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Payment processing basics

What is payment processing? How it works and what it costs

Payment processing is the system that moves money from a customer's card or bank account into your business bank account. Every sale passes through authorization, batching, clearing and funding, and each party along the way takes a fee.

Profit Theory, LLC is not a lender or payment processor. Providers set pricing and terms. Educational only; estimates only; no guarantee of savings or approval.

Last reviewed November 1, 2026

Key takeaways

The core formulas

Cost per sale = interchange + assessments + processor markup

Net deposit = gross sales − refunds − chargebacks − fees

Effective rate = total fees ÷ total card volume

Some providers deduct fees daily from each deposit; others bill once a month. Either way, the effective rate formula works the same.

Worked example (illustrative numbers)

A shop runs one card sale and then looks at the month (illustrative numbers):

  • Sale amount: $100.00
  • Interchange (illustrative): $1.80
  • Assessments (illustrative): $0.14
  • Processor markup (illustrative): $0.30
  • Cost of this sale: $2.24, so the deposit is $97.76
  • Month: $40,000 in card volume and $1,120 in total fees → effective rate = $1,120 ÷ $40,000 = 2.80%

Illustrative numbers only. Your costs depend on your provider, card mix and how you accept payments.

How payment processing works, step by step

Every card payment follows the same path, whether the card is tapped, keyed or entered online:

  • Authorization: the terminal or checkout page sends the card details through the processor and card network to the issuing bank, which approves or declines.
  • Batching: at the end of the day, approved sales are grouped and submitted for settlement.
  • Clearing: the networks route each transaction to the issuer and calculate interchange.
  • Funding: your processor deposits the money, minus fees if they are deducted daily, into your business bank account.

Payment processing systems: the main pieces

A payment processing system is the combination of hardware, software and accounts that lets you accept payments:

  • A merchant account (or an aggregated account under a provider) that holds your processing relationship
  • A point-of-sale terminal, card reader or online checkout
  • A payment gateway for online, invoiced or keyed payments
  • Reporting that shows sales, fees, refunds and deposits
  • Optional ACH, recurring billing, card-on-file and text-to-pay tools

What payment processing costs

Card-not-present, rewards and business cards usually cost more than in-person debit cards. Monthly fees, per-item fees, PCI fees and equipment charges sit on top of percentage rates. That is why the effective rate, not the headline rate, is the number to compare.

Common questions

What is payment processing in simple terms?

It's the service that approves a customer's payment and moves the money into your business bank account, for a fee.

How long does payment processing take?

Approval takes seconds. Funding commonly arrives in one to two business days, depending on your provider, batch time and bank.

Who sets credit card processing rates?

Card networks set interchange and assessments. Your provider sets its own markup and account fees.

Is a payment processor the same as a payment gateway?

No. A gateway securely passes payment data from your checkout; the processor moves the transaction and money through the networks. Some providers bundle both.

What is a good effective rate?

It depends on industry, ticket size and card mix. Track your own rate over time and compare written quotes built from your actual statement.

Know your effective rate

A payments specialist can walk through a recent statement with you, explain the pricing model and whether a change fits how you get paid.

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Estimates only. Results vary. No guarantee of approval, rates or savings.

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