Consumers don't realize that their credit card payments involve more than the banks that issued them the card, because there are more than five entities involved in the transaction to mitigate risk, prevent fraud, allow for global compatibility, and ensure regulatory compliance.
When swiping a credit card or debit card at the grocery store or any retail store, you might marvel for a second at how quick and efficient it is to pay for items nowadays.
Payment card transactions seem simple and easy from the customer's viewpoint. But behind such a simple thing lies a maelstrom of activity from various banks, financial institutions, and technology providers, all working seamlessly to provide a great experience for the customer. It's a carefully coordinated process that's invisible and necessary.
In 2025, 88% of the $64 trillion in annual customer expenditure was electronic, according to the Payments & Commerce Market Intelligence report.
Not just banks are involved in these transactions, and customers need to understand the why and how behind them.
The Key Players in a Card Transaction
The average shopper thinks the card transaction involves just two major players: that is, the customer (themselves) and the merchant (the store where they are buying the item).
But there are at least five major entities in a card transaction and sometimes even more.
The Cardholder's Bank (The Issuing Bank)
This is the bank that issued the credit card to the customer (also known as the issuer). They are involved in the following tasks:
- Verifying the cardholder's identity
- Confirming available funds or credit
- Approving or declining the transaction
- Posting the transaction to the customer's account
Now the customer is usually only aware of this bank and nothing else.
The Merchant's Bank (The Acquiring Bank)
Also known as the acquirer, this is the bank that maintains the merchant's account. They are involved in:
- Receiving transaction details from the merchant
- Forwarding them into the payment network
- Ultimately, depositing funds into the merchant's account
These two banks, the issuer and acquirer, might be similar or not; that doesn't matter. You can learn more about the difference between Issuers and Acquirers here.
Payment Networks (Card Brands)
Visa, Mastercard, American Express, and Discover operate the payment rails that connect issuing banks and acquiring banks. These networks:
- Route authorization requests
- Enforce security and compliance standards
- Set interchange rules and operating regulations
Most people who have credit cards are aware of all four of these payment networks, as they dominate the US market.
Payment Processors
These businesses provide the technology that allows transactions to move between banks. They can be affiliated with banks or be separate organizations.
Gateway Providers
In online or mobile payments, gateways act as digital connectors between merchants and processors. They encrypt sensitive card data and ensure safe transmission during e-commerce transactions.
Encryption is big business nowadays, since there are scammers and hackers galore ready to steal hard-earned money from innocent folks. According to Experian, there were nearly 450,000 reports of credit card fraud in 2024.
Why So Many Players Are Necessary
Why there are so many transaction-processing banks involved is not accidental, but strategic. Here are the reasons for hidden banks in card payments:
- Risk distribution: Reduces the risk of widespread failure by spreading it over many different banks.
- Fraud prevention and security: Each bank performs its own checks, which results in a layered approach, reducing fraud.
- Global compatibility: Card payments must work across borders, currencies, and regulatory environments.
- Regulatory compliance: Shared responsibility results in compliance at every step.
Authorization, Clearing, and Settlement Explained
Another few terms that customers have probably heard of in passing, but never understood, are authorization, clearing, and settlement. Here's what they mean:
Authorization
The issuing bank checks whether the transaction is valid and whether funds are available. Approval happens in seconds, but no money moves yet.
Clearing
Transaction details are exchanged between the acquiring bank and issuing bank, typically in batches. This stage confirms amounts and prepares for settlement.
Settlement
Funds move from the issuing bank, through the network, to the acquiring bank and finally to the merchant. This can take one to three business days.
If you wonder why your transactions can go through in seconds, but a refund takes forever, this is the reason why. Every refund has to go through many checks and balances to make it back to your account.
Frequently Asked Questions
Why Fees Exist in Customer Transactions?
You might have noticed, as a customer, that certain stores won't take American Express or will only accept debit cards. This is all done to avoid certain fees. But why do fees exist in the first place?
This is all because of the complexity of the transactional system. The fees compensate issuing banks for risk and fraud protection, and also support the payment infrastructure. The technology and operational costs are also covered by the fees charged to the customer.
How Are Debit and Credit Cards Different?
Even though credit cards are becoming more popular nowadays, in the past, debit cards were the norm. What is the difference between them?
Well, the main difference is that the risk profile is quite different for debit cards compared to credit cards. Since the debit card is pulling money directly from the customer's account, the risk is much higher and requires stricter fraud monitoring.
Credit cards actually extend the risk and, therefore, are a better bargain for the issuing banks. That's why the approval process and fee structure are different for both.
Why Do Consumers Not Notice the Card Transaction Complexities?
The brilliance of the payment card transactions lies in the fact that their complexity is mostly invisible to the customer. We swipe our cards, not realizing that dozens of different transaction-processing banks, payment processors, and other businesses are working in the background to let our payment go through.
The coordination between banks, networks, and processors happens in milliseconds, shielding consumers from complexity while preserving trust.
Payment Card Transactions: Now You Understand the Complexity
Payment card transactions involve far more banks than consumers realize because the system is built for security, resilience, and global reliability.
There is so much more to learn about this complex subject matter, so keep reading through the articles on our website to stay informed.
This article was prepared by an independent contributor and helps us continue to deliver quality news and information.