Credit card processing: how it works, what it costs, and how to choose a provider

Key takeaways

• Credit card processing is the system that authorises, verifies, and settles card payments between customers, merchants, card networks, and banks, usually within seconds.

• If you understand the full fee structure (interchange, assessment, and processor markup) and look at security, compatibility, and chargeback protections, you’re in a much better position to avoid hidden costs and protect revenue.

• Airwallex brings payment gateway, processing, and merchant account together in one platform, with PCI-DSS compliance, like-for-like currency settlement, and no forced conversion fees.

If you sell online, you’re almost certainly accepting credit cards, and there’s a good reason for that. Around 39% of consumers prefer credit cards for international purchases,¹ and the global credit card market is projected to reach US$1.146 trillion by 2033, growing at a CAGR of 7.45%.²

But, taking cards comes with costs. Processing fees, settlement delays, and chargebacks can all chip away at your margins if you’re not watching them.

In this article, we’ll walk through how credit card processing works, what it costs, and what to look for when choosing a provider, so you can keep more of what you earn.

What is credit card processing?

Credit card processing is the way a business accepts and handles credit card payments. You can think of it as the plumbing behind every card transaction, with multiple parties working together to approve, authorise, and settle payments in real time. Without it, you’d be calling your customer’s bank to verify every purchase by hand.

Who is involved in a credit card transaction?

To understand how a credit card payment moves from your customer to your account, it helps to know who’s involved:

1. The cardholder – the customer who starts a purchase using a credit or debit card online, or via a mobile device.

2. The merchant (your business) – any business that accepts card payments for goods or services. To process transactions, merchants need:

• A merchant account or a payment processor that provides one

• A payment gateway to collect customer payment details

• A payment processor to securely handle transactions

3. The issuer or issuing bank (cardholder’s bank) – the bank or fintech that issues cards to customers. It approves or declines transactions based on available funds, credit limits, and fraud detection measures.

4. The card networks – Visa, Mastercard, and Amex sit at the centre of the credit card system. They set interchange rates, lay down the rules for approving and processing payments, and act between issuing banks and acquiring banks. They also enforce security compliance standards like PCI DSS to protect transaction integrity.

5. The acquiring bank (merchant bank) – the bank that works with the merchant to process payments. It makes sure transactions are completed and that funds from approved purchases are deposited into the merchant’s account.

6. The payment gateway – a secure bridge between the merchant’s website or app and the payment processor. It encrypts sensitive payment details before sending them for authorisation, which helps protect customer data from fraud and breaches.

7. The payment processor – the go-between that connects the merchant, acquiring bank, and issuing bank. It securely sends transaction data, helps with authorisation, and makes sure funds are settled correctly. Payment processors also handle security measures like fraud detection, encryption, and chargeback management.

Today, payment service providers (PSPs) bring all of these functions together in one place: merchant account, payment gateway, and payment processor. So you don’t have to juggle separate vendors. A PSP is like an all-in-one travel booking site, whilst a dedicated merchant account is more like working directly with an airline. The PSP approach makes setup simpler and gives growing businesses more flexibility, though some high-volume merchants still prefer the control of a dedicated merchant account.

With those players in mind, here’s what happens when a customer pays by card.

How credit card processing works

At its core, online credit card processing follows three key stages:

• Authorisation – The transaction starts, and the payment gateway sends the payment information to the issuing bank for approval.

• Clearing – Approved transactions are grouped into batches and sent through the card network for processing.

• Settlement – Funds are transferred from the customer’s issuing bank to the merchant’s account.

Each stage happens in seconds. Here’s what’s going on behind the scenes.

Let’s walk through a real example. Audio store Luxe & Co has a customer, Alex, who decides to buy a pair of headphones using their credit card.

Step 1: Transaction initiation (authorisation begins)

Alex adds the headphones to their basket and enters their card details at checkout. The payment gateway encrypts the information and securely sends the transaction request to the payment processor.

Step 2: Payment processor forwards the request

The payment processor sends Alex’s payment details to the card network (e.g. Visa, Mastercard), which then passes the request to Alex’s issuer (XYZ Bank).

