What is credit card processing and how does it work? 101 Guide

This post was originally published in Jan 2022 and updated in Jan 2025 with new information on payment processing components, best practices, and more.

Credit card processing is a transformative technology that is completely revolutionizing the business world with simplified automated payments. Just what, however, is credit card processing, and how does it work? The first step in this process is to create a merchant account. A merchant account allows you to accept credit cards as a form of payment for goods and services sold. From there, you’re well on your way to processing payments seamlessly. Read on to discover more about credit card processing and how you can choose the best provider.

Read the blog → 5 ways to manage the cost of credit card acceptance

How a business processes credit cards

Most companies now rely heavily on card processing to generate revenue and profits. It's a form of transaction processing in which data about transactions are captured electronically on computer systems for authorization, clearance and settlement purposes. The credit card issuer authorizes a purchase at a business by verifying that the purchaser has sufficient funds to cover it. The credit card processor captures the information from the credit card, including virtual credit cards, and withholds payment from the merchant's account for what was sold. The settlement phase involves transferring funds from the bank to the business's bank account for what was sold.

When accepting credit card payments, a business needs to have a merchant account with a company that can process them. These companies will charge businesses for the service and there may be monthly fees as well as transaction fees. The business may also need an account with the bank that they prefer to do business with, and they will need a terminal or point of sale (POS) device and software to be able to accept credit card payments or cash. This can be done through an online application process for free.

The success of your payment operations depends on how effectively each piece of your payment infrastructure works together. Let's break down the seven essential components that power efficient B2B payment processing:

1. Merchant services and banking relationships

Think of merchant accounts as the foundation of your payment acceptance strategy. For B2B organizations, these accounts need to support various payment methods, including Level 2/3 card processing, virtual cards, and high-volume ACH transactions. Strong banking relationships also enable faster reconciliation and automated cash application, helping your AR team process payments more efficiently.

2. Payment gateway and security infrastructure

Your payment gateway acts as the secure bridge between your AR systems and payment processors. Modern B2B gateways handle everything from traditional credit cards to virtual cards and encrypted ACH transfers. With advanced security protocols and tokenization, you can protect sensitive payment data while maintaining smooth payment processing.

3. Payment processing and automation

The right payment processor streamlines your entire payment workflow. AI-powered systems can automatically optimize payment routing, capture Level 2/3 data to reduce fees, and handle exceptions - all while keeping you compliant with industry regulations.

4. Payment networks and infrastructure

B2B payment processing relies on robust networks that connect trading partners seamlessly. These networks handle various payment types and remittance data while integrating smoothly with both buyer and supplier systems.

5. Bank integration and cash application

Modern bank integration goes beyond basic fund transfers. You need real-time payment visibility, automated reconciliation, and an intelligent cash application to match payments with invoices. With AI-powered matching algorithms, you can achieve match rates of over 90% and significantly reduce manual work.

6. Enterprise payment acceptance systems

Your payment acceptance platform should handle multi-entity processing, automate invoice matching, support international payments, and provide real-time tracking. When these capabilities work together, you can accept payments through any channel your customers prefer.

A unified AR platform like Billtrust's integrates these components seamlessly, enabling automated straight-through processing while giving you the flexibility to accept payments however your customers want to pay. This means faster processing, lower costs, and happier customers.

Download the eBook → Reducing barriers to credit card payments

What is a card processing service?

A credit card processing service is a financial institution that processes the numbers and codes on a credit card. A card processing service does not charge a fee to process a customer's payment but instead charges a merchant a small percentage of the transaction amount.

Consumers often worry about the security of their credit card information when providing it to companies. However, the fact is that most major banks and credit card processors use encryption to protect data as it travels over the internet. Credit card processing services securely stores credit card data and manages the paperwork involved in accepting a card as a form of payment. These services typically include some extra features, such as fraud protection and customer management.

Who is involved in card processing?

Credit card processing is a service that allows merchants to accept payments from credit cards. It consists of three main parties: the merchant, the customer and the card-processing company. Card processing is primarily used by small and local merchants. Large retailers like Walmart and Target usually pay their bills using cash or they use something like an Electronic Data Interchange (EDI) that connects the two. Local merchants often need to accept credit cards because many customers don’t carry cash anymore, so they rely on credit card processing to do business.

