The Future of Payments: How Credit Card Processing Works - Shopify (2024)

Credit card processing is the foundation of any retail business. It is the process that allows customers to pay for your products through various payment options, such as credit cards or mobile payments.

While consumers are using different and more ways to pay for goods, especially through fast-growing contactless payments, small business owners struggle with understanding how the process works.

Taking a payment from a customer requires your business to route the transaction through several parties, many of which charge different fees for their services.

Whether you need a credit card processor for your brick-and-mortar or online store, accepting credit cards and processing the payments is complicated. You’ll learn exactly how the process works in this article.

What is credit card processing?

Credit card processing refers to the system used to complete payments made with a credit card online, in person, over the phone, or by mail. It is a critical part of retail because it ensures customers can check out quickly and easily.

The operation sounds simple in theory. Customers just swipe their card and you get paid, right? But there are many parties involved in collecting payments at your point of sale (POS):

  • The cardholder: the person making a payment.
  • The merchant: the business selling a service or product.
  • The acquiring bank: a.k.a. the merchant bank, which is the account that lets your business take money from payments.
  • Payment gateways: the services that connect with credit card companies to make it easy for you to accept payments. They also let your customer use their payment method of choice. The payment gateway collects payment details from the transaction and routes the information to a payment processor or merchant bank.
  • Payment processor: the system that connects the merchant, the card network, and the cardholder’s bank.
  • Issuing bank: the consumer bank that determines whether or not the cardholder can fund the transaction. If approved, it’ll release the funds for payment.
  • Card associations: a.k.a. the credit card networks, which are responsible for setting the interchange fees and standards for compliance.

How credit card processing works

The credit card processing operation happens in seconds. It is incredible considering the steps it takes to settle a payment through your store:

  1. Customer pays for order
  2. Payment is sent to processor
  3. Bank approves (or denies) transaction
  4. Approval is sent to processor
  5. Payment settles

Customer pays for order

Customers swipe their credit card at the terminal. Their banking information is then shared with the merchant. People can make in-person payments in different ways including:

  • Swiping a magnetic stripe card
  • Dipping an EMV chip card
  • Tapping a contactless card
  • Using digital wallets like Apple Pay or Google Pay

If a customer is online, they can pay through your website or apps through payment gateways, which is technology that captures and transfers payment data from the customer to their bank.

Payment is sent to processor

Once a customer makes a payment, their payment information is sent to a processor. The processor communicates with the customer’s bank through their card networks, like Mastercard, Visa, Discover, American Express, etc.

Bank approves (or denies) the transaction

The cardholder’s bank will then determine if they have enough money to cover the transaction or not. It may also run a security check to see if the transaction is fraudulent.

Three common reasons payments get declined are:

  1. Credit limit reached: the customer doesn’t have enough line of credit to cover the payment.
  2. Insufficient funds: the customer doesn’t have enough money in their bank account to cover the purchase.
  3. Unauthorized purchase: when a card is used after being reported as lost or stolen.

Approval is sent to processor

The bank then sends their decision to the payment processor, which sends it back to your terminal or credit card reader telling you whether the cardholder was approved or not.

Payment settles

Approved transactions are then batched for settlement at the end of the business day. Once settled, the customer’s account is charged for the transaction, and the money is deposited into your bank account.

Typical credit card processing fees

Each time a business processes a credit card transaction, it pays three main fees: interchange, service, and processing. These make up a total payment fee.

You’ll want to understand these fees when you are deciding on a payment processor. Each charge different amounts that impact your business’ bottom line.

Interchange fee

Whenever a merchant processes a credit or debit card payment, card networks charge them an interchange fee. This is a standard, non-negotiable fee collected by the card networks, but paid to the customer’s issuing bank.

Card networks like Visa and Mastercard facilitate the process of credit card payments. For the service, they collect an interchange fee. This represents the largest part of a total payment fee.

The average interchange fee for credit card payments is around 1.8%, while debit card interchange fees are .03%. The actual charge you pay varies depending on the type of card. For example, premium cards like American Express Black are higher than a standard debit card from your local bank.

