Credit Card Payment Processing Explained: A Complete 2025 Guide

Accepting credit card payments is a common part of doing business. Whether in-store, online or through a mobile app, customers often choose to pay with credit cards.

In the US alone, the number of credit cards in use is expected to rise steadily between 2024 and 2029, growing by 25 million cards. By 2029, this is projected to hit a record high of 1.1 billion cards, marking the 15th straight year of growth.

While credit card payments are often processed in a matter of seconds, behind the scenes, there’s a complex system that ensures funds are transferred quickly and securely from the customer’s card to the business’s bank account. 

In this guide, we’ll explore how credit card payment processing works in 2025 by breaking down the different roles and steps involved so business owners can understand how payments move through the system.

Let’s dive in.

• What is credit card processing?
• Key participants in the card processing chain
• Step-by-step card processing workflow
• Understanding credit card processing costs
• Security and fraud prevention strategies
• How to choose the right credit card processing provider
• Best practices for online credit card payment processing
• Partner with a solution that grows with you
• FAQs about credit card payment processors

What is credit card payment processing?

Credit card payment processing is the system that allows businesses to accept credit card payments from customers. When a customer pays with a credit card, their card information travels through several checkpoints before the money reaches the business’s bank account.

A credit card payment processor, like Lightspeed Payments, is the company that handles this information flow. They’re like traffic directors for payment data, ensuring everything gets where it needs to go securely and quickly.

• Core function: Credit card processors connect businesses to card networks and banks so transactions can be completed.
• Main role: They transmit payment data, verify transactions and help move funds from the customer’s account to the business.
• Key benefit: They handle the complex security and communication requirements so businesses don’t have to build these systems themselves.

Credit card processing happens every time a customer swipes, taps or enters their card information. The same basic process works for both in-person sales and online purchases.

Key participants in the card processing chain

When a customer pays with a credit card, several different companies work together behind the scenes. Each has a specific job to ensure the payment goes through correctly.

• Customer: The person purchasing with their credit card
• Business (merchant): The store or company selling products or services
• Payment processor: The company that routes transaction information between the business, card networks and banks
• Payment gateway: The technology that securely captures and encrypts card data before sending it to the processor
• Card networks: Companies like Visa, Mastercard and American Express that maintain the systems connecting banks
• Issuing bank: The customer’s bank that provided their credit card
• Acquiring bank: The business’s bank that receives the payment

Think of these participants as a relay team passing a baton. The payment information starts with the customer, moves through the business’s systems, travels across card networks, gets approved by banks and finally settles as a deposit in the business’s account.

Step-by-step card processing workflow

When a customer pays with a credit card, the transaction follows a specific path, and this process is the same for both in-store and online purchases.

1. Authorization initiation

The process begins when a customer presents their payment information. In a store, they might swipe, insert or tap their card on a terminal. For online purchases, they enter their card details on a checkout page.

The business’s system (either a physical terminal or website) captures this information and sends it to their payment processor through a payment gateway. This happens in seconds, with the gateway encrypting the card data to keep it secure during transmission.

For online credit card payment processing, the gateway is especially important because it provides a secure connection between the website and the processing network.

2. Transaction validation

Once the processor receives the payment information, it sends it to the appropriate card network (Visa, Mastercard, etc.) based on the type of card used. The card network then forwards the details to the customer’s issuing bank.

The issuing bank checks several things:

• Is the card active and not reported lost or stolen?
• Does the account have enough available credit?
• Does the transaction match the cardholder’s normal spending patterns?
• Are the security codes (CVV) and billing address correct?

These checks help determine if the transaction appears legitimate or potentially fraudulent.

3. Authorization response

After reviewing the transaction, the issuing bank sends an approval or decline message back through the same path: bank to card network to processor to business.

If approved, the message includes an authorization code that serves as proof that the transaction was accepted. If declined, it will contain a reason code explaining why (such as insufficient funds or suspected fraud).

The entire authorization process typically takes 2-3 seconds, though it may be slightly longer for online transactions or those requiring additional verification.

