Credit Card Processing Explained: A Comprehensive Guide

As a small business owner completing countless credit card transactions, you may think that having credit card processing explained is unnecessary. However simple the process seems, there’s a complex procedure taking place behind each swipe.

Your customers sliding their cards and signing their recipes is just the beginning of the credit card transaction process. Understanding what happens during card transactions can provide valuable insight into modern commerce and much more.

Having this knowledge as a small business owner is vital since payment processing is one of the most significant aspects of generating company revenue.

In this blog, our team at Rigel Payments will cover:

  • Credit card processing explained
  • What happens with each transaction
  • Why transactions get declined

And much more!

Credit Card Processing Explained

Table of Contents:

  1. Credit Card Processing Explained In 3 Steps
  2. Step 1: Authorization
  3. Step 2: Authentication
  4. Step 3: Clearing and Settlement
  5. Why Credit Card Transactions Get Declined
  6. Conclusion

People Also Ask:

How does credit card processing work?

Small businesses send a batch of approved debit and credit card transactions to their bank or processor at the end of each business day.

The processing company forwards the transaction data to the corresponding credit card network, which forwards it to the bank that issues the credit card.

What does processing mean on credit card?

A processor, like Rigel Payments, is a business that allows your small business to accept credit cards and send payment details. Your processor forwards the authorization to your bank who will pay for it in time.

Why do merchants accept credit cards?

By accepting credit cards, your small business can better avoid complications with bounced checks, counterfeit money, and other payment concerns.

You won’t need to worry about risks like spending money on bad checks or tracking down customers to pay for your goods or services.

Credit Card Processing Explained In 3 Steps

There are many platforms to process credit card transactions.

The most common include:

The entire processing cycle takes several seconds. From the time your customers swipe their cards to receiving their receipts.

Using a physical (brick-and-mortar) store as our example, Rigel Payments has broken down the entire credit card transaction process into the following 3 steps:

Step 1: Authorization

Your small business must first get approval from the issuing bank for a credit card payment to go through at authorization.

During a credit card authorization:

  • The cardholder (customer) presents their card for payments to the merchant (small business owner or employee) at the point of sale.
  • Once customers swipe their cards with a POS terminal, the information is sent to the bank or participating processor.
  • The bank or processor forwards the card data to the credit card network.
  • The network clears the payment and requests authorization from the bank. An authorization request can include the credit card number, expiration date, billing address, and security code (CVV).

Step 2: Authentication

Most banks are very tenacious when verifying customer credit cards during authentication. They use fraud protection tools to ensure everything matches up.

During credit card authentication:

  • The bank gets the payment authorization request from the credit card network.
  • The bank then validates the card number, checks available funds, matches the billing address, and confirms the CVV number.
  • If all information matches, the bank approves the transaction. If not, it declines the processing payment. If declined, the transaction is sent back to the merchant through the credit card processor and network.
  • Once the small business receives the card authentication, the bank places a hold in the amount of the purchase on the customer’s account. The business’s point of sale terminal collects all approved transactions that are processed at the end of the day.
  • The merchant gives the customer their receipt to complete their purchase.

Step 3: Clearing and Settlement

During clearing, the card transaction is posted on the customer’s monthly billing statements as well as your small business’s statement. This occurs at the same time during settlement.

With credit card clearing and settlement:

  • The small business owner or an employee sends approved authorizations in a batch to the processor or bank.
  • The bank or processor forwards the batch of data to the credit card network for settlement.
  • Each approved transaction is forwarded to the bank by the card network.
  • The bank transfers the funds usually within 24 to 48 hours after the transaction. An “interchange fee” is shared with the credit card network.
  • The credit card network pays the bank and the processor their percentages from the remaining funds.
  • The merchant is credited for the customer’s purchases by the bank.
  • The transaction information is posted by the bank on the cardholder’s account. The customer gets the statement and is responsible for paying the bill.

Why Credit Card Transactions Get Declined

Having a customer’s credit card payment declined is never fun. But the rejection of a transaction isn’t always caused by them maxing out their card.

When a card is declined, your small business’s POS terminal will provide a code explaining why. But, sometimes these codes don’t give you the full story.

If this happens, you or the customer will need to contact the credit card issuer to verify the reason for the card rejection.

Below are five of the most common reasons why customers may have their credit card transaction declined:

  1. Invalid card number or expiration date
  2. Insufficient funds
  3. Out-of-state or international charges
  4. Technical issues during the transaction
  5. Too many online purchases within a short amount of time


Credit card processing is an important part of running a small business. Understanding what happens when your customers make a purchase with their credit cards and how accepting these payments affects your bottom line is essential.

With this information at top-of-mind, entrepreneurs like yourself have a better chance at getting ahead in today’s competitive marketplace!

Looking for more information about credit card processing?

Contact our Rigel Payments team today. Our merchant services experts enjoy working with small businesses across San Diego!