When it comes to running a small business, having a good merchant processing solution is non-negotiable. Consumers today expect fast and secure payment processing.
Not only that, but they want the flexibility to pay however they prefer, whether that’s with credit cards, mobile wallets, BNPL, or other digital payment methods. So much so that 70% of consumers say that the availability of their preferred payment method is a significant factor in their choice of where to shop.
But to seamlessly receive these payments, you’ll need merchant processing services. These are solutions that help you authenticate and accept payments according to your business requirements. They will also help you stay compliant with various rules and regulations, including the applicable fees for in-store and online payment processing.
In this article, we’ll learn about the different types of merchant processing and how they work.
TL;DR
- Merchant processing ensures that all entities, such as the issuing bank, the acquiring bank, and the card company, work cohesively to facilitate payments between a customer and a business.
- To receive card-based payments, businesses must have a merchant account. This account temporarily holds the transaction funds until the bank verifies the payment.
- Payment processing incurs certain fees, including the interchange rate and processing charges for each transaction. Businesses can take steps to minimize these charges in order to maximize their revenue.
What is merchant processing?
Merchant processing is the system that allows businesses to accept electronic payments from customers. It connects the various parties involved in a transaction, including the customer, payment processor, card network, issuing bank, and merchant account, to securely move funds from the buyer to the seller.
Whether you’re accepting payments in-store, online, or through mobile devices, merchant processing handles the behind-the-scenes work required to authorize, verify, and settle transactions.
How does merchant processing work?
While a card payment may only take a few seconds from the customer’s perspective, several steps happen behind the scenes to authorize the transaction, verify available funds, and move money from the buyer’s account to yours.
Step 1: The customer initiates a payment
The process begins when a customer makes a purchase using a credit card, debit card, digital wallet, or another electronic payment method. This can happen in person through a card reader, online through a checkout page, or via a payment link or invoice.
Depending on the payment method, the transaction data may be collected through a payment terminal, ecommerce checkout, mobile device, or payment gateway.
Step 2: The payment information is transmitted securely
Once the payment is submitted, the payment processor securely sends the transaction data to the appropriate card network, such as Visa, Mastercard, American Express, or Discover.
Before the transaction reaches the bank, the payment processor may perform basic validation checks and fraud screening. Security measures such as encryption and tokenization help protect sensitive cardholder data while it travels through the payment ecosystem.
Step 3: The issuing bank authorizes or declines the transaction
The card network forwards the transaction request to the customer’s issuing bank. The bank reviews the transaction and checks several factors, including available funds, available credit, account status, spending patterns, and potential fraud indicators.
If everything checks out, the bank authorizes the transaction and places a hold on the funds. If there is an issue, such as insufficient funds, an expired card, or suspected fraud, the transaction is declined.
Step 4: The transaction is approved at checkout
Once authorization is received, the approval is sent back through the card network and payment processor to the merchant’s payment system.
At this point, the customer receives confirmation that the purchase was successful. However, the money has not actually moved yet. The authorization simply reserves the funds and confirms that the transaction can proceed.
Step 5: The transaction enters clearing and settlement
After authorization, the transaction moves into the clearing and settlement stage. During clearing, transaction details are exchanged between the payment processor, card network, issuing bank, and acquiring bank to verify the final payment amount and applicable fees.
The settlement process then transfers funds from the issuing bank to the acquiring bank. During this stage, interchange fees, assessment fees, and processor fees are calculated and applied.
Step 6: Funds are routed to the merchant account
Once settlement is complete, the funds are deposited into the merchant account. This account acts as a temporary holding area while transactions are finalized and reconciled.
For merchants processing a high volume of payments, this step helps ensure transactions are tracked accurately before funds are released.
Step 7: The money is deposited into your business bank account
The final step is funding. The acquiring bank transfers the settled funds from the merchant account into the merchant’s business bank account.
This typically takes one to three business days, though timing varies depending on the processor, payment method, industry risk profile, and funding schedule. At this stage, processing fees and any other applicable charges are deducted according to the merchant’s processing agreement.
Meet the entities that power merchant processing
As explained above, merchant processing involves much more than a customer swiping a card or clicking a checkout button. Multiple parties work together behind the scenes to authorize transactions, move funds, and ensure payments are processed securely and accurately.
We touched on them earlier, but here are more details about the key players involved in merchant processing.
