How do card payments work?

Who is involved in a card payment?

A card looks like a simple deal between you and a shop. In fact, a Federal Reserve Bank of Philadelphia tutorial on card clearing describes five parties in a typical transaction:

• Cardholder: you, the person or business paying.
• Merchant: the shop or website accepting the card.
• Acquirer: the merchant's bank, which signs the merchant up to accept cards and sponsors it into the network.
• Issuer: your bank or card company, which issued the card, holds your account and decides whether to approve each payment.
• Card network: the scheme whose logo is on the card. It carries messages between acquirers and issuers and organizes settlement between them.

Payment processors and fintech card terminals often sit between the merchant and the acquirer, but the core chain stays the same. That is why a small café using a phone-based card reader can accept the same card as a supermarket.

What happens between the tap and the money arriving?

The process has three stages, and only the first one happens while you wait at the till.

1. Authorization. The terminal sends the card details and amount to the acquirer, which passes them through the network to the issuer. The issuer checks that the card is valid and that funds or credit are available, then sends back approve or decline.

2. Clearing. The Philadelphia Fed defines clearing as the nonmonetary exchange of transaction information. The acquirer submits the final transaction details so each bank can record it. For signature-style "dual-message" transactions this typically happens within a day; for PIN debit, authorization and clearing happen together.

3. Settlement. Money actually moves: the issuer pays the acquirer, minus interchange, through the network's settlement process. The acquirer then pays the merchant, minus its own fees.

Who pays the fees on a card payment?

The cardholder usually pays nothing extra at the till. The merchant pays to accept cards, through what the Philadelphia Fed calls a merchant discount fee charged by the acquirer. A large part of that cost is the interchange fee, which flows from the acquirer to the issuer on most sales.

Some interchange is capped by law. In the US, the Federal Reserve's Regulation II limits debit card interchange at issuers with $10 billion or more in assets to 21 cents plus 5 basis points (0.05%) of the transaction, with up to 1 more cent for issuers that meet fraud-prevention standards. Smaller issuers are exempt, and US credit card interchange is not covered by this cap. The Fed's own data for 2024 show covered debit transactions averaged $0.23 in interchange (0.47% of the average sale), against $0.51 (1.21%) for exempt issuers.

In Europe, the Interchange Fee Regulation caps interchange on consumer cards issued and used in the region at 0.2% for debit and 0.3% for credit, according to the European Commission.

How are credit, debit and prepaid cards different?

All three travel over the same networks, but whose money is spent, and what happens when something goes wrong, differs.

Prepaid cards draw on money loaded in advance. Their protections depend on the card's terms and on the rules for that product, so read the card agreement.

What can you do if a card payment goes wrong?

US law gives credit card users specific rights to dispute billing errors. According to the FTC, a billing-error dispute letter must reach your issuer within 60 days after the first bill containing the error was sent. The CFPB adds that the card company must acknowledge your dispute in writing within 30 days.

For lost or stolen cards, speed matters most with debit. The FTC explains that if you report a lost debit card within two business days, your loss is limited to $50; after that, up to $500; and if you wait more than 60 days after your statement is sent, you could lose everything taken from the account.

What mistakes do people make with card payments?

• Waiting to report a lost debit card. Liability limits widen with each day of delay.
• Missing the 60-day dispute window. Read statements every month, not only when you spot a problem.
• Assuming "pending" means final. A pending charge is approved but not yet settled; check the final amount on your statement.
• Accepting currency conversion at the till abroad without checking the rate. Compare the rate you are offered using our currency conversion fee calculator.
• Sharing card details by message. Treat any text or call asking for your full card number and security code as suspicious, and call the number on the back of your card instead.