Payment processing, whether in-store or online, happens so quickly that it seems effortless.

But as many merchants know, there’s a lot going on behind the scenes to keep payments moving without friction.

In this article, we’ll cover the fundamentals of payment processing, outline the players involved and discuss the technology behind it all.

Key players in the payment ecosystem

When a payment is made, these entities work together to complete the transaction:

• The cardholder – The customer initiating the purchase.
• The merchant – That’s you—the business requesting the funds.
• The card networks – Visa, Mastercard, American Express and Discover set transaction rules, manage infrastructure and determine interchange rates.
• The issuing bank – The customer’s bank (the one that gave them the card).
• The acquiring bank – Your bank. They hold your merchant account and take on the risk of your transactions.
• The payment processor & gateway – The technical "middlemen." The gateway encrypts the data at the point of sale, while the processor routes that data between the various banks and networks.

With hundreds of terms specific to payment processing, things can get confusing. Reference this Payments Dictionary for a simplified overview.

How a card transaction actually works

A card payment might feel instant, but it goes through several distinct steps before money lands in your account. 

Step 1: Authorization

The first step is when the transaction is initiated. The customer taps a card, inserts a chip or enters their details online.

The payment gateway encrypts the data and sends it to the processor. Then, the request travels through the card network to the issuing bank.

The issuing bank, for its part, checks a few things. Are there enough funds or available credit? Does the transaction look legitimate? If everything checks out, the payment is approved. If not, then the bank will decline it.

Step 2: Authentication

If the payment is made online, there’s an extra layer of authentication required. Tools like 3D Secure ask the customer to verify the purchase using a one-time code, biometric or banking app. This helps verify that the buyer is the actual cardholder and shifts fraud liability away from the merchant when it’s used correctly.

Step 3: Clearing

Approved transactions are grouped together and sent through the card networks in batches. During clearing, networks calculate the fees owed and route the transaction details to the correct issuing and acquiring banks.

Step 4: Settlement

Settlement is when the money actually moves. The issuing bank releases funds to the acquiring bank after deducting interchange fees. The acquiring bank then deposits the remaining amount into your merchant account.

Funding timeline

Most businesses receive funds within one to two business days. That said, timing may vary by provider and risk profile. Typically, high-risk industries and certain transaction types may experience longer funding delays.

Acquirer vs. processor: What’s the difference?

Acquirers and processors are often lumped together, but they serve very different purposes in the payment flow.

What the acquirer does

The acquiring bank provides your merchant account and takes on the financial risk of processing payments. It handles settlement, deposits funds into your account and manages chargebacks and disputes when they occur.

What the processor does

The processor runs the technical rails. It routes transaction data from your POS or website to the card networks and banks, performs fraud checks, supports EMV and PCI compliance and keeps your hardware and software working properly.

Why are they often confused?

Many modern payment providers bundle acquiring and processing under a single contract. This simplifies setup and support, but it also masks the fact that one entity manages your money while another moves the data. Knowing the difference helps when evaluating pricing, risk and long-term flexibility.

Where the payment gateway fits in

A payment gateway sits at the intersection of your checkout experience and the broader payment ecosystem. It’s the technology that captures payment details, encrypts them instantly and securely transmits the data from your POS system or website to the payment processor.

Whether a customer taps a card in-store or clicks “Buy” online, the gateway ensures sensitive information never moves through your environment in plain text. It acts as a control layer, balancing speed, security and compliance so transactions can move forward without exposing your business to unnecessary risk.

The gateway’s core functions include:

• Secure data capture
• PCI compliance support
• Tokenization and vaulting
• Fraud detection and controls

Fees in payment processing

Processing fees come from multiple players. Some are fixed by banks, while others are negotiable.

Interchange fees - This accounts for the largest cost and it’s paid to the issuing bank for taking on transaction risk. Rates vary by card type, transaction method and industry. Premium rewards or corporate cards cost more and keyed-in transactions have higher fees due to increased fraud risk.

Assessment fees - Paid to card networks (Visa, Mastercard, Discover) to maintain their infrastructure. These are typically small, fixed percentage fees applied to total monthly volume.

Processor and gateway fees - Charged for routing data and maintaining technical connections. These appear as per-transaction fees, subscriptions or compliance charges.

Authorization fees - Charged each time a transaction is sent to the bank, even if declined.

Monthly minimums - Applied if you don’t meet a required volume.

PCI non-compliance fees - Penalties for failing to maintain yearly security validation.

Markup and pricing models

Payment providers structure their markup in a few common ways. Understanding how each model works makes it easier to compare offers and avoid paying more than you should as your volume grows.

Blended pricing

Blended pricing combines interchange, network fees and the provider’s markup into a single flat rate. It’s easy to understand and simple to forecast, but that simplicity often comes at a cost. You pay the same rate for low-risk debit transactions as you do for expensive premium credit cards, which can drive up fees for established or high-volume businesses.

Interchange-plus pricing

Interchange-plus pricing separates the underlying card costs from the provider’s markup, so you can see exactly what you’re paying. You’re charged the actual interchange rate set by the card networks, plus a fixed processor fee. This model is typically more cost-effective for growing businesses and offers greater transparency with fewer pricing surprises.

Membership pricing

Membership pricing (i.e., the one offered at Stax) uses a flat monthly subscription rather than a percentage-based markup per transaction. Interchange is passed through at cost, allowing you to keep more of your revenue as volume increases. This model works well for high-volume merchants that value predictable, transparent pricing.

Tiered pricing

Tiered pricing groups transactions into categories such as “qualified,” “mid-qualified,” and “non-qualified,” each with its own rate. While it may appear straightforward, the final cost depends on how transactions are classified, which isn’t always clear. Without a solid understanding of the tiers, businesses can end up overpaying for routine transactions.

Conclusion

Payment processing isn’t just a technical detail. It directly affects cash flow, customer experience and margins. When you know who’s involved, how transactions flow and where fees come from, you can make smarter decisions about providers and ultimately build a payments setup that works for your business, not against it.