A guide on how credit card processing works in India

Have you ever wondered how credit card processing works in India? When you tap your credit card in a restaurant or uses it for online purchases, how does the payment reach your merchant's bank account?


Credit card processing is a complicated process that is responsible for this money transaction from the customer’s to the merchant’s account.


Credit card is becoming one of the most convenient and acceptable modes of payment in India. You can use it at brick-and-mortar stores and also for online payments.


The number of credit card providers is also constantly growing.


Customers generally focus on the card providers, discounts, interest rates, and payment platforms, and rarely think about credit card processors.


As a customer and business user, it is important to understand more about how the credit card payment system works in India.

Understand the players who are involved in the process


Before getting into the technical process of how credit card processing works, here are the terms and people involved in making a transaction successful when you swipe or use a credit card.

 

1. Customers/card holders

This is the person who owns the card and uses it for making payments.


2. Merchant

The seller or the shop owner who accepts credit card payment systems as a mode of payment.


3. Merchant account

The business account owned by the merchant in a bank. This account allows them to receive payments from their customers and store them in their accounts.


4. Credit card issuer

The bank, financial institution, credit union, or lender that issues the credit card for the cardholder. This issuer provides credit for you to make payments that have to be repaid by the cardholder at the end of the payment cycle.


5. Credit card network

The backbone of the credit card processor which approves the customer applications and governs terms and conditions. Eg. Visa, RuPay, and Mastercard.


6. Payment gateway

The technical platform that connects the merchant to the customer’s banking network. The payment gateway is what redirects the user from the eCommerce site to the banking site to capture account details.


7. Payment processors

They process credit and debit card payments. Without them, the issuing bank, the merchant’s bank, and the card network cannot communicate with each other.

How does credit card processing work?

Here is what happens when the cardholder taps the credit card in a restaurant or uses it during online purchases.


1. Transaction initiation

The customer enters the card details in the payment gateway or swipes them in the physical swiping machine.


2. Encryption of sensitive information

The payment gateway encrypts the entered data and sends it over the network in the form of a token.


3. Processing the transaction

The merchant’s bank receives the tokenized information and sends it to the credit card network for verification after running a quick fraud detection.


4. Authorization and end of the transaction

The card network acts as a router and sends it to the issuing bank. Here, they verify to approve or reject the request based on the availability of credit, validity, card expiration date, etc.


The transaction is complete now and you either receive a receipt (physical payments) or see the payment complete page.


5. Funding and settlement

The payment gateway now sends the authorization approval to the credit card processor, which further sends it to the issuing bank where the credit is withdrawn. This fund is later transferred to the merchant’s bank account.

What are the 4 challenges of credit card payment processing for startups?

Credit cards are used in both personal and business banking transactions.


Particularly for startups, credit cards are the most reliable payment method to obtain credit and manage business expenses.


But the credit card payment system comes with certain drawbacks and complications that are mostly unknown to the payer and payee.


Indian startups are in definite need of payment lending solutions like credit cards that are easy to obtain and use, but the following hurdles make it difficult to choose the right provider and make them wary.

Fraudulent activity

Scammers and hoodwinkers are everywhere. With the least amount of effort, they can either steal your card physically or obtain its details stealthily. And it leads to unauthorized transactions made by people other than the cardholder. In most cases, it’s not even known until you see the card statement. 

 

Though the users are at liberty to cancel unauthorized transactions and get them reported, it can be too late if you fall prey to phishing or skimming attacks.


Phishing is when you submit your card details to a predator’s site and skimming is when you use your card at unapproved ATMs and card machines where a skimmer is installed.


This device is capable of capturing your card details and keys entered to use it illegitimately. 


Multiple payment methods

Let's forget outgoing payments for a while. As a small business, you eventually have to receive payments from your customers.


The ability to attract customers and let them pay using different payment methods and channels are what you need.


An efficient credit card payment processing system should support you in setting up omni-channels to receive payments from customers.


You might be a small business operating from your home now. In the future, if you want to set up your own shop or eCommerce site, your customer should be able to pay you from any payment method they have.


Whether you need a payment gateway, card reader, or phone credit card processing terminal, your payment provider should be able to render that service.


No payment integration support

Unlike personal users, small businesses use credit card details on every platform they buy goods and services.


