• The Main Players in a Card Payment
  • The Steps: Authorization, Clearing and Settlement

Payment processing is everything that happens between a customer paying by card and the money reaching your bank account: the card-issuing bank approves the payment, the transaction details are passed to it, and the funds are settled to your bank, minus fees. In the US, the Office of the Comptroller of the Currency (OCC) describes merchant processing as "gathering sales information from the merchant, obtaining authorization for the transaction, collecting funds from the card-issuing bank, and reimbursing the merchant."

The Main Players in a Card Payment

These definitions come from the OCC's Comptroller's Handbook booklet Merchant Processing (version 1.0, August 2014), which is written for US bank examiners and bankers.

  • The customer's card-issuing bank approves the payment and bills the cardholder.
  • The acquiring bank: "A bank that contracts with merchants for the settlement of card transactions is an acquiring bank. Acquiring banks contract directly with merchants, or indirectly through agent banks or other third-party organizations, to process card transactions."
  • The card networks (the booklet calls them bank card associations) connect acquiring and issuing banks and set the rules.
  • Third-party processors, such as payment service providers, handle some or all of the work for the acquiring bank.

The account a business uses to accept card payments is a merchant account. The OCC's glossary defines it as "A bank account opened by a merchant through a bank or other financial institution that is a member of a major card network." See what is a merchant account, and for the software that passes payment details at checkout, what is a payment gateway.

The Steps: Authorization, Clearing and Settlement

  1. Authorization. The OCC's glossary defines it as "An issuing bank’s approval of a card transaction in a specific amount."
  2. Clearing. "Clearing is the process of delivering final transaction data from acquirers to issuers for posting to the cardholder’s account."
  3. Settlement. "Settlement is the process of transmitting sales information to the card-issuing bank for collection and reimbursement of funds to the merchant."

The OCC describes how the data and the money move: "A typical transaction flows from the merchant to the acquirer (or acquirer’s processor), then to the bank card association, and finally to the card-issuing bank (or its processor), which bills the cardholder. Funds flow in the opposite direction".

When you're paid is set by your agreement: "The timing of the payments to the merchants is specified in the agreement between the acquiring bank and the merchants."

Processing Fees

The OCC booklet describes the fees behind each card payment:

  • Discount rate: "The fee, as a percent of sales volume, an acquirer charges a merchant for processing sales transactions."
  • Interchange fee: "A fee paid by one bank to another to cover handling costs and credit risk in a bank card transaction." The acquiring bank pays it to the issuing bank, and "There are numerous interchange rates relating to factors such as the type of authorization (e.g., card present or card not present) and type of business (e.g., grocery store)."

A payment provider may bundle these into one price per transaction or list them separately, so compare their published pricing. For US debit card interchange caps and payment volumes, see payment processing statistics, and for ways to lower costs, see how to reduce payment processing fees.

Worked Example: What a Card Payment Costs

These are sample figures. The rate of 2.9% plus $0.30 per payment is invented for this example and isn't any provider's actual price.

  • A $100.00 card payment: fee = (0.029 × $100.00) + $0.30 = $2.90 + $0.30 = $3.20. You receive $100.00 − $3.20 = $96.80.
  • A $250.00 card payment: fee = (0.029 × $250.00) + $0.30 = $7.25 + $0.30 = $7.55. You receive $250.00 − $7.55 = $242.45.

The fixed $0.30 is a larger share of the smaller payment: $3.20 is 3.2% of $100.00, while $7.55 is about 3.0% of $250.00.

Chargebacks

A chargeback reverses a card payment after a dispute. The OCC's glossary says a charge-back is "Generated when a cardholder disputes a transaction or when the merchant does not follow proper procedures. The issuer and acquirer research the facts to determine which party is responsible for the transaction." Keep invoices, receipts and delivery records so you can respond.

Payment Processing in Billed

Billed's accept payments page says: "Billed integrates with Stripe to enable online payments on invoices. There is no hidden fee, Billed charges you nothing to accept online payments with Stripe. Only Stripe standard rates apply." It also says: "Add your Paypal account to Billed to start accepting payments via Paypal on your invoices."

In this setup, Stripe or PayPal handles the card processing and sets the processing fees.

Related Guides

FAQ

How does payment processing work step by step?

The card-issuing bank authorizes the payment, the transaction details are cleared from the acquirer to the issuer, and the funds are settled from the issuer through the card network to the acquirer and then to the business. The OCC describes funds flowing in the opposite direction to the transaction data.

What are interchange fees?

Fees paid by one bank to another in a card transaction. The OCC defines an interchange fee as "A fee paid by one bank to another to cover handling costs and credit risk in a bank card transaction", paid by the acquiring bank to the issuing bank.

What is a chargeback?

A reversal of a card payment that the OCC describes as "Generated when a cardholder disputes a transaction or when the merchant does not follow proper procedures." The issuer and acquirer then work out which party is responsible.

Does Billed process card payments itself?

Billed's accept payments page says: "Billed integrates with Stripe to enable online payments on invoices." and "Only Stripe standard rates apply." You can also add PayPal as a payment option.

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