How the UK card payment process works

The UK card payment industry is complex, highly technical and is regulated by UK financial authorities. It can be difficult to navigate and understand the card payment processes, regulations and the different merchant services. This guide provides an overview of the UK card payment process and the roles of the organisations active in card processing to be read alongside our other card payments articles.

This is infographic takes the place of the main photograph for the How the card payment process works article.

Shopper created by Gan Khoon Lay, Shop and Bank created by Vectorstall, Credit cards created by jeff, Bank created by Icon Fair, all from Noun Project.

We have set out below the process that needs to be followed to accept card payments in the UK.

In this article

The card payment process

Card payment process: Stage 1 - Authorisation

This infographic shows Stage 1 of the card payment process: Authorisation

Shopper created by Gan Khoon Lay, Shop and Bank created by Vectorstall, Credit cards created by jeff, Bank created by Icon Fair, all from Noun Project.

Authorisation is the process by which the merchant obtains approval for the credit card payment from the issuing bank.

  1. The cardholder makes a purchase from the merchant using their credit card.
  2. The cardholder’s credit card details are taken from the card by the merchant (e.g. inserting a card into a POS terminal and entering the customer’s PIN number, or via a merchant’s ecommerce website) and, together with the details of the transaction, are sent to the acquiring bank (or its payment processor) through the internet or a telephone line.
  3. The credit card and transaction details are forwarded by the acquiring bank/payment processor to the credit card network.
  4. The credit card network clears the payment and requests payment authorisation from the issuing bank.

Note: You will not see an Independent Sales Organisation  (ISO) in this process as they do not process funds but, instead they broker the merchant services agreement between the merchant and the acquiring bank. To avoid additional complication, we have also not shown the mobile card reader companies in this process. They sit as another link in the chain between the merchant and the acquiring bank (assuming that the merchant has an agreement with a mobile card reader company).

Card payment process: Stage 2 - Authentication

This infographic shows the card payment process Stage 2: Authentication.

Shopper created by Gan Khoon Lay, Shop and Bank created by Vectorstall, Credit cards created by jeff, Bank created by Icon Fair, all from Noun Project.

Authentication is the process by which the issuing bank verifies the cardholder’s credit card details and an approval code is sent back to the merchant.

  1. The issuing bank validates the credit card number, checks the amount of available funds and checks a number of other card details. It approves, or declines, the transaction and sends back the appropriate response to the credit card network.
  2. The credit card network sends the approval code (assuming that the transaction has been approved) to the acquiring bank/payment processor.
  3. The acquiring bank/payment processor sends the approval code to the merchant.
  4. The merchant provides the cardholder with a receipt to complete the transaction. The merchant’s payment software (e.g. POS terminal) will collect all approved authorisations to be processed in a ‘batch’.
  5. The issuing bank will place a hold in the cardholder’s account equal to the transaction amount. 

Card payment process: Stage 3 - Clearing and Settlement

Clearing and Settlement are the processes by which the transaction is posted to both the cardholder’s monthly credit card statement and the merchant’s statement.

Part 1

This infographic shows Stage 3 of the card payment process: Clearing & Settlement - Part 1.

Shopper created by Gan Khoon Lay, Shop and Bank created by Vectorstall, Credit cards created by jeff, Bank created by Icon Fair, all from Noun Project.

  1. At the end of each business day, the merchant (via its payment software) sends the approved authorisations in a batch to the acquiring bank/payment processor.
  2. The acquiring bank/payment processor forwards the batched information to the credit card networks for settlement.
  3. The credit card network approves or rejects the transactions and sends each approved transaction to the appropriate issuing bank.

Part 2

This infographic shows the card payment process Stage 3: Clearing & Settlement - Part 2

Shopper created by Gan Khoon Lay, Shop and Bank created by Vectorstall, Credit cards created by jeff, Bank created by Icon Fair, all from Noun Project.

  1. The issuing bank transfers the funds less its fee (the ‘interchange fee’) to the credit card network.
  2. The credit card network deducts its network scheme fee and pays the net funds to the acquiring bank/payment processor.
  3. The acquiring bank credits the merchant account for cardholder’s purchase, less the above fees and the acquiring bank’s own fees, and then transfers the funds to the merchant’s business bank account.
  4. The issuing bank posts the transaction information to the cardholder’s account.
  5. The cardholder receives the statement and pays the bill.

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