How Credit Card Processing Works: A Step-by-Step Guide

When a customer taps their credit card at your terminal, the transaction appears to complete in seconds. But behind that brief interaction, a complex chain of communications between five distinct parties takes place — and understanding this process is essential for any business owner who wants to manage costs, troubleshoot declines, and choose the right payment processor.

The Five Parties in Every Transaction

Before walking through the steps, it helps to know who is involved in every credit card transaction:

• Cardholder: The customer making the purchase with their credit or debit card.
• Merchant: Your business, the entity accepting the payment.
• Acquirer (Acquiring Bank): The financial institution that processes payments on the merchant's behalf. TIB Finance acts as the acquirer for businesses on our platform.
• Card Network: Visa, Mastercard, American Express, or Interac — the networks that operate the global payment rails and set interchange rules.
• Issuer (Issuing Bank): The bank or credit union that issued the card to the cardholder (e.g., RBC, TD, Scotiabank).

Every card transaction travels through all five of these parties, typically in under two seconds for the authorization phase.

Step 1: Authorization

Authorization is the real-time approval check that happens the moment a customer presents their card. Here is what happens at each stage:

An approved authorization does not transfer money — it simply places a hold. The actual movement of funds happens during settlement.

Step 2: Clearing

Clearing is the process of submitting the day's authorized transactions to the card networks for processing. Most merchants run a batch close at end of day, which triggers the clearing process.

When you batch out, your terminal or payment gateway sends a batch file containing all the day's authorizations to the acquirer. The acquirer submits these to the respective card networks, which then route the transactions to each issuing bank for final processing.

During clearing, the card networks calculate the net amounts owed between acquirers and issuers. This is also where interchange fees are applied — the fees that issuers charge acquirers for access to their cardholders. You can learn more about these costs in our article on understanding credit card fees.

It is important not to wait too long to batch. Most card networks require that transactions be settled within 24 to 72 hours of authorization. Transactions settled more than 72 hours after authorization may qualify for a higher interchange rate, increasing your costs.

Step 3: Settlement

Settlement is when money actually moves. After clearing, the card networks facilitate the transfer of funds:

1. The issuing bank transfers the transaction amount (minus interchange fees) to the card network.
2. The card network transfers funds to the acquiring bank (TIB Finance), after deducting assessment fees.
3. The acquirer deposits the net amount into the merchant's bank account, after deducting its own processing fees and markup.

The amount you receive in your bank account is always less than the total charged to customers. This difference is the total cost of payment processing, broken down into interchange, assessment fees, and acquirer markup.

Timing and Funding Timelines

Understanding funding timelines helps you manage cash flow effectively:

• Authorization: Real-time, typically 1–2 seconds.
• Clearing: Initiated when you batch close, typically at end of business day.
• Settlement/Funding: Most acquirers fund merchants within 1–2 business days after batch close. TIB Finance offers next-business-day funding for qualifying merchants.

Keep in mind that weekends and bank holidays can delay funding. A transaction authorized on Friday evening may not fund until Tuesday if Monday is a statutory holiday.

Why Transactions Get Declined

Understanding why transactions decline helps you advise customers and reduce lost sales. Common decline reasons include:

• Insufficient credit/funds: The cardholder has exceeded their credit limit or the card has insufficient balance.
• Fraud hold: The issuer's fraud detection flagged the transaction as suspicious, often triggered by unusual purchase patterns.
• Expired card: The card's expiry date has passed.
• Card reported lost or stolen: The issuer has blocked the card.
• Do Not Honour (generic decline): The issuer declined without a specific reason; customers should contact their bank.
• Invalid card number: Usually a data entry error in card-not-present transactions.
• AVS/CVV mismatch: The billing address or security code does not match the issuer's records.

For card-not-present transactions, Address Verification Service (AVS) and CVV checks add an additional layer of validation that can both reduce fraud and affect your interchange rate.

Where the Fees Come From

Every credit card transaction carries costs that are deducted before funds reach your account. These fall into three categories:

• Interchange fees: Paid to the issuing bank. These are the largest component of processing costs and are set by Visa and Mastercard. Rates vary based on card type, industry, and how the transaction is processed. Our detailed guide on interchange rates explains how these work.
• Assessment fees: Paid to the card network (Visa, Mastercard). These are small percentage-based fees for using the network infrastructure.
• Processor/acquirer fees: Paid to your payment processor (TIB Finance). This is the markup your acquirer charges for their services, either as a flat rate or as an interchange-plus model.

Under an interchange-plus pricing model, you can see exactly what portion of your fees goes to each party, giving you full transparency into your processing costs. TIB Finance offers interchange-plus pricing so businesses always know exactly what they are paying and why.