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A beginner’s guide to the lifecycle of a credit card transaction

Monday, April 18, 2022

Credit cards didn’t exist as a payment method until the Diner’s Club card came out in 1950. Now, we rely on them so heavily that it’s a major inconvenience when a business requires the cash that so few of us carry. Modern teenagers would be bewildered by a checkbook, but feel entirely at home using a debit card to call in a lunch order at their favorite sandwich shop.

They’re so familiar, in fact, that we don’t put much thought into how they work.  Until you become a business owner, realize credit card processing is a necessity and start shopping for a payment processor. Even then, you’re likely focused on the basics: They use a card, it’s approved or declined, you wait on your money and try very hard not to think about fees.

So how does it all work, really? Who’s involved in the steps between swiping a credit card and money being transferred into a business’ bank account?
We’re glad you asked. This blog is a beginner’s guide to the surprisingly complicated steps that make up the lifecycle of a credit card payment. By the time you finish reading this blog, you’ll know:

  • How the credit card authorization process works

  • Who is involved and what roles they play

  • Why cards are sometimes declined

  • How to get a competitive edge

Credit Card Network Basics

The setting:

Credit card authorization network basics

Did you ever play a board game overseen by a mustached banker where the goal was to charge players colorful bills when they landed on your spaces? (Monopoly. We’re talking about Monopoly.) The process of getting a credit card transaction from swipe to signature shares some similarities. Many entities play a role in moving the transaction forward, and no business works for free, which is why there are certain transaction fees and processing charges introduced along the way.

Think of the gameboard as the credit card authorization network, where each square represents a stop along the journey a transaction takes. Think of credit card transactions as the player pieces, circulating the gameboard from square to square. 

Before we get swallowed up in the details, let’s lay the foundation for who is involved and the role they play.

Credit Card Transaction Lifecycle

The players:

Who’s who in the credit card transaction lifecycle

First, we’ll cover the key players involved in every credit card transaction and their part in the process, including:

  • The merchant - sells a good or service

  • The customer - uses a payment card to make a purchase

  • The payment processor - provides technology that moves the request back and forth between the merchant and financial institutions

  • The acquirer - receives credit card authorization requests and funds merchants for approved transactions

  • The issuer - provides credit cards to individual cardholders and approves or declines transaction requests based on cardholder account info

  • The card associations - major card brands (Visa, Mastercard, etc.) that govern the rules of credit card processing

A Merchant With Credit Cards

Merchant | Sells a good or service to the buying public

Also known as business owners, corporations or “Tom down the street who owns the flower shop,” merchants are often the hardest working, most inspirational people on the planet. Without their drive to create and sell goods or services to the public, there’d be no need for customers to pay. 

Merchants have their pick of ways to take credit cards. But generally speaking, smaller operations use simple, affordable solutions, like a sturdy handheld POS. Enterprises are more concerned with scalability, so they’re more likely to provide omnichannel processing, meaning in person, over the phone and via online portal.

A Customer Shopping

Customer | Uses a card for in-person, online or over-the-phone payment

Customers are called by many names — consumers, cardholders, guests or buyers. But whatever you call them, the vast majority prefer paying with a card instead of cash.

The 2019 Diary of Consumer Payment Choice study conducted by the Federal Reserve found that consumers used cash in just 26% of transactions.

U.S. Bank found the same type of results. In a survey of over 2,000 Americans conducted that same year, 50% of respondents said they carry cash less than half of the time they are out. So while it may take time and money to set up card processing technology, the benefits outweigh any temporary inconvenience.

Payment Processor Playing Chess

Payment Processor | Initiates the transaction request and moves it through the authorization network

Think of a payment processor as the hand that moves the transaction (our game piece) from square to square. Payment processors provide the technology required to send transactions through an electronic network of data for authorization. Essentially, they’re the mediator between the merchant and financial institutions involved in a transaction. 

The payment processor uses encryption to secure the transaction details they receive from the merchant and forwards them to the issuer or card association for verification. They carry out other anti-fraud measures as well, like tracking the card's country of issue and previous payment history for suspicious activity.

But that’s not all payment processors do. Sometimes, they provide physical point of sale technology, like hardware terminals where customers swipe, dip and tap their cards. They also help merchants with PCI data security compliance assistance, customer support and a host of other services. Sometimes, the acquirer and payment processor for a transaction are one and the same.

Bank Graphic

Acquirer | Receives payment authorization requests

While they have many aliases — acquiring bank, merchant acquirers, etc. — their function is pretty straightforward. Acquiring banks acquire merchant accounts and essentially help them get paid by cardholders. The acquirer is a transaction’s first stop along the authorization network.

Something to keep in mind is that merchants sign contracts with acquirers to create a merchant account, which is not a regular business bank account. A merchant account basically represents a relationship with an acquirer, and allows the business owner to accept card payments.