Card processing systems are typically operated by banks, financial institutions or commercial enterprises called "merchant service providers." To process payments from customers, merchants will have to pay for what is called an “acquirer” or “merchant processor.” Merchant processors can be either independent companies or banks that have been approved as an acceptor of cards from certain issuers. These providers, such as banks, often offer a wide range of services to their customers, from savings, loans and credit cards to investment advice and insurance. They can also provide a variety of technologies that can help a business manage its finances and cash flow more effectively.

How credit card processing works: 4 essential steps

Imagine you’re in a restaurant and the waiter takes your credit card. He hands it to the bartender to swipe, hands it back to the waiter, who then hands it back to you. You might think this is just for show - that they have already swiped your card - but in reality, this is one of four steps involved in accepting credit cards:

The customer presents a credit card to a merchant.

This information is transmitted to the acquirer as the merchant swipes the card through a machine that reads it and transmits information about the credit card and transaction to a processor for authorization.

The credit card processor sends this information along with their bank’s routing number to verify that this is an authorized transaction. The processor checks with the bank that issued the credit card—typically using an encrypted connection—and verifies whether or not there is enough money in the account and assesses whether or not other criteria such as age restrictions have been met for this specific purchase to go through successfully.

If authorized, funds are withdrawn from the customer’s account and transferred to the merchant’s account.

Accepting virtual credit cards as part of a payment processing strategy is an increasingly popular way for small businesses to expand their customer base and make money. Credit cards are the most popular way to purchase products and services. It's convenient for both the buyer and the seller, despite the process of setting up a new credit card processing service.

Your payment acceptance strategy can make or break your cash flow, efficiency, and customer relationships. Let's look at proven approaches that will help streamline your payment operations:

1. Strategic payment processor selection: Look for a provider that brings enterprise-level capabilities to the table—think automated reconciliation, seamless ERP integration, and AI-powered cash application. They should handle high volumes effectively while supporting Level 2/3 data and understanding the nuances of B2B payment workflows.
2. Security and compliance infrastructure: Strong security measures like tokenization and encryption aren't optional anymore. The key is maintaining PCI DSS compliance and fraud prevention controls that scale with your business without creating payment friction.
3. Digital payment optimization: Smart automation drives electronic payment adoption. Your digital channels should work smoothly with customer AP systems, while AI helps identify which customers are ready to make the switch to digital.
4. Team empowerment through automation: Your AR team needs tools that eliminate manual tasks and provide clear insights. When you automate the basics, your team can focus on what really matters—managing customer relationships and optimizing cash flow.
5. Data-driven decision-making: Payment analytics reveal trends that help you optimize cash flow and reduce costs. Monitor key metrics like DSO and customer payment patterns to guide your strategy.
6. Strategic payment acceptance policies: Smart policies balance customer needs with operational efficiency. You might consider automated surcharging programs or early payment incentives to keep costs in check while maintaining customer satisfaction.
7. Integration optimization: The secret to straight-through processing? Seamless integration between your payment systems and core business applications. This gives you real-time visibility across your organization.
8. Proactive exception management: Let automated workflows handle payment exceptions. AI can spot potential issues before they impact your cash flow, creating clear paths to resolution without manual intervention.
9. Customer experience enhancement: Self-service payment options and automated communications make life easier for everyone. Your customers get to pay their way, while your AR team maintains efficient operations.
10. Future-ready infrastructure: The payment landscape evolves quickly. Choose solutions that adapt to new payment methods and regulations while maintaining flexibility in your payment stack.

Organizations that implement these practices with a unified AR platform typically see dramatic improvements—shorter DSO, lower processing costs, and happier customers. The right partner brings proven expertise in enterprise B2B payments to help you optimize every aspect of your operation.

What should I be paying for credit card processing?

Credit card processing can be costly, but it doesn't have to be. There are a variety of factors that can affect the cost of processing credit cards, including the type of business you have, the type of cards you accept, the volume of transactions and more. To better understand how much you should be spending and calculate your credit card processing fees, ask yourself these questions

• What types of cards do they accept?
• Does the company offer you a discount on your processing fees every time you sign up for a monthly billing service?

Understanding the card processing fee is essential for any business owner. The card processing fee consists of two parts: a percentage, which is paid to the merchant account provider, usually 2%-3% of each purchase, and a flat fee that is usually $0.0015 or less per transaction. Understanding your needs for your card processing fees will help you determine the best way to go about choosing a credit card processor.

There are a lot of options out there, and everyone has different needs amid the digital revolution. Whether you're an individual or running a business, the right credit card processing company for you is out there.