How Payment Processing Cards Work

How Payment Processing Cards Work
How Payment Processing Cards Work

With each passing day, the world inches closer and closer to becoming a cashless society. This becomes even more evident when you look at the rapid growth of payment and processing companies such as PayPal, whose stock went up by 55% in 2020. The company makes a great amount alone on paypal fees that merchants must pay to use the service.

The rise of eCommerce will only hasten this transition, as payment processing will be more important than ever before. Given how vital payment processing is to daily life in the digital age, it’s peculiar that not everyone fully understands how it works.

To shed some light on this subject, we’ve prepared a quick breakdown of the factors that are involved in payment processing. If you’re interested in learning more about the inner-workings of this process, read on as we explain how payment processing cards work.

Merchant Accounts

Given the prevalence of online businesses and stores, we find that it’s important to understand the important role that merchant accounts play when it comes to payment processing.

Do note that different service providers have varying terms and fees that will come into play when it comes to the success of a business.

How Merchant Accounts Work

You can think of merchant accounts as the middlemen between your business and your customers. This makes them vital for the success of any online business operations.

While brick and mortar establishments may forego this and just direct payments to any deposit account, online stores don’t have this option. To start accepting credit and debit payments, an online business will need to partner with a merchant bank and sign up for a merchant account.

The merchant bank will then accept and process non-cash payment transactions and deposit them into a merchant account. This is why acquiring a merchant services provider is the first thing an online business should address when expanding its payment options.

Applying for a Merchant Account

To apply for a merchant account, a business has to go through a rigorous screening process. This makes sense as they’ll be responsible for managing their customer’s data not to mention the inherent risk that comes with online business transactions.

Merchant service providers look at several factors when evaluating a business’ application for a merchant account. And while some service providers may differ, expect them to look into the company and owner’s credit rating, background, and even their history with past merchants.

Aside from that, they’ll be requiring information on the nature of the business that’s applying for an account. The type of products a business transacts in will also give them a rough estimate of a business’ average sale amount, which could affect the standing of a business’ application.

Types of Merchant Accounts

There are also different types of merchant accounts, all of which have different features that are better suited for specific types of businesses. Businesses will want to choose the right type in order to get the best deals and maximize their business.

  • Retail Merchant Accounts
  • eCommerce Merchant Accounts
  • Mobile Merchant Accounts

Retail merchant accounts are best for businesses with physical stores. The main difference with these types of merchant accounts is that they’ll need to install a physical terminal in their stores. Some service providers offer free terminals but that’ll depend on the service provider that you choose.

As the name suggests, eCommerce merchant accounts are best for online stores. These types of merchant accounts usually charge a higher transaction fee, as the service providers will get a bulk of their earnings from transactions as they won’t be making money via physical terminal installation.

Mobile Merchant Accounts are for businesses that don’t have a fixed location. Due to this, the terminals assigned to these types of accounts come with smartphone integration to make transactions easier for the business and its customers.

If you’re looking for an in-depth breakdown of the best merchant services, check out this review of the best online payment processing apps!

Card Processing

Now that you understand where the money goes, it’s time to talk about where the money comes from. This is where debit cards and credit cards come in. And while it may seem simple at first glance, a lot goes into processing a transaction.

Card Transactions

Certain tools are needed in order to process card transactions. These come in the form of both hardware and software that are specifically built to ensure quick and easy card transactions.

These tools are often supplied by the company that is providing a business with payment processing solutions. However, to make things convenient for businesses some companies have made it possible to integrate their card transaction tools with everyday smartphones and tablets.

Now, this doesn’t mean that they’re compromising security for convenience. Companies that provide payment processing solutions pride themselves on making sure that transactions are secure on both ends, as they understand that protecting the businesses and consumers is of the utmost importance.

Transaction Security

One of the most important aspects of payment processing is ensuring that all transactions are secure. So much so that companies that provide payment processing solutions have to comply with security requirements set by the Payment Card Industry Security Standards Council.

This is understandable considering that around 27% of online sales end up being fraudulent. To protect both the businesses and their customers, credit card processors have to comply with these guidelines:

  • Protect the cardholder’s data.
  • Implement strong access control measures
  • Comply with a strict information security policy

On the flip side, the card issuers also employ the use of security checks. This is usually in the form of a PIN that the cardholder inputs before transactions are cleared.


Now, what happens if a fraudulent transaction makes it through and the cardholder disputes it? This is when a chargeback will occur. Essentially what this means is that the card issuers will issue a request to recover the money for their cardholder.

This is different from a refund, as that falls onto the side of the business and all they’ll have to do is send the money back to the cardholder. Now, once the chargeback is filed the business must pay a chargeback fee. The business can then either dispute it or send the disputed amount back.


Lastly, it’s time to talk about the different fees that are involved in these types of transactions. It’s important that you know about this aspect of payment processing to fully understand the services you’re paying for and the reason why you’re paying certain fees in the first place.

Understanding these fees can help a business make a more informed decision regarding their choice of a merchant service provider, as well as other choices they can make to maximize payment processing to grow their business.

Card Brand Assessment Fees

Card issuers charge an assessment fee every time their cards are used in a transaction. This will either depend on the percentage of volume charged or a flat rate per transaction.

Now, what’s tricky about this is that you can’t approach the card brands when it comes to the exact amount for these fees. If you want to know how much card brands are charging your business, you’ll have to go through your merchant service provider.

Interchange Rate

The interchange rate or fee is the amount that the card issuer charges to the receiving bank every time a customer pays via card. This fee is paid to offset the handling cost and the risk that is taken on when paying via card.

This fee varies depending on the product or services involved in the transaction, the type of card used, as well as the mode in which the payment is accepted. The higher the risk, the higher the interchange fee will be.

One important thing to note about the interchange rate is that no entity earns revenue from this fee. Think of this as a handling fee for your transactions. If you want to know more about this fee, most card brands publicly disclose their interchange rate on their websites.

Merchant Account Fee

Merchant service providers have fees attached to their services. On top of the fee that they charge for transactions, they may also charge you a monthly maintenance fee.

This is common in brick and mortar establishments, as the merchant service provider often supplies businesses with hardware that’s made to process card payments.

The merchant account fee is dependent on both the nature and the size of your business. Small businesses often pay less than large corporations. This can be attributed to scale, as larger corporations tend to have more transactions than small businesses.


While the act of swiping a card may seem simplistic at first, there are many moving parts involved to complete a single transaction. Indeed, each aspect of payment processing is geared towards making the transaction as secure, efficient, and convenient as possible for both buyers and sellers.

We hope that you come away with a deeper understanding — and by extension a deeper appreciation of payment processing as a whole. If you feel like we’ve missed anything or if you have any more questions, let us know in the comments below.