When there are just a few transactions, it’s okay to manually enter the details every time. However, it’s not feasible to connect the card details with every site you do business with.

 

The accounting team of growing businesses needs smart integrations of payment methods with ERPs, bookkeeping systems, and vendor platforms for a simplified procurement process.


Along with the integration facility, the credit card platform should offer consistent support as well if anything goes down.


Processing fees are high

Your credit card bill doesn’t just include the amount spent through that. There are transaction and processing fees, which are comparatively high in India.


And then there is the interest which you have to incur if the bill is not paid on time.


Typically, the charged interest percentage by dominant credit card payment systems in India is 3 to 5%.


Other fees that you unconsciously pay monthly or annually are maintenance fees, application processing fees, over-limit fees (when you max out the credit limit offered to you), and balance transfer fees (when you transfer the balance from one credit card to another). 

 

Credit cards offer more rewards, cashback, and platform-based offers than any other payment mode. To compensate for all these is also why credit card platforms are charging more.

What are the fees and costs for credit card processing?

Credit card processing systems are expensive to set up and operate.


Merchants who gain payments through debit or credit card processing bear these fees and are liable to pay the card networks and issuing banks.


Depending on the credit card processors (Mastercard, RuPay, Visa), the fee percentage changes. 


1. Payment processor fees

Depending on the payment pricing model chosen by the merchant and the risk associated with the processed payment, the merchant is liable to pay a fee which is the payment processor fee.


Transactions that are made with the help of high-end technology and happen online are charged more due to the high-risk factor involved compared to the physical swipe transaction.


The payment processing fee is the generic umbrella term that includes different credit card payment processing charges.


2. Interchange fees

This is the highest credit card processing fee category. Card networks express this in percentage with an addition of a fixed amount along with it.


Since card networks are responsible for getting the payment request authorized and processed from the card-issuing bank, the interchange fees are used to cover that.


Interchange fees are frequently changed by the card networks. The factors that decide the interchange fees are the type of card used for transactions, the size of the business, and the transaction type (whether it’s an online order or the card is scanned). 

 

MCC (Merchant Category Code) also plays a role in deciding the interchange fees.


Each merchant who allows credit card payment systems are given a code depending on the industry they fall under. So, customer transactions are categorized based on the merchant coming from and charged variably. 


3. Tiered fees

Not all customer payments are made using the same payment method. A merchant can opt for a bundled pricing system to reduce the additional fees charged.


In this payment structure, different interchange fees for different kinds of payments are grouped based on the risk factors and charged accordingly.


There are three tiers, qualifier rate, mid-qualifier rate, and non-qualifier rate. Higher processing fees are charged as the tier further goes down. 

 

Qualifier rate - Ideal payments with zero or low-risk rates that are easy to process and meet every requirement of the payment processor fall under the qualifier rate. Eg. A standard credit card is swiped into a terminal to make the payment.


Mid-qualifier and non-qualifier rate - Payments that don’t meet the requirements set by the payment processor fall into the lower-level categories. Eg. On-the-Phone transactions without the presence of a credit card. 


The highest amount of fees is charged for the non-qualifier category. Payments made using no-signature cards or reward cards fall under this category.


4. Assessment fees

This fee is the smallest amount of credit card processing fee that the cardholder has to pay directly to the card network like Visa, Discovery, Mastercard, etc.


It varies from 0.11% to 0.15% depending on the network your card falls into, with Amex charging the highest of 0.15% of assessment fees. This fee depends on various payment factors.


If the merchant has opted for the bundled pricing system, the assessment fee is negligent or zero because that would be replaced or compromised with another item.


5. Merchant account provider fee

The merchant needs a bank account that receives and collects the money paid by their customers through their credit card transactions.


To maintain this account and let the deposit happen, the merchant has to pay a nominal fee to the bank. The amount depends on the number and type of transactions and their volume. 

3 ways to lower your credit card processing fees

Higher credit card processing fees may sound unfair both as a merchant and a customer.


With cards becoming the most common and convenient way to make payments, the overall processing fee you pay might become unaffordable one day.


Here is what you can do to keep the credit card processor fees at the limit.


