Payment Processing Explained: How Transactions Move from Customer to Business
From a customer’s point of view, buying something at a physical or online checkout seems like it would be pretty simple. After they swipe their card, their money probably goes right to the owner’s account, right? Due to security checks, compliance requirements, and fees, it’s nowhere near that simple. Multiple financial systems, banks, and networks have to communicate in order to safely bring a customer’s funds to the right place. This procedure is known as payment processing.
While the steps and parties behind payment processing are usually the same, merchants have the ability to choose different providers in order to customize the experience and save money. Certain payment processors and payment gateways can offer lower fees, smoother implementation, and even a better-looking checkout for the customer. If you’re a merchant looking to establish or expand the ways you accept payments, understanding how it all works from a top-down perspective can help you choose the right infrastructure.
This article explains how payment processing works, which systems are involved, how processors charge businesses for their services, and what to evaluate when setting up a payment stack. We’ll also discuss Slash, a business banking platform that’s built to work alongside payment systems.¹ While Slash isn’t a payment processor, its integrated financial dashboard can centralize the funds and data you receive from your payment solutions in the same place as the rest of your banking tools.
The standard in finance
Slash goes above with better controls, better rewards, and better support for your business.
Glossary
We’ll be using quite a few technical terms throughout this guide that could be confusing to someone who’s new to the world of digital payments. Before we start, take a quick look at this glossary of important terms:
- Payment gateway: The technology that captures and transfers payment data from a customer to a merchant’s acquiring bank. It sits at the beginning of the overall process.
- Payment processor: The financial service that manages the backend logistics of electronic transactions. Common examples include Stripe, PayPal, and Apple Pay.
- Payment service provider: A standalone product that bundles payment gateways, payment processors, and other merchant services together.
- PCI DSS: Stands for Payment Card Industry Data Security Standard. This is the set of security standards that govern how payment data must be handled.
- Card networks: The infrastructures that power debit and credit card transactions. Common examples include Mastercard, Visa, and Discover.
- Issuing bank: The customer's bank in a given transaction. It’s the financial institution that issued the card being used for the purchase.
- Acquiring bank: The merchant’s bank in a given transaction. It receives the funds from a purchase.
- Merchant account: A specialized holding account specifically designed for processing transactions from cards or digital wallets.
What Is Payment Processing?
Payment processing is the term that describes the steps and systems involved in authorizing, routing, and settling a transaction from the moment the customer pays to the moment funds reach a business's account. Unlike some simpler transfers, it’s not a quick trip from point A to point B. It's a chain that connects a customer's bank account or credit line to a merchant's account through a few other parties.
The term covers a wide range of payment types. It can apply to credit card and debit card transactions, online checkout payments, bank transfers, digital wallets like Apple Pay or Google Pay, and ACH transfers. The specific systems involved might vary depending on the payment method, but they’ll always hit the same checkboxes. They validate that a payment is legitimate, send the authorization request, and eventually move funds to the merchant account.
How Processing Payments Works Behind the Scenes
Before a business can access the funds from a transaction, it must be approved, routed, recorded, and settled. Let’s break these steps down in a little more detail:
Authorization
Before anything else, the purchase has to be authorized. When a customer initiates a payment, the payment details are captured and transmitted securely to the payment processor. The processor validates the information and routes an authorization request through the card network to the customer's issuing bank. The bank checks for available funds or credit, evaluates fraud signals, and returns an approval or decline. This lightning-quick exchange determines whether the transaction can proceed.
An approved authorization doesn't mean money has moved yet. Instead, it’s more like a hold. The issuer sets aside the funds and communicates to the payment processing system that the payment is valid. The funds don’t actually travel until later down the line.
Clearing
After authorization, the transaction enters the clearing stage. Here, the details of the approved transaction are exchanged between the acquiring bank and the issuing bank through the card network. Clearing confirms the transaction record and calculates exactly what's owed by whom, including the fees owed to the card network and issuing bank, which are deducted before funds reach the merchant.
When it comes to credit or debit card transactions, clearing often happens in batches. Merchants can submit a batch of approved transactions at the end of each business day, and the clearing process runs across all of them together.
Settlement
Settlement is when funds actually transfer through the banking and payment networks and become available to the business. The issuing bank sends the funds through the card network to the acquiring bank, which deposits them into the merchant's account after deducting processing fees.
The actual timing of settlement varies. Depending on the payment method, processor, and fraud checks, funds may become available on the same day or several business days after the transaction was approved. Business owners that want a consistent cash flow should confirm settlement timelines with their processor before going live, since long payout delays can affect financial analysis and reporting.
