How does credit card processing work?

Often the question is asked, how does the processing of credit cards actually work. For example, how does Authorize.net or Card Service International or Bank of America process credit card transactions.

Well, they essentially, use their economies of scale, to process transactions for you. Companies like Authorize.net et. al. setup elaborate system, networks, infrastructure, etc. to connect to all the Card networks like VISA, Mastercard, AMEX, Discover and others. Comply with their very strict security requirements and auditing requirements (fraud management, KYC, AML, SAR, etc.) I’m not sure if they connect to ACHs (in case of Authorize.net) but some payment gateways do connect to them.

They then provide you with their platform to conduct a credit card transaction (online/offline), i.e. when your customer wants to do a transaction they take the card details, connect to the requisite network, validate the transactions and then process it. In doing so, they also do the accounting that is required of it, to make sure if the transaction was successful, to minus the balance, credit the merchant, provide the relevant transaction records to all parties concerned for a successful settlement and in doing so, make money off it.

All this translates to a very economical system for you (the merchant) to use. When you have 10,000s of merchants using a system like this, it become inherently a great B2B model for companies like Authorize.net, etc. to be able to provide you with a service, with low up-front fees, etc.

The transaction fees for every transaction you are processing is distributed amongst various players, the card network, the payment processor, you the merchant (if you have a markup), the issuing bank, etc.

You could in some way some it up, that these payment processors are credit card transaction brokers.