Step 3: Issuing bank approves or declines the transaction

XYZ Bank checks:

✅ If Alex has enough available credit

✅ If the transaction fits their usual spending patterns (fraud prevention)

✅ If the card is valid and not blocked

If the transaction is flagged as potentially risky, 3D Secure authentication may be triggered, prompting Alex to verify their identity through their banking app or a one-time code. If it’s approved, XYZ Bank sends an authorisation code back through the card network to confirm the purchase. If there isn’t enough credit or there’s a fraud flag, the transaction is declined.

Step 4: Clearing and batching

Think of clearing as a daily tally. Instead of settling each transaction one by one, Luxe & Co’s payment processor groups all approved transactions from the day together and sends the batch to the card network. The network then works with the issuing banks to get the funds ready for transfer.

Step 5: Settlement and funding

The acquiring bank collects funds from XYZ Bank and deposits the money into Luxe & Co’s merchant account. Depending on your payment provider, funds may be available the same day or may take one to three business days to settle. Some providers also offer like-for-like settlement, which lets you receive payments in the same currency they were collected in, and that can save you from unnecessary conversion fees.

That’s how the mechanics work. But why does the choice of processor matter so much for your business?

How much does credit card processing cost?

If you’re accepting card payments, fees are your biggest ongoing cost. Most businesses pay between 1.5% and 3.5% per transaction, but that headline number hides a more complex structure underneath. Here’s how it breaks down.

Every card transaction involves three separate fees:

• Interchange fee (paid to the issuing bank): This is the biggest part, usually ranging from 1.15% to 2.8% depending on the card type, transaction method, and risk level. Premium rewards cards usually come with higher interchange rates.

• Assessment fee (paid to the card network): Visa, Mastercard, and other networks charge a small fee for using their rails, usually around 0.13% to 0.15% of the transaction value.

• Processor markup (paid to your payment processor): This is what your processor charges on top of interchange and assessment fees. It usually ranges from 0.2% to 1.0%, plus a fixed per-transaction fee (often £0.20–£0.30).

Here’s how that adds up on a £100 sale:

• Interchange: ~£1.80

• Assessment: ~£0.15

• Processor markup: ~£0.50

• Total fees: ~£2.45 (leaving you with £97.55)

These figures are approximate. Actual rates vary by card type, region, and your processor’s pricing model.

Different credit card pricing models compared

Not all processors charge fees in the same way. The pricing model you choose can make a big difference to your total costs.

For most growing businesses, interchange-plus pricing gives the best mix of transparency and value, though flat-rate can be simpler if you’re just getting started.

Other fees to watch for

Beyond per-transaction costs, there are a few other fees that can add up:

• Chargeback fees: When a customer disputes a transaction, you’ll usually pay £15–£100 per incident, no matter the outcome.

• PCI compliance fees: Keeping up the security standards required for card processing can cost £10–£30 per month, though some PSPs include this in their pricing.

• Cross-border transaction fees: International payments often add 1%–1.5% on top of standard processing fees.

• Setup and monthly fees: Some processors charge one-time onboarding fees or monthly minimums.

Local payment methods like bank transfers and digital wallets can sometimes cost less than credit cards. That’s worth thinking about if you serve markets where those options are popular.

How to choose the right credit card processing provider

Once you understand the cost structure, the next step is finding a provider that fits your business. Here are the four key factors to look at.

1. Evaluate total cost

Don’t just compare headline rates. Ask for a full fee schedule that includes chargebacks, PCI compliance, cross-border fees, and any monthly minimums. If you process high volumes, interchange-plus pricing will usually save you money compared with flat-rate. For smaller or newer businesses, flat-rate’s predictability might still be worth the slightly higher cost.

2. Check compatibility with your existing systems

Not all processors fit easily with the tools you already use. Before you commit, ask:

• How difficult is implementation? Some processors offer plug-and-play integrations with platforms like Shopify and WooCommerce, whilst others need custom API work.

• Does it support the payment methods your customers use? If you serve international customers, look for mobile wallets, local payment methods, and multi-currency support.

