How Do Credit Cards Work? A Guide to Restaurant Payment Processing

It turns out that the old adage “cash is king” doesn’t quite hold up anymore. In 2019, 54% of all payments in the U.S were done by either debit or credit card — up 9% from 2016. Meanwhile, cash payments remained unchanged in 2019 at 26% after falling 5% in 2018 from 31%. 

This increase in debit and credit card use comes as no surprise as restaurant operators and diners become more comfortable with technology and less reliant on cash. 

On the surface, these debit and credit card transactions seem simple enough: a customer's card is inserted, tapped, or swiped at a restaurant’s card reader — or is entered manually (keyed-in) such as for an online or phone order — the card is then either approved or declined, and the sale is carried out as long as the card is approved for payment.

What most people (customers and restaurateurs alike) don’t realize is that each debit and credit card transaction actually consists of many underlying steps involving multiple banks and regulating entities. When you list out all the steps involved, a seemingly simple transaction can actually be pretty confusing.

But don’t worry, this article seeks to eliminate that confusion by providing a simple view of what happens when a restaurant carries out a debit or credit card transaction.

Restaurant Payment Processing Key Terms and Entities

Let’s start by defining some of the key terms and entities that are involved with every debit and credit card transaction.

• Cardholder: This is an easy one. The Cardholder refers to the owner of the card, who is usually the guest, making a purchase with a debit or credit card.
• Merchant: Another easy one. The Merchant is the business selling goods and/or services to the Cardholder and is the one accepting credit/debit cards as payment (like your restaurant). Merchants aren’t required to accept credit/debit cards, but a vast majority do.
• Processor: A Processor provides Merchants with technology and payment processing services that enable businesses to accept debit and credit card payments. A Processor can be a third party, an independent organization, or an extension of a Merchant’s Acquiring Bank. In some cases, the Processor may also provide the devices (often called terminals, like Toast’s POS and Toast Go 2) that accept payment cards. 
• Acquiring Bank: An Acquiring Bank (also known as a Merchant Bank) is the financial institution that maintains the merchant’s bank account. The contract with the acquirer enables merchants to process credit and debit card transactions. The acquiring bank passes the merchant’s transactions along to the applicable issuing banks to receive payment.. Depending on the set-up, a Merchant’s Acquiring Bank can also be a Merchant’s Processor.
• Card Networks: Card Networks (also known as Card Brands and Card Associations) are the organizations that own and operate the networks that process debit and credit card transactions and may set interchange, discount, and/or other processing fees. Card Networks provide the “rails” that facilitate debit and credit card transactions — think of them like pathways or plumbing. The most common Card Networks in the U.S. are Visa, Mastercard, Discover, and American Express.
• Issuing Bank: An Issuing Bank (also known as a Card Issuer or Card Issuing Bank) is a bank or financial institution that issued the debit and credit card involved with a transaction to the Cardholder. Issuing Banks are the entities that ultimately approve or decline transactions. American Express and Discover are both card networks, but also act as their own respective Issuers.

How do restaurant credit card transactions work?

Now that you’ve met the players and familiarized yourself with some key terms, let’s dive into an overview of the steps involved for payment card processing. 

There are three key areas in the debit and credit card transaction process: authorization, authentication, and settlement. Let’s break each of these areas down into clearer steps and look at how the various parties come into play.

The following looks at how cards that are physically presented (“card-present” transactions) are processed. For debit or credit card transactions where the card is not physically presented for processing, the process is similar, but the process starts online, via a mobile device, or through the restaurant’s terminal, depending on how the card information is entered. Many restaurants are using online ordering, QR codes and other cardless transactions to minimize customer/staff interaction. Please see our guide to card-not-present transactions for more information on these transactions. 

Authorization 

The authorization step of the transaction process begins the moment that a customer presents the restaurant they are patronizing with their debit or credit card, then:

• The card is swiped, dipped, or tapped at the payment terminal. The terminal instantly and electronically sends the Cardholder’s card details to the Acquiring Bank.

• The Acquiring Bank receives the Cardholder’s card details from the Terminal and sends these details to the corresponding Card Network.

• The Card Network inspects the card details and sends an authorization request — which includes information such as the card number, expiration date, security code, the Cardholder’s billing address, and the transaction amount — to the Issuing Bank.

Authentication

Now that the Card Network has communicated with the Issuing Bank:

• The Issuing Bank verifies the validity of the payment card and checks to see if the Cardholder has the requisite amount of available funds.

• The Issuing Bank then either approves or declines the transaction and sends the result of the authorization request back to the Merchant through all of the same channels.

• After receiving the result of the authorization request, the Merchant creates a receipt and provides it to the Cardholder, signifying the end of the transaction process for the Cardholder.

Settlement 

The Authorization and Authentication steps of this process typically take less than a minute to complete, but we aren’t done yet:

• At the end of every day, the Merchant aggregates all approved authorizations for that day into a “batch” that’s sent to the Acquiring Bank.

• The batched information is then sent to the Card Network for settlement.

• The Card Network forwards each approved transaction to the appropriate Issuer. 

• Usually within 24 to 48 hours of the transaction, the Issuer transfers the funds, less any fees which it shares with the Card Network.

• Finally, the Acquiring Bank deposits the Merchant’s hard-earned money (minus any processing or service fees) into the Merchant’s bank account.

And that’s the end of the transaction process. Not too complicated, right?

Making Sense of Restaurant Debit and Credit Card Transactions

As we outlined above, the debit and credit card transactions happening in your restaurant every day involve many steps and many different players associated with them. If you have any additional questions regarding debit and credit card transaction fees, check out our Processing Fees Explained page as well as some of our other resources on owning and operating a restaurant, and don’t hesitate to reach out to us to chat with an expert.