The customer
The customer is the person making the purchase. They initiate the transaction using a credit card, debit card, digital wallet, or another payment method.
The merchant
The merchant is the business accepting the payment. Whether you’re running a retail store, restaurant, ecommerce site, or service business, you’re the party receiving funds in exchange for goods or services.
The payment processor
The payment processor acts as the intermediary that moves transaction data between the merchant, card network, and banks. It helps verify payment information, route authorization requests, and facilitate the transfer of funds.
The card network
Card networks such as Visa, Mastercard, American Express, and Discover provide the infrastructure that allows transactions to move between financial institutions. They also establish many of the rules and standards governing card payments.
The issuing bank
The issuing bank is the financial institution that issued the customer’s credit or debit card. It reviews the transaction request, checks for available funds or credit, and either approves or declines the payment.
The acquiring bank
Also known as the merchant’s bank, the acquiring bank receives approved transactions on behalf of the business. It works with the payment processor to ensure funds are transferred and settled correctly.
The merchant account
A merchant account is a specialized account used to temporarily hold funds from card transactions before they are deposited into the merchant’s business bank account. It serves as an important step in the payment settlement process.
Types of merchant processing solutions
Most businesses accept multiple payment methods. They can accept traditional payment methods like cash or checks or opt for modern methods, such as credit cards and online wallets. They may also accept payments in person or online.
While cash and checks don’t require processing, modern payment methods require different types of solutions to process payments.
For example, if you are purchasing a shirt in-store, you’ll complete your card transactions using a physical card terminal. This machine collects credit card information and processes payments. However, if you’re buying the shirt online, then the payment can be processed by simply entering the card details into the device used for purchase.
Depending on the business type, merchant processing solutions can come in the form of:
Point-of-sale (POS) systems
POS systems are the commerce hubs of brick-and-mortar stores.
They consist of the hardware and software components required to process an in-person payment. This includes hardware such as a display monitor, card terminal, and receipt printer.
Customers can swipe or tap their cards using the terminal to start a payment. These machines are connected to the merchant processing systems that verify the transactions and push the payment through to your business account.
Many POS systems are also equipped with software that helps with other business processes like inventory and staff management, in addition to payment processing.
Mobile processing solutions
Mobile processing solutions don’t require additional equipment to initiate a card payment. These systems enable a smartphone or tablet to function as a card terminal, like through tap to pay. The device can collect payment details, send requests through a payment processor, and complete transactions.
Businesses that move frequently or don’t have a fixed location rely on mobile processing solutions. In comparison, POS systems are ideal for businesses that operate from a static location.
While merchant processing is crucial for accepting card payments, choosing the right merchant processing company is also equally important for hassle-free transactions.
Online merchant processing
Mobile commerce now accounts for over 70% of all online retail sales globally as of 2025. Furthermore, digital wallets are projected to be used in more than 52% of all online transactions by the end of 2026, emphasizing the need for processors that support Apple Pay, Google Pay, and PayPal.
Online merchant processing enables businesses to accept payments through their websites, apps, or ecommerce platforms. This type of solution is essential for digital-first companies and retailers who serve customers remotely. It works by securely capturing card or digital wallet details at checkout, encrypting the information, and routing the transaction through a payment gateway and processor for authorization and settlement.
Online payment processors go beyond just accepting cards—they securely capture card details using tokenization and encryption. Tokenization is vital because it replaces sensitive card data with a non-sensitive token, drastically reducing the merchant’s PCI compliance scope and liability. Whether you’re selling a single product or managing a high-volume storefront, a robust online processing system ensures a fast, secure, and reliable checkout experience.
When choosing an online merchant processor, look for features like real-time analytics, recurring billing support, and transparent pricing. The right provider will not only help you accept payments but also scale your business efficiently.
Virtual terminal processing
Virtual terminals allow businesses to accept payments without a physical card reader. Instead, payments are keyed in manually through a secure web-based interface. This is ideal for businesses that accept orders over the phone, via invoice, or by mail.
With a virtual terminal, you can input the customer’s card details directly into the terminal’s interface, authorize the payment, and generate a receipt—no hardware required. It’s especially useful for service-based businesses, remote consultants, or anyone operating without a storefront.
Recurring payment processing
For subscription-based or service businesses, recurring payment solutions are key. These systems securely store customer payment details and automate billing on a set schedule (e.g., monthly or annually).