Why does a merchant need the acquirer to get this special account? Because acquirers are registered with card associations (think Visa or MasterCard), meaning they’re given special trust after having promised to comply with the card associations’ rules and regulations. When business owners sign up for a merchant account, they’re agreeing to comply with the card association rules as well.

When a credit or debit card transaction is authorized, the funds are credited to the merchant account first, and then deposited into the merchant’s business banking account shortly after.

But acquirers can’t go it entirely alone. They rely on card issuers to make sure everything is in order with the card and associated bank account (meaning funds are available) before approving a transaction.

Issuers Graphic

Issuers | Provides credit cards to consumers and authorizes or declines their transactions

Would an issuing bank by any other name sound important? Let’s hope so, because card issuers do vital work behind the scenes. On the front end — before any transactions ever happen — they offer debit and credit cards to consumers on behalf of financial institutions registered with the card associations.

When they receive an authorization request, they make sure a customer’s card is valid and connected to a bank account with sufficient funds (or credit) to cover the purchase being requested.

When an acquirer contacts an issuer for approval, the issuer sends a code back that gets relayed as an “Approved” or “Declined” message on the merchant’s POS screen.

All of this happens in a few seconds. Technology is wild, isn’t it?

If the transaction is approved, the issuer also handles “settlement”, which is how the merchant receives the appropriate funds. The issuer transfers money for approved transactions to the merchant account, which then deposits funds into the merchant’s business bank account.


Card Associations | Governs acceptable practices in payment processing

Also called card networks, card brand associations or bank card associations, these organizations set the terms for the parties we mentioned above (merchants, issuers and acquirers) to process and use credit cards. Major players include American Express, Discover, Mastercard and Visa.

Card associations regulate things like interchange rates and the rules merchants must follow in order to be allowed the privilege of accepting credit cards for payment. They even set and maintain data security standards, including the move from traditional magnetic stripe cards to the more secure EMV chip cards.

The Journey

The journey:

From the customer’s wallet to funding settlement

The process differs slightly for in-store vs card-not-present transactions like ecommerce and payments taken over the phone. For the sake of simplicity, let’s just look at the steps for an in-store payments transaction.

Square 1 - CUSTOMER

The customer inserts their card into the POS terminal to pay for a purchase.

Square 2 - MERCHANT

The merchant's POS electronically sends the cardholder’s information and transaction details to the payment processor.

Square 3 - PROCESSOR

The processor sends the authorization request to the acquirer.

Square 4 - ACQUIRER

The acquirer routes the transaction request through the issuer for approval.

Square 5 - ISSUER

The issuer receives the validation request. They check to see if the transaction is valid, whether the cardholder account has sufficient funds and if the merchant’s account is in good standing.

Square 6 - DENIED

The issuer sends an “Approved” or “Denied” code, which the acquirer or processor relays to the merchant. If the transaction is denied, the purchase ends here.


If the transaction is approved, the merchant receives authorization and the issuer places a hold for the amount of the purchase on the customer’s account.

Square 8 - BATCHING

The merchant sends a batch of approved credit card transactions to their acquirer. This is generally done at the end of each business day.

Square 9 - CLEARING

The acquirer receives a batch of transactions, collects appropriate funds from the issuers and credits the merchant account.

Square 10 - SETTLEMENT

The acquirer deposits merchant earnings in their business bank account and generally bills merchants for all interchange and related fees in a monthly credit card statement.

Square 11 - CUSTOMER

The cardholder eventually pays the issuer for the purchase, including any accrued interest and fees associated with their card agreement.

Authorization Denied


Authorization denied:

A few common reasons for rejection

There's no worse feeling for a customer than a cashier or waiter telling them as quietly as possible that their card has been declined.

As a business owner, you can train your staff to handle these notifications delicately. But in case a customer wonders aloud why it’s happening, here are a few causes for declined transactions:

  • Suspected fraud - When a customer makes purchases outside their normal shopping behavior, uses a card for the first time after a long lapse in activity or the card is used outside of the state or country, a bank might flag these transactions as potential fraud.

  • Over credit limit, missed payments or insufficient funds - It can happen to anyone. You thought you submitted a payment and didn’t, or forgot you recently rented a car and the security hold has you over your credit limit.

  • Incorrect card information - Especially when ordering online or over the phone, it’s easy for a few numbers to get switched around. If your business takes over-the-phone payments, make sure your staff always read the numbers back to your customer to be sure they’re accurate.

  • Technical issues with the credit card company or issuer - It’s frustrating, but glitches happen. Moments like these are when alternate payments options — like holding the merchandise and texting the customer a simple invoice they can pay later — are convenient and keep the line moving.

Solutions For Every Business

Get in the game:

Payment processing solutions for every business

Some things in life are a gamble. But your business’ payments future doesn’t have to be. Whether you’re a tiny shop just starting out or a thriving mid-sized business looking for a competitive edge, picking the right partner is half the battle. If you’d like to find out why nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind, visit us at