niche markets, they are willing to negotiate fees. It may also be possible to find secondary processors who have better processing fee agreements.