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Did you know that 81% of the money spent in restaurants is from card payments? Consumers are shifting away from cash and want to pay by card. This is largely due to earning rewards from their bank provider and because it’s easier.

We’ve all encountered a time where a line is out the door and a customer is scrambling for change. Cash is inconvenient at times, especially during busy peak hours. You have to run to the back to grab more change and it takes more time to handle. According to a 2018 TSYS U.S Consumer Payment Study, debit cards are the top payment preference to diners. Cards are simple and the ease of use appeals to your guests.

Though straightforward it may seem to them, there is a lot more behind it. As a business owner, you have to deal with what happens behind every swipe. That’s where it gets tough and comes at a cost. Many owners are unaware of how credit card processing works but we’re about to fix that.

In this blog post, we will go over everything you need to know about credit card processing. All the details about fees, regulations, and tips for security. It’s time to take back your business and know exactly where your money is going.

How Credit Card Processing Works

First, let’s get familiar with the participants involved in the credit card transaction. There are five key players that will help you understand how processing works.


This is the business that accepts credit card payments. In this case, this would be the restaurant. This business is selling foods and services to the cardholder (guest).


Acquiring/Merchants Bank

The merchant’s bank is in charge of getting payment authorization requests from you. Then they send the requests to the issuing bank through the appropriate channels.

Payment Processor

The company that provides your payment terminal and runs each transaction. The terminal or device allows merchants to accept credit cards. It also sends payment details to the credit card network. After it’s done this, the payment authorization goes back to the acquiring bank.

Credit Card Network

Some examples are but not limited to Visa, MasterCard, and American Express. These companies control the networks for processing cards and govern interchange fees.

Issuing Bank

The financial institution that issues the credit card. Examples of credit card issuers are Bank of America, Chase, and Citibank. The issuing bank receives the payment authorization request from the network. It then either approves or declines the transaction.

As you can see, there are many different parties involved in each transaction. Understanding who the key players are is very beneficial. Payment processing is one of the highest costs small business owners have to face. Knowing about the credit card transaction process is the first step. It will allow you to save money and make smarter business decisions.

The Transaction Process

There are three stages to the transaction process. Stages include authorization, authentication, then, clearing and settlement. Here’s an overview of the transaction process:

Stage 1: Authorization

  1. The cardholder gives their credit card to the merchant at their POS system.
  2. A staff member swipes the card at POS and card details are sent to the acquiring bank.
  3. The acquiring bank forwards the card details to the credit card network.
  4. The credit card network forwards the payment authorization request to the issuing bank.


Stage 2: Authentication

  1. The issuing bank receives the request.
  2. They then confirm the credit card number and check available funds. After, they match the billing address to the one on file and verify the CVV number.
  3. The issuing bank approves or declines and forwards that information to the merchant. The response is sent through the credit card network and processor.
  4. Once approved, the issuing bank places a hold on the cardholder’s account. The POS will collect all authorizations at the end of the day in a “batch”.
  5. A receipt is given to the customer provided by the merchant.

Stage 3: Clearing and Settlement

  1. The merchant sends the “batch” to the acquiring bank or processor.
  2. The processor routes everything to the credit card networks for settlement.
  3. The credit card networks then send each approved transaction to the issuing bank.
  4. The issuing bank transfers the funds minus an “interchange fee”.
  5. The credit card network pays the acquiring bank and processor their certain percentage fees.
  6. Acquiring bank credits the merchant’s account for the card purchases. A “merchant discount rate” is a fee charged to pay for the processing of cards.

Feeling like you have a better understanding yet? It’s a lot of back and forth under the surface of a simple swipe. Now, let’s get into the different types of processing fees.

Processing Fees

Every step in the transaction process has a fee because everybody has to get paid. This is typically a percentage that the payment processor pays out to the key players. Sadly, all these fees add up. That’s why payment processors charge the merchant a processing fee. According to PayPal, here’s a breakdown of processing fees:

  • A percent of the transaction amount – Interchange Fee
  • Another percentage of the transaction amount – Merchant bank takes a cut with a markup fee
  • An assessment fee – Credit card network charges this fee
  • A dollar amount for every transaction – The payment processors way of getting paid

In general, the first three fees are combined and quoted as a single rate, while the transaction fee is separate (e.g., 1.25%+ 0.3%).

On top of this, be sure to know why it’s important your restaurant is PCI compliant here.

Pricing Models

Before choosing your payment processor, it’s important to know what it’s going to cost. There are three main pricing models that are common in credit card processing. Understanding them will help you choose what’s best for your restaurant.


This is the easiest of them all. A flat-rate fee involved paying the processor a flat fee for all card transactions. Whether the transaction was five dollars or $500 it’s a flat-rate fee to the processor. This rate may be a bit higher than others so it can cover all the fees of processing above.

Interchange Plus

When a customer pays with a card, their credit card network charges an interchange fee. Each credit card network has a set percentage-based interchange fee they charge. The fee is the cost of authorizing the card. It’s no surprise that the interchange fee is much less for a debit card (0.3%) than a credit card (1.81%).

The interchange charge and assessment fee are combined together as the “interchange fee”. In this pricing model, your payment processor adds a fixed markup fee. The pros of this model are that it offers visibility into the breakdown of your processing rates. But on the flip side, your statements will be harder to understand.

Check out the average interchange rates by card type from ValuePenguin here.


A tiered pricing model is broken down into three tiers. The tiers are based on the amount of risk associated with each transaction. The three tiers are:

  • Qualified rate: This involves transactions with a  credit card that are non-rewarding. This is normally offered at the lowest rates.
  • Mid-qualified rate: This is a higher rate than the qualified rate. Mid-qualified rates include a higher risk of fraud because there’s no card present. 
  • Non-qualified: This tear is for those who don’t qualify for those above. A non-qualified tier is going to be one of the highest rates you can pay. Guests who have rewards, corporate, or signature transactions may have non-qualified rates.

These fees are a great way to start examining different payment processors. Kind in mind that each processor will have different fees. That’s why it’s critical you know what each payment processor offers.

To visually see how pricing really works, use this helpful infographic from PayPal.

Simplify Your Payments

This blog post is set up to help you understand everything about credit card processing. We went over the key players in the credit card processing. Then, we covered all the details on the physical transaction process. After, we finished credit card processing by going over the process and its fees.

This information is the most critical knowledge of credit card processing. In hopes, it will allow you to choose the best payment provider for your restaurant.

With Mad Mobile, we want to make it easy for you to focus on your business. For most credit card networks, we charge no hidden, monthly, refund, or inactivity fees. We offer Smart Chargeback Assistance to help manage chargebacks each day.

Ready to get started with a new credit card processor? Begin by checking out how we can start simplifying your payments today.