Switch to a better pricing model

Payment processors know how to cajole merchants to accept bundled pricing models to pay fixed processing fees. But this is hardly transparent as you have no idea why the charges are for.


Rather than going for a bundled pricing system, you can choose a flat rate or interchange model where you pay dynamically but clearly know why you pay it.


Avoid credit card fraud

The merchant holds a higher responsibility to protect the cardholder from undergoing a risk of fraud and thereby assuring the card network and credit card processor system with a low-risk transaction.


Keying in card details and using other options than physically swiping the card triggers the transaction as risk-associated and lets you pay more.


Swipe cards if possible instead of using scanner devices.

 

Also, the merchant can validate the payment before it goes into the credit card payment processing phase by entering a pin code and security code. Don’t forgo this stage while accepting the credit card payment method.


Negotiate the markup fees with the credit card processors

Among the entire credit card processing fees list, markup fees are the only charge which is negotiable.


Markup fees are the profit margin for the credit card processor companies and they include a specific percentage of the total processing fee (around 20 to 25% depending on the provider). 

 

Merchants are at the liberty to discuss and negotiate this fee and check with different processor networks to find the one with the best deal.



Suggested read: How to get a corporate credit card in India?

Difference between credit card issuer and credit card network

In simple terms, a credit card issuer is a bank or financial institution that distributes credit cards to customers and lends credit to use.


Whereas, the credit card network is the backend operator that makes the transaction happen and acts as a bridge between the merchant who initiates a payment request and the card issuer who is in the position to release funds.

 

Examples of credit card issuers in India - Banks like SBI, HDFC, Kotak Mahindra, Standard Chartered, etc.


Examples of credit card networks in India - Visa, Mastercard, and Rupay.

 

Card networks undertake the most important operation of credit card payment processing, which is capturing and transferring sensitive banking information safely to the issuer bank.


On the other hand, the issuer works on fund movement, approving or rejecting the transaction based on credit availability and other factors.

 

A card network gains profit based on the processing fees it sets and collects from merchants who are at the receiving end of the transaction.


A card issuer gets profit through maintenance charges, interest, and other charges they make the cardholder liable to pay.

 

From the cardholders’ point of view, card issuers are the primary contact points.


From applying and qualifying for a credit card to collecting reward points to reporting concerns, they reach out to the card-issuing bank only. 

 

Yet, there are certain companies that do both the above tasks together. They issue cards as well as maintain credit card processing networks.


One well-known example that operates in India is American Express. They are a card processing network, but they also issue credit cards.

Why should you choose Volopay?

As a business owner and merchant in India, you need a powerful accounts payable system that lets you pay money without chaos.


You also need a reliable and trackable payment processing system that settles down your vendor payments on time, keeps track of the payments and does automated invoice processing.


An all-in-one solution that can do the above-discussed tasks automatically is Volopay. You can automate every function of your accounts payable team with Volopay.


It has strong AP automation, expense reporting and reimbursement system, customizable approval workflows, budgets, and accounting controls. virtual cards, Bill Pay to make super-fast local and international transactions, in-built, no-collateral credit, and competitively low fx charges.


Smart corporate Visa cards

We have seen how safe, strong, and fast the Visa credit card payment processing network is. Volopay has a card management system with which you can create an unlimited number of virtual cards and use them for business transactions, and online and vendor payments.


These cards operate through the credit card payment processor Visa which enables highly encrypted, speedy, and successful transactions.

 

Load your Volopay wallet or borrow credit within the application and spend that through cards.


Volopay quickly validates your credit application, approves, and adds the credit to your account for usage. You can repay the used credit at the end of the billing period. 


Suggested read: Guide to corporate credit cards in India

Spend with complete control and visibility

The more you excise control on your accounts payable, the more you save.


Use budgets to cap the expenses of different departments or expense categories and connect every outgoing payment with the budgets created to track how close you are to exhausting them.


For any spending beyond the set budget, approvals will be needed which brings you in the control again. 


Monitor your expenses from a centralized point of view

See the list of expenses, related departments, and vendors you have made the payments to, with the Volopay dashboard.


You can derive many useful insights, identify the expensive categories, find anomalies, patterns, and similarities, and even draw budget conclusions. This way, you always know how much you spend and how to use the remaining resources wisely.

Manage vendor payments and employee expenses with corporate cards