Service fee

A service fee (or network fee or assessment fee) is paid to the card networks. This is a non-negotiable fee that varies by card network and type of card.

Basic assessment fees are between 0.1% and 0.15% of the transaction. However, the markup can change depending on factors such as:

  • Cardholder’s country
  • Merchant’s location
  • Currency
  • Card type

Processing fee

Your payment processor and its affiliates charge processing fees. This is the only negotiable fee out of all your payment processing fees.

It covers a few different fees, including acquiring, processing, and gateway fees. You can negotiate based on the number of transactions, volume of charge backs, and industry. Discuss your options when speaking with a sales representative from your prospective payment processing company.

Pricing structures for credit card processing

Payment processors use a mix of pricing models. Below are the four common types:

  • Flat rate
  • Interchange plus
  • Subscription
  • Tiered

Flat rate

Flat rate pricing is a popular model for accepting credit cards. In this model, the company charges you based on a fixed percentage of volume. You pay one fee for all credit and debit card transactions.

Flat rates are packaged as a simple base rate, say 2.75%. It may also merge a per-transaction amount, such as 2.75% + between $.20 and $.30 per transaction.

Payment processors charge according to the type of transaction. For example, card-present transactions (e.g., in-store payment) have a lower rate than card-not-present transactions (paying online) because they are less risky.

Interchange plus

The interchange-plus pricing model is used to determine the per-transaction cost by merchants. It consists of two elements:

  • The interchange rate determined by the card network
  • A markup set by the payment processor itself

This model is touted as one of the more fair and balanced pricing models used in the industry, due to its transparency.

Interchange-plus pricing costs business around 2.2% + $0.22 per transaction on average.

If you sign up with a processor using this model, you’ll see your costs vary based on the types of cards each customer uses. For example, a swiped Mastercard debit card may have an interchange rate of 1.05% + $0.15. A Visa Rewards Signature card will cost your business more, at around 2.3% + $0.10.

The more premium a card is, the higher the interchange rate will be.


A subscription flat rate model is where the payment processing company charges a fixed cost instead of a percentage of sales.

What makes it different from interchange plus is that the markup is applied as a flat monthly fee and per-transaction fee instead of a percentage of sales volume.

The business only pays the interchange fees and a flat monthly or annual fee to the processor. This can be a cost-effective model for new and growing retail businesses.


Tiered pricing, also known as bundled pricing, charges a fee based on the card type a consumer uses. It allows processors to group interchange fees into rate tiers of their choice. It’s opaque, expensive, and a home for hidden fees you don’t want to pay.

More cost effective, transparent pricing alternatives are available and mentioned above in this section. You ideally don’t want to get stuck on a tiered pricing model with any payment-processing company.

How to choose a credit card processor

Considering nearly 55% of customers prefer to pay with credit or debit card, it’s clear your business needs a credit card processor. How do you pick the best one?

Besides taking your preferred payment options, keep the following criteria in mind when choosing a payments processor:

  • Transaction speed
  • Costs and rates
  • Reliability and uptime
  • Security
  • Customer support

Transaction speed

Credit card processing services aren’t made equal, and all don’t operate in the same way. Technical limitations can affect payment transaction speed, which is incredibly important when taking card payments.

Think about retail environments: one or two extra seconds between one or two terminals in your store can add up to many wasted resources over time.

Customers have come to expect faster payment speed as people start to settle more bills online. If people buy from your store (both ecommerce or in-person), but the payment takes forever, they may get bothered and leave. Or even worse, never return.

What’s considered fast enough is always a competition. Today most processors complete transactions in under two seconds.

Ask the prospective credit card processing company their average transaction speed. If they cannot complete transactions in under two seconds (and aren’t actively working to improve performance), consider looking elsewhere.

Costs and rates

Pricing is one of the most important components of choosing a credit card processor.

As mentioned above, all credit card companies charge an interchange fee for transactions—they’re unavoidable. These fees can be up to 3% per transaction, depending on the card and where they make the purchase.

