Guide on how credit card processing works

For most businesses in New Zealand, taking credit cards is an essential part of getting paid. However, the actual process can be confusing for business owners and teams. There’s lots of moving parts, with the systems that support card payments involving multiple players and fees that aren’t always immediately obvious.

Getting a handle on how it all works is important. It will help you to make informed decisions about the methods you can use to accept card payments and reveal where there may be opportunities to reduce costs along the way.

In this blog, we’ll break down credit card processing in full detail, looking at key terms and steps involved, some of the common fees, and how you can find the right setup for your business.

What is credit card processing?

Credit card processing is a system that allows a business to take a credit card payment from a customer at an online checkout or physical card terminal and then receive the funds into its bank account. When a customer pays using a credit card, there are several behind-the-scenes mechanisms that check and approve the funds so the payment is settled quickly and securely.

Card payments account for 90% of all payments in New Zealand¹, so it’s a baseline expectation for pretty much every business, from cafes to consultants, to accept and process debit and credit cards online or in store. Catering to these customer preferences is important: it can increase sales, vastly improve checkout experiences, and help businesses get paid faster.

Key credit card processing terms explained

Under the hood of credit card processing lies a number of parties and technologies that connect the dots and make the whole thing work. These key terms will help you to understand who’s involved and how a card payment moves from a customer to your business.

• Cardholder - your customer who completes the purchase using a debit or credit card issued by a bank or financial service provider.
• Merchant - you, the business that accepts the card payment from the customer.
• Point of sale (POS) - where the card is used to make the payment. It can be a physical terminal, online checkout system, or mobile app.
• Issuing bank - the cardholder's bank, which approves or declines the transaction.
• Acquiring bank - the merchant’s bank, i.e. your bank, which processes credit card transactions.
• Card networks - Organisations like Visa and Mastercard that set the rules and provide infrastructure for card payments to work.
• Payment processor - the service that routes all the important transaction data between banks and card networks.
• Payment gateway - the technology that gets the payment data from the merchant to the payment processor.

Also, it’s important to note that credit card processing is an umbrella term** for handling both credit and debit card payments**, as they run through the same infrastructure.

Steps involved in credit card payment processing

All of these terms refer to what happens in the background during card processing. Before we cover all the steps, here’s a simple horizontal flow chart to illustrate the journey from start to finish:

Now, let's look at each step in turn.

1. Customer initiates payment

Before all the processing gets underway, it starts with the cardholder initiating the payment by either tapping or inserting their card at a terminal, or entering their details online and completing a purchase.

2. Payment details are encrypted and sent

Next, your POS system or payment gateway gets the card info and transaction amount, and encrypts all the details, before sending them to your payment processor. This all happens instantly and securely to prevent fraud.

3. Acquirer forwards details to card network

Your acquiring bank now carries the baton, passing off the transaction details to the relevant card network (Visa, Mastercard, etc.). The network acts as an intermediary here, routing the request to your customer’s issuing bank.

4. Issuer approves or declines

The issuing bank now does a few checks to see if the customer has enough funds or credit available to complete the transaction, while also verifying the card hasn’t recently been reported stolen and running its own fraud detection checks. Based on these checks, it then gives the transaction a green or red light. This all happens in milliseconds; it’s incredibly fast.

5. Response travels backs

Now it’s time for a quick return journey. The approval or decline decision makes its way back through the card network to your acquiring bank, then to your payment gateway, and finally the POS system. If everything’s good, your customer sees “approved” on the screen and gets a receipt.

6. Transaction is captured

Everything up to this point has taken seconds (if that). The customer’s account is debited almost immediately, but there’s a little longer to wait for you to receive the funds. All the approved transactions are usually batched and sent for settlement at the end of each business day.

7. Funds are settled

Finally, the issuing bank sends funds through the card network to your acquiring bank, which deposits the money minus any fees into a business account. This usually takes around 1 to 3 business days in New Zealand.

Common types of credit card processing fees

When a customer pays by card, the fee you’re charged is actually made up of several smaller costs, each for a different party involved in the transaction.

• Interchange fees - the biggest chunk of your overall fees, these are an amount your bank pays to the customer’s bank. In New Zealand, interchange fees for domestic personal credit cards were recently capped at 0.30% for in-person credit card transactions and 0.70% for online transactions³.
• Assessment fees - charged by card networks like Mastercard for using their infrastructure.
• Processor markup - your bank or payment processor’s fee for handling transactions, as well as reporting and customer support.
• Transaction fees - flat per-transaction charges, typically around $0.20 or $0.30, charged in addition to any percentage-based fees.

In practice, all these fees are often bundled together as a single percentage of between 1.5% to 3% per transaction. This is why people commonly refer to a “3% credit card fee.” The exact percentage you pay will vary on factors such as the card type and the pricing agreement with your provider.