4. Settlement process

Authorization doesn’t immediately transfer money to the business. Instead, it reserves those funds in the customer’s account. The actual movement of funds happens during settlement.

At the end of the day (or another scheduled time), the business’s payment system sends all approved transactions as a batch to their processor. The processor forwards these to the appropriate card networks, which then communicate with the issuing banks.

For online businesses, the credit card processing systems often handle this automatically, while retail stores might need to manually trigger the settlement process by “closing out” their terminals.

5. Fund deposit timeline

After settlement is complete, the funds move from the issuing banks through the card networks and processor to the business’s acquiring bank. The acquiring bank then deposits the money into the business’s account.

Understanding credit card processing costs

Every time a customer pays with a credit card, the business pays several fees to the companies involved in processing that payment. These fees make up the total cost of accepting credit cards.

Credit card payment processors charge different rates based on their pricing models, the types of cards accepted and how the business processes transactions. Understanding these costs can help retailers choose the right processor for their needs.

Many businesses look at the “effective rate” to understand their total processing costs. This is calculated by dividing the total fees paid by the total sales volume processed. For example, if a business processes $10,000 in credit card sales and pays $300 in fees, its effective rate is 3%.

Credit card processing costs vary based on:

• Business type and risk level
• Card types accepted (rewards cards cost more)
• How cards are processed (in-person vs. online)
• Transaction volume
• Pricing model used by the processor

Security and fraud prevention strategies

Keeping payment information safe is a critical part of credit card processing. Businesses that accept cards need to protect their customers’ data and reduce the risk of fraudulent transactions.

Credit card processing services include various security features designed to prevent fraud and data breaches. These tools help businesses comply with industry standards while reducing their risk of financial losses.

1. PCI compliance measures

The Payment Card Industry Data Security Standard (PCI DSS) is a set of security requirements for businesses that accept credit cards. All merchants must follow these standards to protect cardholder data.

Key PCI requirements include:

• Using firewalls to protect cardholder data
• Encrypting stored and transmitted card information
• Restricting access to cardholder data
• Scanning systems regularly for vulnerabilities
• Maintaining security policies for staff

Many credit card processors include PCI compliance tools in their services, helping businesses meet these requirements without needing specialized security expertise.

2. Tokenization and encryption

These two technologies protect card data during and after transactions.

• Encryption: Converts card data into unreadable code during transmission
• Tokenization: Replaces actual card numbers with random strings of characters for storage

Think of encryption like sending a locked box that only the recipient can open, while tokenization is like replacing a valuable item with a claim ticket. Both methods ensure that even if data is intercepted, it can’t be used to make fraudulent purchases.

Most credit card processors use both technologies to create multiple layers of protection for sensitive payment information.

3. Avoiding chargebacks

A chargeback happens when a customer disputes a charge with their bank instead of requesting a refund directly from the business. Chargebacks can result from fraud, customer dissatisfaction or processing errors.

To reduce chargebacks, businesses can:

• Keep detailed records of all transactions
• Use clear billing descriptors on credit card statements
• Implement address verification and CVV checks
• Create clear return and refund policies
• Respond quickly to customer complaints

Many credit card processors provide tools to help identify potential fraud before it leads to chargebacks, such as flagging unusual purchase patterns or transactions from high-risk locations.

How to choose the right credit card processing provider

Selecting a credit card payment processor is an important decision for any business. The right processor should offer reasonable rates, reliable service and features that match your specific needs.

1. Analyzing cost structures

Credit card processors use different pricing models that affect how much businesses pay for each transaction.

Interchange-plus pricing is often considered the most transparent because it clearly separates the processor’s markup from the base costs set by card networks and banks. Flat-rate pricing is simpler but may cost more for certain transaction types.

When comparing processors, look at the total cost rather than just the advertised rate. Some processors with low rates add monthly fees or have higher costs for certain card types.