What you want to look for is how the processing company charges you:

  • Are they charging you monthly?
  • Do they have minimum processing volume to avoid additional charges?
  • What’s the monthly minimum fee?

Some processors also charge an early termination fee if you cancel your contract, which can cost a few hundred dollars.

Processing costs vary by company. It’s important to understand all the fees and service terms. If you have any questions, ask a sales representative for an explanation. If they can’t give you a good one, you may want to consider another company.

Reliability and uptime

Uptime refers to the percentage of time a processor is working and available. The more payments you process, the more revenue you stand to lose if your authorization networks go down.

Look for a company with a track record of reliability. Learn how they address outages if they happen. Ask how frequently a processor experiences downtime.

For example, say a payment network works with a processor that goes down for maintenance once a night between 3 and 4 a.m.. They should advise you not to use that processor if you’re selling online 24/7.

Processors cannot prevent outages, but they can lessen the effects and how it impacts your business.


Another critical point in considering a payment processor is security. This is important to both you and your customers because a security breach can lead to disaster for everyone.

If you plan to take multiple retail payment options, you’ll want a processor that specializes in omnichannel solutions. Look for one that can manage all points of a transaction from your POS to checkout pages like Shopify Payments.

Look for a processor that covers:

  • EMV chip readers.These help prevent counterfeit cards in-store. They use a dynamic cryptogram that makes transactions unique. If you don’t have an EMV chip reader, you can be held liable for any fraud charges.
  • PCI compliance. Payment card industry data security standards (PCI DSS) provides guidelines for merchants on how to secure customer data and avoid payment fraud. Being PCI compliant is important to protect your customers and business from risk.
  • Tokenization. When taking online payments, you shouldn’t store customer data on your server. A good payment processor will make sure card information doesn’t touch your server or other unsecured files using tokenization, a process that encrypts data before it's stored on outside servers.
  • Smartphone processing. With the rapid rise of mobile payment options like Apple Pay and Samsung Pay, having a system equipped to process mobile wallets is becoming essential. These mobile options are also increasingly popular for their convenience, as well as their added security advantages.

Customer support

What happens when you run into a problem with your credit card machine? Or have questions about your billing statement? Work with a payments processor that offers 24/7 merchant services and can help you solve issues. They should also be able to explain any charges you don’t understand.

Hardware for credit card processing

Many consumer payment preferences have changed in just one year, and wild growth occurred in markets like contactless payments and local delivery. People are focused on minimizing contact without sacrificing convenience and speed.

Let’s look at the hardware you’ll need to process payments quickly and safely.

Point of sale (POS)

It’s no secret that a reliable POS system is the foundation of your back office. A good POS will give you all the tools you need to manage your business and take payments anywhere, all in one place.

The Future of Payments: How Credit Card Processing Works - Shopify (1)

With Shopify POS, you get access to our point-of-sale app, which lets you accept popular payments. It also comes with a retail stand for iPad, to flip or detach your iPad from its base to show customers their order or assist them around the store.

One of the best parts we have found is that each of our staff on the floor now get a mobile device to easily utilise the Shopify POS for orders and even check things like stock and availability.

With an integrated point of sale like Shopify POS, you can also save with competitive card rates from Shopify Payments. You get a one-year warranty on Shopify POS hardware and 24/7 support to make sure checkout is easy for shoppers all the time, no matter where you sell.

LEARN MORE: What is Point of Sale Software? A Checklist for Choosing the Best POS for Your Business

Contactless payments

Rather than swiping cards and paying with cash, consumer preferences are moving toward digital wallets. Consumers aren’t the only ones excited by these changes, with over 80% of merchants saying contactless payments keep their checkout areas clean and stores safer.

As a small business owner, accepting contactless payments is a must-have to meet the demand of modern consumers.

Visa found that contactless usage in the US grew 150% from March 2019 to March 2020. Revenue generated through contactless methods in the US alone is projected to hit $358 billion by 2025.

A contactless payment is a transaction made by tapping a device, like a smartphone or contactless card, onto a payment terminal. They are placed within proximity of your placed within proximity of your POS terminal. When a wireless connection is made, the payment processing begins.