The Systems Involved in Processing Payments
In order to construct an efficient payment processing system for your business, it’s important to know what task belongs to who. Let’s take a closer look at each party involved in moving a transaction from place to place:
Payment Gateway
The payment gateway securely captures, encrypts, and sends payment information between the customer, merchant, processor, and payment networks during checkout. In short, when a customer enters their credit card details at checkout, this system handles that information and sends it onward.
The gateway is the infrastructure behind the checkout page, but it’s not technically the page itself. The form a customer fills out does link to the gateway, but the data only reaches that gateway when the customer hits submit and leaves the checkout page.
Payment Processor
The payment processor is the system that routes the transaction between the merchant's acquiring bank and the customer's issuing bank, communicating through the card network. It’s in charge of managing the authorization request and coordinating the clearing and settlement that follow.
Some merchants work with a processor separately from their gateway, such as Stripe or Square. Others use a full payment service provider that bundles both functions together. Each option ultimately gets the job done, but they can come with different fees and implementation timelines.
Issuing and Acquiring Banks
Two banks are involved in every card transaction. The issuing bank is responsible for approving or declining the transaction and for releasing funds during settlement. Afterwards, the acquiring bank receives the payment on behalf of the merchant, processes the transaction, and deposits funds into the merchant account after settlement clears. Some payment service providers handle the steps that the acquiring bank would usually take.
Card Networks
Card networks like Visa and Mastercard send authorization requests between banks during a transaction. They also set the interchange rates, which are the fees that acquiring banks pay to issuing banks. Not only does the customer’s card network affect interchange costs for a merchant, but their actual card can as well. To offset their perks and rewards, many premium credit cards come with higher fees that the business is responsible for paying.
Merchant Account
A merchant account is the bank account that holds funds before they’re transferred to a business's operating account after settlement. Typically, merchants open a standalone merchant account with a financial institution. However, some payment service providers bundle the merchant account function into their platform, meaning businesses can accept card payments without opening a separate bank account.
The standard in finance
Slash goes above with better controls, better rewards, and better support for your business.
How Payment Processors Charge Businesses
Once you start accepting purchases at your storefront, you can expect fees from the card networks, the issuing bank, and the payment processor. While it might seem like a lot at first, you can take certain strategies to minimize these fees. Here’s an overview of each charge you may run into:
Card Network and Processor Fees
As you begin accepting card payments, there are three fees you’ll consistently pay:
- Interchange fees are set by the card networks and paid to the issuing bank. Representing the largest portion of most processing costs, they can vary by card type, transaction method, and risk.
- Assessment fees are a small percentage (0.1%-0.2%) charged by the card networks themselves to fund their infrastructure.
- Processor fees are the markup your payment processor adds on top of those two fixed costs. These fees can potentially be negotiated, especially if your business carries high traffic that’s valuable to your provider.
Different Types of Pricing
Depending on your processor, you may arrange for different pricing formats. Flat-rate pricing charges a single fixed percentage for every card transaction. Whether a customer swipes a fancy rewards credit card or a basic debit card, you’ll pay the same rate.
Interchange-plus pricing adds a defined processor markup at the end of each transaction after the interchange and network fees. This structure allows a bit more visibility into the cost breakdown, and can result in lower overall fees for businesses with higher volumes or a favorable card mix.
You may also take advantage of tiered pricing groups, which label transactions as qualified, mid-qualified, or non-qualified based on the transaction's risk and card characteristics. Each tier gets a different rate. This may not be as handy as you initially think, since merchants usually don’t know which tier a given transaction will fall into until it's already been processed.
Situational Fees
Beyond these pricing models, businesses can also run into quite a few extra charges, depending on their setup. These can include monthly platform fees, chargeback fees, currency conversion fees, POS (point of sale) system costs for in-person setups, setup fees, account termination fees, fraud prevention tools, and any PCI DSS compliance-related charges. There’s a lot to account for, but comparing the all-in cost is how you get the most accurate picture of what a payment setup will actually cost to run.
What Businesses Should Evaluate in a Payment Processing Setup
Your payment processing setup should be chosen based on how a business sells, where its customers are, and what payment methods are most often used. When evaluating your options, take the following factors into consideration for both your current operations and your future plans:
- Online vs. in-person sales: In-person card transactions typically carry lower processing fees than card-not-present transactions because the fraud risk is lower. If your business works in-person and online, confirm that the processor handles both and that the fee structure is fair.
