How Retail Credit Card Processing Works – An Overview


Credit card processing is the foundation of retail. It is a process that helps customers pay for products through diverse payment options, such as credit cards and mobile payments. While consumers are happy to use these fast-growing (and increasingly) contactless payment systems, many businesses still struggle to understand how the whole process works.

Whether you need a credit card processor for your brick-and-mortar or online store, accepting credit cards and processing the payments seems challenging. Here, we will learn how retail credit card processing works.

A Complete Guide to Retail Credit Card Processing

There are a few vital things you should know about credit card processing for retail businesses.

What Is Credit Card Processing?

This refers to a system to complete payments done with a credit card online, either in person, over the phone, or via mail. It is a crucial part of retail because it ensures that customers can pay quickly and easily.

This retail payment solution sounds simple. The customers just have to swipe their card and make their payment, right? But there are many parties and systems involved in processing credit card payments. These include:

  • The Cardholder: The individual who is making the payment
  • The Merchant: The business selling a product or service
  • The Acquiring Bank (The Merchant Bank): The bank or financial institution that processes credit or debit card payments on behalf of the merchant. The acquirer allows the merchants to accept credit card payments from the card-issuing banks within an association.
  • Payment Gateways: The services that connect with the credit card companies and make it simple and easy for you to accept payments. They also help your customers use their preferred payment method. This gateway collects details of the payment from the transaction as well as routes the information to the 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 will release the funds for payment.
  • Card Associations: The credit card networks responsible for setting the interchange fees and standards for compliance


Vital Steps of Credit Card Processing

The credit card processing operation happens in a few seconds. Take a look at the steps that are followed to settle payment through your retail store:

1. The customer pays for the order

Customers swipe their credit cards at the terminal. Once done, their banking information is shared with the merchant. People may make in-person payments in the following ways:

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

If a customer is online, they may pay through your website or apps through payment gateways. This is the technology that captures as well as transfers payment data from the customer to their bank.

2. Payment is sent to the processor

After the customer pays, their payment information is sent to a processor. The processor communicates with the customer’s bank through their card networks, like MasterCard, Visa, Discover, or American Express.

3. Bank approves or denies the transaction

The cardholder’s bank will then determine if they have adequate money to cover the transaction. It may also do a security check to find out if the transaction is fraudulent. Here are a few common reasons why payments are declined:

  • The credit limit is reached: The customer doesn’t have a sufficient line of credit to cover the payment.
  • Insufficient funds: The customer doesn’t have enough money in their bank account to cover the purchase.
  • Unauthorized purchase: This is applicable when a card is used after being reported lost or stolen.

4. Approval is sent to the processor

The bank sends their decision to the payment processor, who then sends it back to your terminal or credit card reader telling you whether the cardholder was approved.

5. Payment Settles

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


What Are Different Options for Retail Credit Card Processing?

Different Options for Retail Credit Card Processing

With the growth of e-commerce as well as digital payments, retailers, as well as service providers who fail to provide card payment options to their customers could potentially miss out on sales. There are different ways to accept credit card payments. You will want to familiarize yourself with your options so that you can choose the best one for your retail store. Here are three common options to choose from:

1. Traditional POS Systems

If you’re selling goods and services in a brick-and-mortar location, you’ll likely benefit from having a POS system. This technology allows you to manage customer interactions and accept multiple forms of payment, including debit and credit cards. Today’s vast array of POS systems comes with a variety of features. It’s important to do your research so you can select the one that best suits your company’s unique needs.

Here are some factors to consider when choosing a POS system for your business:

  • Company size as well as sales volume
  • Quality as well as quantity of features provided
  • Potential for expansion
  • Hardware as well as software costs
  • Customer service and support

Some POS systems are designed for specific types of businesses such as retail. These come with customized features that enable you to provide better customer services.

2. Online Payment Processors or Payment Aggregators

Online payment processors make it easy to accept online payments. Popular options like PayPal, Stripe, and Square allow business owners to send invoices or connect the payment aggregators to their e-commerce shopping carts. Then the merchant can easily accept debit or credit card payments without a merchant account. Popular e-commerce solutions such as Shopify and Etsy have credit card payment mechanisms built in. All business owners need to do is connect their bank account to their online account so the fund transfer is complete once the transaction is processed.

However, a payment aggregator is not the best solution for every business, especially if you process a high volume of transactions. For example, when your customer pays you, the money first gets processed through the payment aggregator, which means that a third-party service controls your funds. Some put a 24- to 48-hours hold on disbursing funds; sometimes longer. As the transaction volume continues to grow, so will the fees.

3. Mobile POS Systems

A mobile POS system is a smartphone, tablet, or other device that acts as the “register” for credit card payments. Many retail stores with multiple employees on the floor find it convenient to carry a tablet with them to swipe a customer’s credit card on the spot, rather than have them stand in line at check-out. Some retailers use a mobile or tablet POS system if they’re selling goods off-site, such as at a market or trade show.

While some mobile POS companies manufacture their own portable devices, most allow you to download their software onto the mobile device of your choice. You then purchase the hardware for credit card transactions separately. This hardware connects to the device by wirelessly plugging it into a port or Bluetooth.

Happy customers enjoy and deserve a seamless and stress-free transaction when paying at your store. If you can boost a customer’s overall experience with your credit and debit terminals, you will make their shopping experience that much happier. Be ready to join this digital trend of cutting-edge retail credit card processing and keep your customers coming back happy.