Contactless payments are seen as more secure. Compared to the magnetic stripe on chip-and-PIN cards, hackers cannot copy your customers' data onto another card. This payment method also provides faster and easier checkout for customers.

The pandemic accelerated the shift to contactless payments. In the UK, 70% of shoppers reported that making contactless payments was important to them.

The Future of Payments: How Credit Card Processing Works - Shopify (2)

The contactless payment trend isn’t just happening in the UK. According to American Express’s 2020 Digital Payments Survey, 58% of consumers who’ve used contactless payment options said they are more likely to use them post-pandemic than pre-pandemic. Moreover, 50% claimed that using contactless methods is safer for their health than paying with cash or swiping or inserting a credit card.

The Shopify Tap & Chip Card Reader lets you accept contactless payments, on top of standard chip-and-PIN cards. Retailers looking for an affordable, secure, and simple way to accept payments are best suited for contactless payments.

LEARN MORE: Tap to Buy: Should I Offer Contactless Payments in My Retail Store

Credit card readers

Small business owners are on the go these days. If you’re selling at a farmer’s market or local event, you may find that most people don’t want to pay in cash anymore. That’s where credit card readers come in.

A credit card reader decodes personal and financial information from your customer’s magnetic strip, microchip, or mobile phone. They are used by merchants to accept payments through debit or credit card, EBT payments, and any other payment method.

Credit card readers typically come with your POS. Shopify POS offers a Tap & Chip Card Reader to accept chip payments at the counter or curb wirelessly. It also comes with a dock to keep your Tap & Chip Reader charged for a smooth and secure checkout.

Get started with credit card processing at your store

There’s no doubt that a good credit card processor can impact your business. From accepting different preferred payment options to providing speedy checkout for customers, it’s vital to work with a reputable company for your retail business.

With the increasing popularity of alternative payments, retailers can win over shoppers by offering different payment options with Shopify POS.

Read more

  • How Do Credit Card Readers Work? A Retailer's Ultimate Guide
  • What is a Shop Till? (+ How to Use One in Your Retail Store)
  • What Is a Third-Party Payment Processor and How Does It Work?
  • What Retailers Need to Know About Card-Not-Present (CNP) Transactions
  • Chip Credit Cards and Payment Transactions: What Merchants Need To Know
  • Fraud Prevention: How to Kick Bogus Transactions to the Curb
  • EMV Chip Cards are Coming to the U.S. (Here's What Merchants Need to Know)
  • The Future of Checkout: How Retailers are Innovating the Payment Experience

Credit card processing FAQ

What are the duties of a credit card processor?

  • Ensure all credit card transactions are accurately and securely processed.
  • Responsible for monitoring and analyzing daily credit card transaction activity.
  • Review customer information for accuracy and verifies that credit card information is correct.
  • Establish credit limits and review credit card requests.
  • Ensure compliance with all applicable laws and regulations governing credit card processing.
  • Assist with fraud prevention.
  • Monitor credit limits and update customer records.
  • Resolve customer inquiries and disputes.
  • Maintain detailed records of credit card transactions.
  • Reconcile credit card accounts.

How do credit card processors make money?

Credit card processors make money by charging merchants fees for processing credit card payments. The fees they charge include interchange fees, which are set by credit card networks and are a percentage of the total transaction amount, and a flat fee, which is a fixed amount that is charged per transaction. In addition, many processors also charge monthly fees, set-up fees, and early termination fees.

What is credit card processing merchant services?

Credit card processing merchant services is a service that provides businesses with the ability to accept payments from customers using credit and debit cards. This service is provided by a merchant account provider, which is a company that specializes in processing card payments. The merchant account provider will provide the necessary hardware and software to process payments, as well as provide customer service and fraud prevention measures.

How much do credit card processing agents make?

The amount of money credit card processing agents make varies depending on their experience, the type of clients they work with, and the services they provide. Generally speaking, experienced agents can expect to make anywhere from $25,000 to $100,000 a year.

The Future of Payments: How Credit Card Processing Works  - Shopify (2024)
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