As a business, you’ll be responsible for paying these fees directly, but you can pass the costs on to customers as a ‘surcharge’, given that it meets certain regulations in New Zealand.

How does credit card payment processing fees look for small businesses

It’s understandable that small businesses are wary of credit card payment processing fees that eat into profits. The New Zealand Commerce Commission states that merchants spend approximately $1 billion every year to accept card payments via Visa and Mastercard². That’s a huge chunk of money.

However, credit card processing fees exist because there are multiple parties that all play a part in making a transaction happen. Each player, from card networks to banks, takes a cut for their role in getting money from a customer’s account to yours without fuss, securely every time.

While it might seem frustrating, think of it as the price of offering customers the payment convenience they expect and need to buy something from you.

The merchant service fee (MSF) you pay is structured to reflect how these costs are shared across the payment card ecosystem.

Factors influencing credit card processing fees

As we mentioned, the exact amount you’ll pay for credit card processing services depends on a range of factors, some of which you have control over, and others that are linked to your business type and industry.

• Business type - industries deemed higher risk may have to pay heftier fees. For example, e-commerce businesses exposed to card-not-present (CNP) risks are likely to have higher fees than a retail-only store.
• Transaction volume - getting through higher volumes of transactions can qualify you for better rates, as you’ll have more ‘leverage’ to negotiate with payment processors.
• Average transaction value - small-ticket transactions generally cost more proportionally than larger average transactions.
• Payment method - interchange fees are higher for online transactions and international cards compared to in-person chip and pin transactions.
• Card mix - consumer and business credit cards have different fee structures. You’ll typically pay higher fees for premium and rewards cards because the issuing bank is funding the reward points and passing the cost on.
• Pricing model - payment processors also structure their fees differently. Some use tiered pricing, while others offer flat-rate or interchange-plus pricing structures.

Finding the right credit card processing services for your business

You can use the previous factors to inform your decision when choosing a credit card processing service. Obviously, headline rates are important, but try to look for a well-rounded offer covering the points below:

• Transparent pricing - avoid processors who hide fees in confusing tiered structures. The fees should be clearly explained upfront.
• Security and compliance - your payment processor should be PCI DSS compliant, the gold standard for global security, and have strong fraud detection and prevention tools in place.
• Customer support - look for New Zealand-based support during business hours so you can talk to someone if anything goes wrong.
• Integration - compatibility with your POS and other software (accounting, e-commerce platform, etc,) will make everything flow smoother.
• Contract terms - be wary of long-term contracts that lock you in. A month-by-month agreement with transparent exit terms might be best, especially for small businesses.

Beyond payment processing: Wise Business

Once your credit card processing is complete and the funds are ready for settlement, a Wise Business account can help solve the logistical hurdle of where that money goes next. Businesses can get access to NZD account details to receive payouts from your payment processor or e-commerce platform.

Expanding a business globally opens up exciting opportunities, but also new challenges like receiving payments across borders. Hidden foreign transaction fees and hefty currency conversions involved with international payments can eat into your profits and time.

Wise Business serves as a cost-effective solution where you can receive money from around the world at the speed and price of local payments.

Transform the way you receive payments with Wise Business:

• One-time fee of 40 NZD for local account details in 8+ currencies, including AUD, NZD, USD, and more—no recurring fees
• One account to hold, send, and convert money with no hidden fees or exchange rate markups
• Create and send professional invoices directly to your customers through Wise Business
• Create payment links to request money in specific currencies
• Seamlessly receive payments from customers, online sales, or PSPs like Stripe and Amazon.
• Wise is safe and secure - Trusted by 13 million people and counting

Sign up for the Wise Business account! 🚀

This general advice does not take into account your objectives, financial circumstances or needs and you should consider if it is appropriate for you.

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Credit card processing FAQs

1. Who bears the cost of credit card processing fees?
The merchant typically pays credit card processing fees, not the customer. Most businesses usually opt to absorb this expense, but you can choose to pass on the fees as a surcharge. However, the New Zealand Commerce Commission recently announced strict new rules about this practice, such as being fully transparent about the costs⁴.

2. What is the best credit card processing service for small businesses?
There’s no single, de-facto ‘best’ option for every small business. However, those processing under around $10,000 per month may benefit from the simple fee structure offered by flat-rate service providers, rather than interchange-plus, which is better suited to higher volumes. The right choice also depends on the industry you operate in and if you take payments mostly in store or online.

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Sources:

1. Consumer org NZ - Payment technology
2. ComCom Govt NZ - Retail payment system PDF
3. MinterEllison - New Zealand Payment System update: Interchange fee regulations
4. Commerce Commission New Zealand - Surcharging