• What other integrations does it offer? Links to accounting software like Xero or QuickBooks can make reconciliation and reporting much simpler.

3. Assess security and PCI compliance

Security breaches can lead to financial losses, legal liabilities, and reputational damage. A secure provider will comply with PCI DSS (Payment Card Industry Data Security Standards), the framework that makes sure all companies processing card information maintain a secure environment.

Good processors also use tokenization (replacing sensitive data with unique identifiers) and encryption (converting data into coded format) to protect transaction data. Look for providers that offer 3D Secure or Smart 3DS authentication, which dynamically selects the right security protocol based on transaction risk. Some PSPs handle PCI compliance for you, and that can save both the hassle and the £10–£30 monthly compliance fee.

4. Look at chargeback protections

A chargeback happens when a customer disputes a transaction with their bank. Whilst chargebacks exist to protect consumers, “friendly fraud”, where customers dispute legitimate transactions to get a refund, can cost you £15–£100 per incident, plus the lost revenue.

Strong providers offer pre-chargeback alerts that flag suspicious transactions before they escalate, plus dispute resolution tools that help you respond quickly with the right evidence. Real-time fraud detection can also cut down the number of chargebacks you face in the first place.

Understanding these factors is one thing. Finding the right provider to deliver them is another.

Why credit card processing matters for your business

Imagine if every business had to manually verify transactions by calling a customer’s bank before accepting a credit card payment. The process would be slow, error-prone, and frustrating for everyone involved. Credit card processing automates all of that, letting payments be authorised, processed, and settled within seconds.

It’s not just about speed, either. The right processor gives you faster access to your money, and some offer same-day settlement, whilst like-for-like settlement lets you avoid conversion fees when you’re paid in one currency and want to keep it that way.

If you’re selling internationally, accepting cards, alongside digital wallets and local payment methods, is essential if you want to meet customers where they are.

Accept credit card payments globally with Airwallex

If you’re selling internationally, you need a processor that can handle multiple currencies without eating into your margins. Airwallex is an all-in-one payment service provider that combines payment gateway, processing, and merchant account into a single platform.

Here’s what that means for your business:

• Transparent pricing: Domestic cards at 2.80% + £0.30, international cards at 4.30% + £0.30 – no hidden fees.

• Like-for-like settlement: Collect payments in one currency and settle in the same currency, without forced conversions or unnecessary FX fees.

• 160+ local payment methods: Accept the payment methods your customers actually use, from digital wallets to local bank transfers.

• Local acquiring in 35+ markets: Process payments locally to reduce cross-border fees and improve approval rates.

• Enterprise-grade security: PCI-DSS Level 1 certified, plus SOC 1 and SOC 2 compliance, so your customers’ data stays secure.

Frequently asked questions

What is credit card processing?

Credit card processing is the system that moves payment data and funds between a customer, merchant, card network, and banks when a card payment is made. It happens in three stages, authorisation, clearing, and settlement, and usually completes within seconds.

How much does credit card processing cost?

Most businesses pay between 1.5% and 3.5% per transaction, depending on the card type, pricing model, and whether the payment is domestic or cross-border. That breaks down into interchange fees (to the issuing bank), assessment fees (to the card network), and processor markup (to your payment provider). Other costs like chargeback fees and PCI compliance can add to your total.

What's the difference between a payment gateway and a payment processor?

A payment gateway encrypts and sends your customer’s card details to the processor; a payment processor routes that data between the banks and card networks so the transaction can be approved and settled. Many modern PSPs bundle both into one service, so you don’t have to manage them separately.

What is interchange-plus pricing?

Interchange-plus pricing charges you the actual interchange fee set by the card network, plus a fixed markup from your processor. It’s seen as more transparent than flat-rate or tiered pricing because you can see exactly what goes to the network versus your processor. For higher-volume businesses, it usually works out cheaper than flat-rate models.

Sources and references

1. https://www.airwallex.com/ecommerce-campaign-2024

2. https://www.sphericalinsights.com/reports/credit-card-market