This reduces administrative overhead, ensures timely payments, and improves customer experience by eliminating manual re-entry of payment details. Look for providers that support flexible billing models, automated reminders, and dunning management.
Integrated payments (for SaaS and custom platforms)
Integrated payments are built directly into your software or platform, offering a seamless user experience. Often used by SaaS companies or custom-built applications, this type of processing allows users to pay without being redirected to external sites.
Through APIs or SDKs, businesses can embed payment capabilities directly into their platforms, manage data more effectively, and even monetize payments via revenue sharing. It’s a great option for platforms looking to deliver a frictionless, branded experience.
Fees and costs associated with merchant processing
Since payment processing involves multiple entities, the fees associated with merchant processing can be confusing. Each entity issues its fees either to the customer or to the merchant.
The typical total cost for credit card processing generally ranges between 1.5% and 3.5% of the transaction amount. Ecommerce businesses usually face higher rates (averaging 2.2% to 3.2%) compared to in-person retail due to the increased risk of fraud.
Here’s a detailed list of the common costs associated with merchant processing:
- Interchange rate: The primary cost of accepting a card, this fee is set by the card networks but paid to the issuing bank (the customer’s bank) to cover their risk and rewards programs. .
- Payment processing fees: Charges applied by the payment processing service to the merchant.
- Assessment fees: These are charged directly by the card network and are a necessary, non-negotiable component of the wholesale cost
- Chargeback fee: If a customer requests a chargeback, the merchant may have to incur a chargeback fee to compensate for additional processing.
- Monthly fee: Depending on the payment processor, you may need to pay a monthly or annual fee.
In addition, there are other costs like statement fees, merchant account fees, and verification fees. While the individual costs are small, they accumulate much larger amounts, particularly for high-volume merchants.
Here are a few tips to minimize these fees to ensure maximum profit:
- Use address verification systems: Address verification systems help verify customers’ addresses beforehand to prevent chargebacks and fraud.
- Add a surcharge: Surcharging helps you offset the interchange fees by making the customer bear the costs. However, this isn’t legal in all states, so you need to check the laws before applying a surcharge.
- Negotiate: Some card processors may be willing to negotiate a lower processing fee, especially if you deal with large transaction processing volumes every day.
Choosing a merchant processing service
Understand your payment needs
Start by identifying how and where you plan to accept payments. Do you need to process online transactions, in-person payments, or both? Will you be accepting credit and debit cards, ACH payments, or contactless payments like Apple Pay and Google Pay?
Key questions to ask:
- Will customers pay online, in-store, or over the phone?
- Do I need recurring billing or one-time credit card processing?
- What devices or hardware are needed for in-person payments?
- Will I be managing payments through a mobile app or integrated system?
Evaluate fee structures and transparency
Merchant services cost structures can vary widely, so look for providers that offer transparent pricing and clearly explain fees like:
- Transaction fees
- Monthly minimum fees
- Setup fees and annual fees
- Chargeback fees
- Early termination fee (if any)
Avoid long-term contracts unless there are meaningful incentives. The best payment processing providers won’t hide costs in complex fee structures—they’ll make it easy to understand what you’re paying for and why.
Consider integration and related services
Your payment processor should work seamlessly with your existing tools, whether it’s accounting software, CRM, or an ecommerce platform.
Look for solutions that offer:
- Built-in integrations with platforms you’re using
- Related tools like invoicing, reporting, customer portals, or loyalty programs
- Multi-channel support for both ecommerce transactions and in-store payments
These extras can drive better cash flow management and increase customer engagement over time.
Review merchant account options
Some providers give you a dedicated merchant account, while others use an aggregated setup like a third-party processor. The right fit depends on your business model.
Consider:
- Separate merchant accounts: more control and stability for scaling businesses
- Aggregated accounts: fast setup but may lack flexibility
- Payout frequency: Do they offer same-day funding or standard delays?
- Where will funds land—your business checking account or another bank account?
Match services to your business type
The best merchant account providers often specialize by industry. Choosing a provider that understands your field—whether you’re a small business, high-risk merchant, or ecommerce store—can help you:
- Reduce the risk of account holds or denials
- Ensure proper setup for online payment processing
- Optimize fee structures for your transaction volume
Bonus tip: Some payment service providers offer flexible plans so you can scale up or down based on your seasonal needs.
