How Credit Card Processing Works in the UK: A Complete Guide

Accepting credit cards at your business might seem simple. A customer dips or taps their card on a card machine, the payment is approved, and the money appears in your business bank account soon after.

But beneath the surface, credit card transactions are surprisingly complex. Multiple banks and other companies are typically involved, each performing a critical role in ensuring that money flows smoothly to your business.

Understanding this process is important for knowing when you expect to get paid, how much you’ll pay in fees on each transaction, and more. Keep reading to learn exactly how credit card processing works in the UK in 2024.

Key Takeaways

• Credit card processing is a complex process that involves the bank that issued your customer’s credit card, your merchant account provider, your account provider’s acquiring bank, and card networks like Visa and Mastercard.
• Credit card processing involves three steps: authorisation, payment to your business by your merchant account provider, and settlement of funds by the bank that issued your customer’s credit card.
• Credit card transactions are typically authorised in seconds, and your business can receive payment the same day or the next day. However, transactions may not fully settle for two to five days after a customer makes a purchase.

What Is Credit Card Processing?

Credit card processing is a catch-all term that covers the entire process of approving and settling a credit card transaction. In short, it involves making sure that a customer’s card is legitimate and sending money from your customer’s credit card issuer to your business.

Credit card processing involves multiple players and steps—it’s more complicated than most business owners realise at first. Let’s look at who’s involved and what steps are required to ensure your business gets paid.

Credit Card Processing: Who’s Involved?

There are four key players in processing credit card transactions: the issuing bank, your merchant services provider, the acquiring bank, and the card network.

Issuing bank

The issuing bank is the bank that issued a customer’s credit card. For example, if a customer has a Barclaycard Mastercard credit card, Barclays is the issuing bank. Other major issuing banks in the UK include HSBC, Santander, and Tesco Bank.

The issuing bank is responsible for providing a cardholder’s line of credit and advancing money for any purchases they make.

Merchant account provider

The merchant account provider is the company that holds your merchant account. Examples of popular UK merchant account providers include SumUp, Square, Stripe, PayPal, and GoCardless.

Your merchant account provider is responsible for providing your credit card processing machine and online payment gateway. They’re also responsible for collecting fees from your business for each credit card transaction and distributing them back to the other players involved.

As a business owner, you get to pick your merchant account provider. That’s noteworthy since you don’t get to choose any of the other players involved in credit card processing. Different providers offer different services, fees, and payment speeds, so it’s important to choose the right merchant account provider.

Acquiring bank

The acquiring bank is where your merchant account provider actually holds your merchant account. An acquiring bank is necessary since merchant account providers aren’t actually banks. So, they need a place to store your money safely before transferring it to your business chequing account.

Different merchant account providers use different acquiring banks. As an example, SumUp holds many of its merchant accounts at Starling Bank. It’s possible that the same bank will serve as both the issuing bank and the acquiring bank for a transaction, but this doesn’t have much of an impact on the process.

Card networks

Credit card networks like Visa, Mastercard, American Express, and Discover act as essential middlemen in processing credit card transactions. They employ tools to check whether a customer’s card is legitimate, communicate critical details like how much money a customer has spent, and provide payment rails for the issuing bank to send money to the acquiring bank.

How Does Credit Card Processing Work in the UK?

Now that you know more about who’s involved in credit card processing, we can break the process down into three steps.

Step 1: Authorisation

When a customer dips their card, taps for contactless payment, or enters their card information online, the first thing that happens is authorisation. This is a multi-part process in which all the players work together to ensure a customer’s card is legitimate and that a payment can proceed smoothly.

First, information about a customer’s purchase—including the total cost, store location, card details, and more—is sent by your merchant account provider to the acquiring bank. The acquiring bank passes the information to the card network, which then passes it on to the issuing bank.

The issuing bank checks the customer’s card to ensure there are no signs of fraud. It also checks that the purchase won’t push the customer over their credit limit. If everything looks good, the issuing bank authorises the transaction. The chain of communication is then reversed so the transaction can be completed.

All of this happens very fast. A typical credit credit card transaction is authorised or declined within a few seconds.