- Supported payment methods: Not all processors support the same payment types. Verify that the provider supports the specific methods your customers use, including digital wallets, buy-now-pay-later options, or ACH, before building your checkout experience.
- Payout timing: Some processors send funds right away, while others can take up to 2-3 business days. This isn’t a big deal for businesses with a healthy cash flow, but it can be for merchants working with tight liquidity.
- Integrations: Confirm that the processor connects cleanly with your existing tools, including your e-commerce platform and accounting software. It can also be helpful to adopt a business banking solution like Slash that connects with those accounting systems, creating a consistent link between each piece of your financial stack.
- Fraud prevention and PCI DSS: Processors and PSPs often provide fraud detection tools, secure payment handling, and PCI-related support. That said, businesses still remain responsible for understanding their own compliance obligations based on how they collect, store, and process payment data.
- International or multicurrency needs: If you accept payments from customers in other countries, take a look how the processor handles cross-border volume. This means evaluating which currencies are supported, what foreign exchange costs apply, and how settlement works across jurisdictions.
Optimize the Post-Payment Layer with Slash
Setting up your payment process isn’t an easy project, but once you select your providers and account for your fees, you’ll be ready to cleanly accept a wide variety of payments. From there, a new challenge arises: managing everything else. After a payment clears, a merchant still needs to manage where funds are stored, what rails it uses for outgoing payments, and how it’s all reconciled at the end of the month. This is where Slash can help.
Slash is a neobank that’s designed to work alongside a business’s existing payment solutions. Users can track all incoming transactions on the Slash dashboard in real time, no matter the payment method their customers use. Once funds settle, they can be stored in Slash’s treasury account (earning up to 3.79% annualized yield) or in unlimited sub-accounts that can be used for budgeting.⁶
If you’re accepting payments from customers in other countries, there’s a good chance you’ll need to send money across borders as well. For merchants that work internationally, Slash supports SWIFT transfers to 180+ countries, global ACH payments, and even stablecoin payments with built-in on/off ramps.⁴
Here are some other features Slash users can take advantage of:
- Invoicing: With Slash’s invoicing and bill pay features, users can send customized invoices, collect payments, and manage vendor bills all in the same place.
- AI-powered finance: Our platform comes with Twin, a built-in AI agent that can be prompted with natural language to complete complex tasks. Users can ask it to create cards, pay invoices, review your cash flow, and much more.
- Slash Visa® Platinum Card: The Slash Card allows you to set customizable spending controls and issue unlimited virtual cards for handling team expenses, vendor transactions, subscriptions, and more. Users can also earn up to 2% cash back on business purchases.
- Working capital financing: Access short-term financing with flexible 30-, 60-, or 90-day repayment terms to help bridge cash flow gaps.⁵
- Accounting & ERP integrations: Sync transaction data with QuickBooks Online, Xero, NetSuite, or Sage Intacct to streamline reconciliation, reporting, and month-end close.
If you've just finished building out your payment operations and you want a banking solution that can handle the rest of your finances, give Slash a try today.
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Frequently Asked Questions
What are some examples of payment processors?
Some popular payment processors include Stripe, WorldPay, PayPal, and Payoneer.
Payment Orchestration Layer: Meaning & Use Cases
Can payment processing fees vary by payment method?
Payment processing fees are a bit different across every payment method. Debit card payments typically carry charges between 0.5-1.5%, while online payments via ACH usually carry a flat fee, often $0–$1.50 per transaction. If a customer uses a credit card with a particularly high level of rewards, the fees will be higher to account for them.
What's the difference between online payments using credit cards and in-person card swipes?
Online transactions (card-not-present) are more vulnerable to fraud, as stolen credit card information can be used without the merchant or processor knowing. In-person transactions (card-present) are generally safer. For that reason, payment processors often charge higher fees for online payments.
Merchant Accounts: How Card Payments Work
What's a POS (point-of-sale) system?
A POS system is the physical terminal that allows storefronts to accept different payment methods like credit cards and digital wallets.
What happens during a chargeback, and does the merchant get their processing fees back?
When a cardholder files a chargeback, their issuer investigates the transaction and forces a payment reversal if their claim is valid based on the context and payment details. Unfortunately, the associated fees do not return to the merchant account.
Chargeback Prevention: 6 Ways to Protect Revenue and Reduce Risk
Is there a difference between a merchant account and a general business bank account?
Yes. A merchant account is a temporary holding account specifically for processing credit and debit card transactions. A business bank account is your primary operating account used to pay expenses, deposit cash, and manage your company's overall finances.