2. Integration with existing systems

Your credit card processor needs to work smoothly with your other business systems. This includes your point of sale (POS) system, ecommerce platform, accounting software and inventory management tools.

Many businesses prefer embedded payment solutions that connect directly with their existing systems. For example, Lightspeed offers built-in payment processing that works seamlessly with its POS and ecommerce platforms.

Embedded payment processing helps:

• Reduce manual data entry
• Minimize reconciliation errors
• Simplify end-of-day closing
• Provide unified reporting across sales channels

3. Evaluating contracts and terms

Credit card processing agreements often contain important terms that affect your business relationship with the processor. Review these carefully before signing up.

Watch for:

• Contract length (month-to-month vs. multi-year)
• Early termination fees
• Equipment lease requirements
• Monthly minimum processing requirements
• Automatic renewal clauses
• Rate increase conditions

Best practices for online credit card payment processing

Accepting credit cards online requires specific approaches to ensure security, convenience and reliability. Credit card processors online provide specialized tools for ecommerce businesses.

Online credit card payment processing differs from in-person transactions in several ways. Customers can’t physically present their cards, which creates different security challenges and opportunities for fraud.

To create an effective online payment system:

• Optimize for mobile devices: Make sure your checkout works well on smartphones and tablets, as more customers shop on mobile devices
• Offer multiple payment options: In addition to credit cards, consider digital wallets, buy-now-pay-later options and other alternative methods
• Streamline the checkout process: Reduce the number of steps and form fields required to complete a purchase
• Display security indicators: Show trust symbols, SSL certificates and other visual cues that reassure customers their information is safe
• Use address verification: Implement checks to compare the billing address entered with the one on file at the issuing bank

Online credit card payment processing systems should balance security with convenience. Too many security steps can frustrate customers and lead to abandoned carts, while too few can increase fraud risks.

Partner with a solution that grows with you

As your business evolves, your payment processing needs will change too. The right credit card processor should be able to adapt to your growing transaction volume, expanding sales channels and changing customer preferences.

Look for a processor that:

• Supports both in-person and online sales
• Provides detailed analytics to track performance
• Keeps up with emerging payment technologies

Lightspeed Payments works within the same system as inventory management, customer tracking and sales reporting. This connected approach helps businesses spot trends, make better decisions and create seamless experiences across all sales channels.

To see how Lightspeed’s payment processing fits into your business operations, talk to an expert to learn how Lightspeed can help grow your business.

FAQs about credit card payment processors

What is the difference between a payment gateway and a payment processor?

A payment gateway securely captures and encrypts card information before sending it to the processor, while a payment processor handles the communication between banks and card networks to authorize and settle transactions. Most online businesses need both services, though they’re often bundled together.

How long does it take for credit card payments to reach my business account?

Most credit card payments reach business bank accounts within 1-3 business days after processing. Some processors offer faster options like next-day or same-day funding, though these may come with additional fees.

What information do I need to provide when applying for a merchant account?

When applying for a merchant account, you typically need to provide your business registration documents, bank account details, processing history, expected monthly sales volume and information about what products or services you sell.

How can businesses negotiate better credit card processing rates?

Businesses can negotiate better rates by comparing offers from multiple processors, bundling services, requesting interchange-plus pricing instead of tiered pricing and leveraging their processing volume or growth potential during discussions with sales representatives. Lightspeed, for example, offers a customized rate for high-volume businesses.

What should I do if my business experiences a data breach involving payment information?

If your business experiences a payment data breach, immediately contact your processor, notify affected customers according to legal requirements, engage security experts to identify and fix vulnerabilities and follow the specific incident response procedures outlined by card networks.

Editor’s note: Nothing in this blog post should be construed as advice of any kind. Any legal, financial or tax-related content is provided for informational purposes only and is not a substitute for obtaining advice from a qualified legal or accounting professional. Where available, we’ve included primary sources. While we work hard to publish accurate content, we cannot be held responsible for any actions or omissions based on that content. Lightspeed does not undertake to complete further verifications or keep this blog post updated over time.