Step 2: Merchant payment

At the end of your business day, your merchant account provider will make a list of all of the authorised credit card payments to your business. This list covers all transactions processed across all of your business’s credit card machines and store locations, plus your online payment gateway. It will also include fees for each transaction, which will be deducted from the total.

Your merchant account provider will transfer the total amount into your merchant account at the acquiring bank. You can then move the money into your business chequing account when you’re ready.

Step 3: Settlement

While your business typically receives payment the same day or early the next day for credit card transactions, it actually takes a few days longer for credit card transactions to settle. So, the payment you receive from your merchant account provider at the end of each day is an advance, and your customer’s issuing bank must pay back your merchant account provider. This step is known as settlement.

During settlement, the issuing bank sends a payment to the acquiring bank using the card networks. The acquiring bank puts the funds in the merchant account provider’s bank account (not your merchant account), repaying them for the money they advanced to your business.

The issuing bank will eventually be repaid when your customer pays their credit card bill.

Why Is Credit Card Processing Necessary?

Although credit card processing may seem overly complex, this system is in place for several important reasons.

Communication

Imagine if every small business in the UK needed to call a customer’s issuing bank every time they wanted to accept a credit card payment. Business owners and bank agents would spend their entire day on the phone, and it’s more likely than not that information would get lost or miscommunicated.

The credit card processing system provides a standardised, fast, and mistake-free alternative. Card networks automate much of the information-sharing process among financial institutions, enabling transactions to be processed in seconds instead of minutes.

Fraud Prevention

The credit card processing system is also designed to minimise fraud. Transactions have to be authorised by a customer’s issuing bank, which significantly decreases the likelihood that someone could try to pay for a purchase with a fake card. The authorisation process also flags unusual purchasing behaviour, helping to prevent purchases with stolen cards.

For businesses, credit card processing eliminates the need to verify your business every time you want to make a sale. For example, in a world without credit card processing, your business would have to identify itself to the issuing bank and provide proof that your sale is legitimate every time a customer makes a purchase.

Smooth Payments

The credit card processing system is also designed to ensure money flows smoothly through the system. Merchant account providers, acquiring banks, and issuing banks all have established relationships with one another, so there’s trust in the system that a bank or merchant account provider will be paid back if it advances funds.

How Long Does It Take To Process a Credit Card Transaction?

Credit card transactions are typically authorised in a few seconds, but settlement can take two to five days. Settlement times vary widely because the issuing bank may want to thoroughly inspect a transaction for fraud before sending funds to the acquiring bank.

The good news for business owners is that you don’t usually have to wait for a transaction to settle to get paid. Many UK merchant account providers advance your business the funds from your credit card sales. So, you can get paid the same day you accept a credit card payment or the next day, even if the issuing bank hasn’t sent funds yet.

What Are the Fees for Credit Card Processing?

Credit card processing fees typically add up to 1.2% to 3% of each credit card transaction. There are three main types of fees:

• Interchange fee: The interchange fee is charged by your customer’s issuing bank. This fee covers the costs associated with checking transactions for fraud and the risk that a customer will fail to pay their credit card bill. In the UK, interchange fees are limited by regulations to 0.3% of a transaction for credit card payments.
• Assessment fee: The assessment fee is charged by the card network and covers the cost of operating payment rails. The assessment fee varies by card network, but it’s usually around 0.07% to 0.12% of each transaction.
• Processor fee: The processor fee is charged by your merchant account provider. It covers the costs associated with managing your merchant account, ensuring your business is compliant with security requirements, and leasing your card readers. Processor fees can range widely and make up the bulk of credit card processing fees.

Fees are deducted from the funds your merchant account provider sends to your merchant account. Your merchant account provider pays the interchange and assessment fees on your business’s behalf.

How Does Debit Card Processing Work?

Processing debit cards is very similar to processing credit cards. Each transaction goes through the same steps of authorisation, payment to your business, and settlement.

There are two notable differences for processing debit card transactions. First, during the authorisation step, your customer’s issuing bank will check your customer’s chequing account balance to ensure they have sufficient funds for the transaction. Transactions will usually be declined if a customer overdraws their account.

Second, during the settlement phase, the issuing bank doesn’t advance any of its own funds to pay for a customer’s purchase. Instead, the issuing bank sends money directly from your customer’s chequing account.