How Credit Card Processing Works: The Key Entities Involved in Processing Payments for Businesses

The act of swiping, inserting, or a tapping a credit card takes less than a minute, but there’s actually a lot going on behind the scenes whenever a business accepts a credit card as a form of payment.

The fact is, a number of parties come into play whenever credit card payments are involved. There’s the acquiring bank, issuing bank, the merchant service provider, and the credit card networks to name a few. And in some cases, additional middlemen — such as software integrators, membership service providers (MSP) and independent sales organizations (ISOs) — can get involved.

Every entity that’s part of this part of the payments process makes money by either taking a cut out of your sales or by earning a commission for referring you to a bank or processor. As the merchant, it’s important to be aware of these parties, so you know who you’re paying and who’s benefiting from your business.

The entities involved in payment processing: You, your customers, and everyone in between

While a transaction is essentially between the merchant (i.e., you) and your customers, there are a number middlemen that facilitate the process of accepting card payments. Below, we’ll dive into who these entities and third-parties are, and what their role is in the transaction.

Acquiring bank

Sometimes referred to as the “merchant account provider” or “merchant’s bank,” this is the bank, credit union, or financial institution that creates and maintains your merchant account (e.g., Chase, Bank of America, etc.)

A key role of the acquiring bank is to deposit the funds you earn from your credit card sales to your merchant account. The acquiring bank deducts interchange fees from the total amount processed which is then paid to the issuing bank.

Issuing bank

Also known as the cardholder’s bank, this entity is the bank or financial institution that granted the credit card account to the customer. During a transaction, the issuing bank pays the acquiring bank the sum in question.

Card networks

Sometimes referred to as card associations, these are essentially the credit card brands — Visa, Mastercard, Discover, etc.

Card networks oversee and set the interchange rates or the “swipe fees” that you pay whenever you accept a credit card. It’s important to note, though, that card networks don’t issue credit cards nor do they work directly with merchants — these jobs are handled by the issuing and acquiring banks.

We should also point out that card networks don’t earn revenue from interchange fees. Instead, credit card brands make money through assessment fees from each transaction.

How much do card networks charge in assessments? Fees will vary depending on the network and nature of the transaction, but here’s a table from Wells Fargo summarizing the assessment fees from Visa, MasterCard, American Express, and Discover.

Credit card processor

The credit card processor is a third-party company that passes along cardholder information to the card network (primarily) as well as various other parties. Credit card processors earn revenue by charging merchants such as yourself for their services.

The fees that you pay will depend on the pricing model of your payment processor. Some companies (such as Payment Depot) make money through membership fees, while others take a cut out of your sales.

Independent sales organization (ISO) and membership service providers (MSP)

ISOs and MSPs resell credit card processing services to businesses and they are usually affiliated with banks and/or processors. ISOs and MSPs help merchants accept credit cards by:

  • Selling credit card processing on behalf of banks and/or processors
  • Setting up payment terminals and POS systems for the merchant
  • Ensure that merchants stay compliant with credit card regulations
  • Provide customer support to merchants

ISOs and MSPs typically earn revenue by marking up the interchange rate set by card associations, so if you’re working with one, consider inquiring about their rates and pricing models.

Integrated software vendors (ISV)

ISVs are software providers that integrate with payment processors. ISVs and payment processors often create partnerships that incentivize ISVs to resell or recommend the payment processor to their software users.

Through these partnerships, ISVs make money from commissions and/or by earning a cut from credit card transactions.  

Payment gateways

The payment gateway authorizes ecommerce transactions. Payment gateways play a crucial role when you’re selling online, as they at it securely transmits payment data to your processor. These entities make money from fees, which include network participation fees and data processing fees which are passed on to the merchant.

For obvious reasons, payment gateways are essential if you’re an online retailer. If you sell offline using a POS system, they may not be necessary.  

Are you paying too much in credit card processing fees?

Now that you know the middlemen involved in credit card processing, the next step to asses the fees that you’re paying so you can find ways to save. You need to remember that when it comes to payment processing, the only fees that are non-negotiable are the interchange rates and assessments, as these are fees that are set by card networks.

Other fees — particularly the ones charged by your payment processor — may be negotiable, as these costs are the markups set by payment companies. So, take the time to review your merchant statement or proposal to identify the costs you should and you shouldn’t be paying.

Once you have a handle on those fees, negotiate with your processor or shop around to find better rates.

Need help figuring out your rates?

If you’re having trouble identifying the information we’ve outlined above, feel free to send us your merchant statement and our payment consultants will analyze it for you.

Get in touch with the Payment Depot team — we’re happy to assist you.