How a Credit Card Transaction Works

Most merchants assume their processor gets all their fees. In reality, four parties are involved in every single swipe, and only one of them is negotiable.

Step 1: Customer Taps Their Card

The moment a customer pays by card, an authorization request fires from your terminal to the card network (Visa, Mastercard, Amex, Discover). The network routes it to the bank that issued the customer’s card, their “issuing bank.”

All of this happens in about 1–2 seconds. By the time the receipt prints, three separate entities have already processed the transaction.

Step 2: The Card Network Routes and Charges

Visa and Mastercard act as the rails, the infrastructure that connects everything. They charge a small assessment fee (about 0.13–0.15%) for this routing service. This is non-negotiable and the same for every merchant in the country.

Step 3: The Issuing Bank Takes Interchange

The biggest cut goes to the customer’s bank, the one that issued the Visa or Mastercard the customer is holding. This is called “interchange,” and it ranges from about 1.5% to 2.5% depending on card type.

Rewards cards cost more. Business cards cost more. Debit cards cost less. Premium travel cards cost the most. You don’t choose what card your customer pulls out, and you can’t negotiate the rate. It’s set entirely by the card networks.

Step 4: Your Processor Takes Their Markup

After interchange is paid out, your processor keeps their piece. This is where your pricing model matters enormously:

• Flat rate (Stripe/Square): The markup is bundled into one number, you can’t see what’s interchange vs. what’s profit margin for them.
• Interchange-plus: The markup is shown separately as a basis-point spread. This is the most transparent model, and typically the cheapest at volume.
• Tiered pricing: Transactions are sorted into “qualified,” “mid-qualified,” and “non-qualified” buckets. Most land in the most expensive one.

The processor markup is the only piece of the fee stack that varies by contract, and the only piece you can negotiate down.

Why This Matters for Your Bottom Line

Most merchants think they’re paying “2.9%”, full stop. In reality, they’re paying 1.8% in interchange + 0.14% in network fees + whatever markup their processor tacks on. The 2.9% is just where all of those get bundled together into one opaque number.

When you know which part is which, you know which part to fight. Only the processor markup is negotiable, and that’s exactly where a PAIR audit focuses.

The Authorization and Settlement Distinction

A card transaction actually happens in two separate phases, and understanding both helps explain how fees work.

Authorization happens in real time: the two-second process where your terminal contacts the network, the network contacts the issuing bank, and the bank approves or declines. This determines whether the transaction goes through.

Settlement happens later — typically in a batch at the end of the day or automatically overnight. This is when money actually moves. The interchange fee is calculated and deducted during settlement, not at authorization.

The gap between authorization and settlement is why keyed-in transactions cost more. A card swiped at authorization can be matched to physical card presence during settlement. A transaction keyed in manually cannot. The network treats it as higher fraud risk and charges elevated interchange accordingly.

Why Different Cards Cost You Different Amounts

The issuing bank sets the interchange rate based on the type of card and the risk profile of the transaction.

A basic consumer debit card carries low interchange, often under $0.30 on a $50 purchase — because the funds are already in the account and fraud risk is low.

A premium travel rewards card carries high interchange, often $1.35 or more on the same $50 purchase — because the issuing bank is extending credit, funding a rewards program, and absorbing fraud risk.

You don’t choose what card your customer pulls out. But you can structure your processing to manage the cost difference: either through interchange-plus pricing that passes savings on low-cost cards through to you, or through a dual pricing program that shifts the cost of premium card acceptance to the customers who chose those cards.

The Acquiring Bank: The Party Most Merchants Forget

There is actually a fourth party in most card transactions that the simplified three-party model leaves out: your acquiring bank.

Your processor — whether that’s Stripe, Square, or a traditional provider — typically works through an acquiring bank that sits between you and the card networks. The acquiring bank takes on the risk of your merchant account and participates in the settlement process.

On flat-rate pricing, this relationship is invisible to you. On interchange-plus pricing, you may see assessment fees listed separately from interchange, reflecting costs at different layers of the chain.

For most merchants, the acquiring bank relationship is managed entirely by the processor. You don’t need to think about it. But understanding that it exists explains why processor pricing varies and why some processors are more flexible on markup than others.

Putting It All Together

Every card swipe is a small piece of financial infrastructure running in the background of your business.

Understanding how it works — who gets paid, how much, and why — is what gives you the knowledge to negotiate effectively, choose the right pricing model, and decide whether a structure like dual pricing makes sense for your volume and customer base.