Read the merchant services agreement
Always read the merchant services agreement before signing. Look for:
- Defined roles of the merchant account provider vs. payment processors
- Clarity around statement fees, refund policies, and chargeback procedures
- Terms that affect your ability to switch providers
- Usage of service marks, especially if you’re white-labeling a solution
Understanding these terms helps you avoid surprises and ensures the merchant processing relationship is built on trust.
Enjoy hassle-free payment processing with Stax
As consumers prefer digital transactions, accepting card payments is a must for all businesses. However, you need a trustworthy payment processing service to ensure hassle-free and quick card transactions.
Stax is an all-in-one, end-to-endpayment processing solution that’s built for all types of businesses. It has a variety of products in its suite to meet many of your processing and reporting requirements.
Whether you are a small brand or an enterprise-level business, Stax can help you accept card-based payments with ease. Check out the payment processing solution by Stax.
Quick FAQs about merchant processing
Q: What is merchant processing in simple terms?
Merchant processing is the system that lets a business accept electronic payments, such as credit cards, debit cards, digital wallets, and online payments. It moves payment information between the customer’s bank, the merchant’s bank, card networks, payment gateways, and processors so the transaction can be authorized, approved, and settled.
Q: Do I need a merchant account to accept credit card payments?
In many cases, yes. A merchant account temporarily holds funds from card transactions before they are transferred to your business bank account. Some payment service providers use aggregated accounts instead, which can be faster to set up but may offer less control than a dedicated merchant account.
Q: What is the difference between a payment gateway and a payment processor?
A payment gateway securely captures and verifies payment details, especially for online transactions. A payment processor transmits transaction information between the merchant, acquiring bank, card network, and issuing bank to authorize and settle the payment. Many providers offer both services together.
Q: How long does it take for merchant processing funds to reach my bank account?
Funding times vary by provider, transaction type, and merchant account setup. Standard deposits often take one to three business days, while some processors offer same-day or next-day funding. Businesses should review payout timing before choosing a merchant processing solution.
Q: What types of businesses need merchant processing services?
Any business that accepts electronic payments can benefit from merchant processing. This includes retail stores, ecommerce businesses, restaurants, service providers, subscription companies, mobile businesses, SaaS platforms, and companies that accept phone or invoice payments.
Q: What are the main merchant processing fees businesses should expect?
Common merchant processing costs include interchange fees, assessment fees, processor markups, monthly fees, chargeback fees, statement fees, and possible setup or cancellation fees. The total cost often depends on your transaction volume, payment methods, industry, and whether payments are made in person or online.
Q: Why are online payment processing fees often higher than in-person fees?
Online payments are usually considered higher risk because the card is not physically present, which can increase the chance of fraud or chargebacks. As a result, ecommerce transactions often have higher processing rates than card-present transactions made through a POS terminal.
Q: How can a business reduce credit card processing costs?
Businesses can reduce costs by comparing transparent pricing models, negotiating rates based on transaction volume, using fraud prevention tools like address verification, reducing chargebacks, and choosing the right processor for their business type. In some locations, compliant surcharging may also help offset processing costs.
Q: What should I look for when choosing a merchant processing provider?
Look for transparent pricing, reliable customer support, strong security features, integrations with your existing tools, support for your preferred payment methods, clear contract terms, and funding timelines that match your cash flow needs. The best provider should fit how your customers pay, whether online, in person, mobile, or recurring.
Q: Is mobile payment processing the same as POS processing?
Mobile payment processing allows a smartphone or tablet to accept payments, often with minimal hardware. POS processing usually involves a more complete in-store system with terminals, receipt printers, inventory tools, and staff management features. Mobile processing is best for businesses on the go, while POS systems are better for fixed locations.
Q: What is recurring payment processing used for?
Recurring payment processing is used to automatically bill customers on a set schedule, such as monthly or annually. It is commonly used by subscription businesses, service providers, memberships, software companies, and any business that needs repeat payments without manually re-entering card details.
Q: How do I know if I need integrated payments for my business?
Integrated payments may be a good fit if you want payment processing built directly into your software, app, ecommerce platform, or customer portal. This is especially useful for SaaS companies, platforms, and businesses that want a seamless checkout experience without redirecting customers to an external payment page.
