How Does Credit Card Payment Processing Work?

Ever wonder what happens when your customer swipes a card or clicks “buy now”? It’s not as simple as one, two and three. There’s an entire credit card processing system in place that powers transactions in businesses of all sizes.

With the rise of online payments, having a clear answer to the question of “how does credit card processing work”, will keep your accounting firm running smoothly and securely. Plus, it can save you money and improve customer satisfaction.

Below, we’ll provide an overview of the credit card transaction process, credit card fees your accounting firm should consider, and tips for streamlining your firm’s credit card payment processes.

The Credit Card Transaction Journey (Step-by-Step)

Understanding how the credit card transaction journey works can help accounting firms keep accurate records for their clients, spot any potential fraud, and provide advice about using credit cards safely.

Here's a breakdown of what happens, step by step:

Transaction Initiation

The credit card transaction begins when a customer or client decides to make a purchase or issue a charge. In an in-person scenario, the customer/client swipes, taps, or inserts their card into a point-of-sale (POS) terminal. For online purchases, the customer/client enters their card details on the website or selects a stored card from a digital wallet like Apple Pay or Google Pay. Once the credit card details are provided, the transaction is triggered, and the merchant’s system captures the payment information.

Data Transmission

After capturing the credit card information, the merchant’s POS system or online payment gateway securely transmits the card details to the payment processor. These details are encrypted to ensure the security of the transaction. The payment processor acts as the intermediary, passing the encrypted transaction data to the appropriate card network (Visa, Mastercard, etc.).

Authorization Request

Once the payment processor receives the transaction data, it sends an authorization request to the relevant card network. The card network then forwards this request to the issuing bank (the customer’s/client’s bank that issued the credit card). The authorization request contains key details such as the transaction amount, card information, and merchant identification.

Approval or Decline

The issuing bank reviews the authorization request by checking whether the cardholder has sufficient credit and whether the transaction shows any signs of potential fraud. Based on these factors, the bank either approves or declines the transaction. This decision is sent back to the card network, which relays the information to the payment processor.

Authorization Response

The payment processor receives the bank’s decision and sends an authorization response to the merchant’s POS system or payment gateway. If the transaction is approved, the merchant can complete the sale. If the transaction is declined, the merchant informs the customer/client that the payment has been rejected, and the sale does not proceed.

Settlement

At the end of each business day, the merchant sends all approved transactions to the payment processor for settlement. The processor batches the transactions and sends them to the respective card networks. The card networks then coordinate with the issuing banks to process these transactions.

Funds Transfer

Once the card networks process the batch, the issuing banks transfer the appropriate funds for each transaction to the acquiring bank (the merchant’s bank). The acquiring bank deposits these funds into the merchant’s business account, minus any processing fees. This step typically takes one to three business days.

Cardholder Billing

The final step occurs when the issuing bank adds the transaction amount to the cardholder’s monthly credit card statement. The cardholder is responsible for paying this balance according to the terms of their credit card agreement, thus completing the credit card transaction process.

Behind the Scenes: The Authorization Process

Role of the issuing bank: The issuing bank takes over after receiving the authorization request from the card network. The following steps are crucial for the approval of the transaction.

Verifying card details: The first check the issuing bank performs is on the card’s validity. This includes confirming that the card number, expiration date, and CVV code are correct and match the bank’s records.

Checking available credit: The issuing bank then checks whether the cardholder has sufficient credit (or funds, in the case of a debit card) available to cover the transaction amount. If the cardholder is over their credit limit, the transaction is declined.

Fraud prevention measures: Fraud detection plays a significant role in this stage. The issuing bank uses various tools to identify potential fraud, including:

• CVV check: This process ensures that the customer/client provided the correct three-digit code on the back of the card.

• Address verification service (AVS): This system verifies that the billing address provided by the customer/client matches the address on file for the cardholder.

• Real-time fraud analysis: Banks use sophisticated algorithms and machine learning to analyze transactions for unusual patterns that may indicate fraud. This includes purchases in a foreign country or abnormally large charge amounts.

Approval or Decline

Based on the checks above, the issuing bank decides whether to approve or decline the transaction. If approved, the transaction moves forward, and the issuing bank sends an authorization code back through the card network to the payment processor—signaling that the transaction can proceed. If declined, a reason code is sent back (e.g., insufficient funds, expired card, suspected fraud), and the transaction is stopped.

Importance of Fraud Prevention for Accounting Firms

Effective fraud prevention at the authorization stage of credit card payment processing can protect businesses from chargebacks (when clients dispute charges) and potential financial losses. By utilizing chargeback prevention and security measures such as CVV verification, address verification, and other anti-fraud protocols, accounting firms can ensure a safer transaction process. This reduces the likelihood of fraudulent credit card transactions while protecting the firm’s reputation and financial well-being.

How Does Credit Card Processing Benefit Accounting Firms?

According to the CPACharge “Ultimate Guide to Credit Card Processing,” businesses get paid 39% faster on average when they offer online credit card payments.

By providing clients with a convenient and modern payment experience, firms can increase client satisfaction, improve cash flow, and reduce time chasing down invoices. Plus, with online payment processing solutions like CPACharge, accounting firms can gain access to valuable data and reporting—making it easier to track payments, identify trends, and reconcile accounts. All of this contributes to a more efficient and profitable practice.

Credit Card Processing Fees and Considerations for Accounting Firms

Accountants typically face a range of fees when accepting credit card payments. The most common are interchange fees, usually between 1.5% to 3.5% per transaction. These fees can vary based on whether the transaction is made with a debit or credit card, in-person or online, and the type of business. Debit card transactions often have lower fees due to lower risk. Other fees include monthly service charges and assessment fees from the card networks, which are around 0.13% to 0.15% of the transaction amount.

When selecting a credit card processor, it’s important to look for transparency in pricing, security features (such as fraud protection), and strong customer support. Some processors offer flat-rate pricing, which is easier to understand, while others offer interchange-plus models that break down costs but may appear more complex.

Tips for Streamlining Your Accounting Firm’s Credit Card Processing

• Choose simplified systems: Utilize a user-friendly POS system that can manage multiple payment types efficiently.

• Adopt integrated online payment systems: Opt for payment processors that integrate with an accounting firm tech stack, which has the features to simplify reconciliation and reduce administrative errors.

• Automate reporting: Select processors with automated reporting tools to reduce manual reconciliation tasks.

• Enhance security: Implement encryption and tokenization to prevent fraud while maintaining a smooth transaction flow.

A payment processor like CPACharge can significantly simplify your payment operations. It integrates directly with accounting software, automates reconciliation, and offers robust security features, making it easier to improve your accounting firm’s workflow. CPACharge often provides flexible pricing options to help accounting firms reduce costs while maintaining security and compliance.

Boost Cash Flow with CPACharge Online Credit Card Payments

Credit card payment processing involves a complex network of players and actions, all operating in sync to ensure a seamless and secure exchange between businesses and their customers. From the moment a card is swiped or clicked to the final settlement, a lot happens behind the scenes. This includes verifying card details, implementing robust fraud prevention measures, and securely transferring funds.

To learn more about how CPACharge's online credit, debit, and eCheck offerings can benefit your accounting firm, book a demo today.