How Credit Card Processing Works: Authorization, Capture, Settlement and Funding

Who are the parties to a card payment, and what does each one do?

Seven. The cardholder presents the card; the merchant asks for the money; the gateway collects the card details and formats the request; the processor carries the messages; the acquirer holds the merchant account and owes the merchant the money; the card network routes between acquirer and issuer and sets the rules; the issuer is the cardholder's bank, which approves the transaction and ultimately pays. Every card payment involves all seven, even when one company plays several of the roles.

The cardholder and the merchant are the only two parties who experience a payment. Everyone between them exists to answer one question — will the issuer stand behind this transaction — and then to move the money once it has been answered. Reading the list in that order is the fastest way to stop confusing the middle five.

The issuer matters most and is the least visible to you. It issued the card, it holds the cardholder's account, it decides whether to approve, and it is the party that eventually pays the acquirer. When a transaction declines, the decline came from the issuer in almost every case, not from your terminal, your gateway or your processor. Chasing a decline through your own stack is usually chasing it in the wrong building.

The acquirer is the mirror image on your side. It is a financial institution licensed by the card networks to accept transactions on behalf of merchants, it underwrites your business, and it is contractually the party that owes you the proceeds of your sales. That is why a merchant account is an account with an acquirer, and why an unfunded chargeback is the acquirer's exposure before it is anyone else's.

What is the difference between a gateway, a processor and an acquirer?

A gateway is software that captures card details and submits them. A processor is the infrastructure that carries authorization and clearing messages between the acquirer and the card networks. An acquirer is the licensed financial institution that holds your merchant account and owes you the money. The gateway handles data, the processor handles messages, the acquirer handles money and risk. Many providers do all three, which is why the three words get used as if they were one.

The distinction is easiest to hold onto by asking what breaks when each one fails. If the gateway is down, your checkout cannot collect a card at all. If the processor is down, the card is collected and the request never reaches the network. If the acquirer closes your account, everything technical still works perfectly and you still cannot get paid.

It also decides who you call. Gateway problems look like errors at the point of entry: a form that will not submit, a saved card that will not tokenize. Processor problems look like timeouts and intermittent failures across every channel at once. Acquirer problems look like funding delays, holds, reserves and underwriting questions. When one provider is all three, that internal boundary still exists and the support team still routes your ticket along it.

One more distinction worth keeping straight: an independent sales organization or a payment facilitator is none of the three. It sells and services the merchant relationship under an acquirer's licence. That is a commercial layer rather than a technical one, and it changes neither the route a transaction takes nor who ultimately owes you the money.

What happens during authorization, and why is an authorization hold not a charge?

Authorization asks the issuer a question and records the answer. The card details reach the gateway, the processor sends an authorization request through the acquirer and the network to the issuer, and the issuer checks the account, applies its own risk rules and returns an approval or a decline with a reason code. On approval, the issuer reduces the cardholder's available credit by the amount. That reduction is a hold, not a charge: no funds have left the account.

The difference matters because holds and charges age differently. A charge is a completed transaction that posts to the cardholder's statement and can be refunded. A hold is a reservation against an approval that was never captured. If the merchant never captures it, the hold expires on its own after a period the issuer applies under the card network rules, and nothing was ever billed.

This is why a customer sometimes reports a pending amount that later vanishes. An order that authorized and could not be fulfilled, a duplicate attempt, an estimated amount taken before the final total is known — each leaves a hold that resolves itself without a refund ever being issued. Explaining that to a customer is considerably easier than trying to reverse something you never captured.

Some categories authorize an estimate deliberately. A fuel pump, a hotel stay or a vehicle rental cannot know the final figure at the start, so the merchant authorizes an estimated amount and captures the true one later. Visa and Mastercard both publish rules covering how estimated and incremental authorizations must be submitted, and following them is what keeps an over-reserved amount from sitting against a cardholder's account longer than it should.

Why is capture a separate step from clearing and settlement?

Because capture is the merchant's decision and the other three are not. Capture is you telling the acquirer that the sale is final and for how much. Clearing is the network passing that captured transaction to the issuer with the amounts each party owes. Settlement is the transfer of funds between issuer and acquirer. Funding is a further transfer, from your acquirer into your bank account. One step you control, three you only observe.

Capture is usually automatic in person — tapping a card at a counter authorizes and captures in one motion — and usually deliberate online, where an order may be authorized at checkout and captured at shipment. That gap is why an online merchant can cancel an order without ever issuing a refund, and why card-not-present businesses have to make an explicit decision about when a sale becomes final.

Clearing is where the money is counted rather than moved. The network takes the captured transactions, calculates interchange, applies its assessments and produces the net obligation between each issuer and each acquirer. Nothing has changed hands at this point. What exists is a set of figures that both financial institutions agree on.

Settlement is the movement between those institutions. Funding is a different movement, from your acquirer to you, on your acquirer's schedule and net of what it is owed. Merchants routinely treat the two as one event, and that conflation is the source of most reconciliation confusion: your deposit is not the settlement, it is what your acquirer sends you after the settlement it received.

Step by step: who acts at each stage and what moves

The sequence is fixed and does not vary by provider: present, authorize, approve, capture, clear, settle, fund. Each step has one actor who initiates it and one thing that moves — a message, an obligation, or actual funds. Setting them out side by side makes two things obvious: the first four steps move no money at all, and the merchant only ever acts twice.

Step 1 — Presentation. Actor: the cardholder. What moves: card credentials, from a card, phone or checkout form into the terminal or the gateway. No obligation exists yet.

Step 2 — Authorization request. Actor: the merchant's gateway and processor. What moves: a message, travelling from the merchant through the acquirer and the card network to the issuer.

Step 3 — Authorization response. Actor: the issuer. What moves: an approval or a decline, and on approval a hold placed against the cardholder's available credit. Still no funds.

Step 4 — Capture. Actor: the merchant. What moves: an instruction that the sale is final at a stated amount. This is the merchant's last action in the whole sequence.

Step 5 — Clearing. Actor: the card network. What moves: the transaction record and the calculated amounts — interchange to the issuer, assessments to the network, the remainder owing to the acquirer.

Step 6 — Settlement. Actor: the issuer and the acquirer, through the network. What moves: funds, between two financial institutions, for the first time in the sequence.

Step 7 — Merchant funding. Actor: the acquirer. What moves: a deposit into the merchant's bank account, net of the fees the acquirer is owed.

Read down the actor column and the shape of the system appears. The merchant initiates twice and waits five times. The issuer decides once and pays once. Everything in between is the network and the acquirer keeping the books on an obligation that already exists.

Who charges whom at each stage of a card payment?

Three parties take a cut, and each takes it from a different counterparty. Interchange is set by the card network and paid by the acquirer to the issuer. Assessments are set by the network and collected from the acquirer. The markup is set by your processor or acquirer and charged to you. You receive one bill, but that bill is the recovery of two costs your acquirer has already paid, plus whatever it prices on top.

The order is what makes the pricing model matter. Interchange and assessments reach your acquirer as costs already incurred; the markup is the only component two providers can quote differently for the same transaction. Interchange-plus pricing prints those as separate lines. Flat and tiered pricing deliver them combined, which does not make them smaller — it makes them unreadable.

A worked shape makes the stack concrete. Take a single $100 sale — the figure is illustrative, chosen only to show the order of operations. Interchange comes out first and goes to the issuer. The network's assessment comes out and goes to the network. Your processor's markup comes out and stays with your processor or acquirer. What remains is what reaches your bank, and it reaches it inside a batch total rather than as a visible $100 line. The sale amount and the deposit amount are different numbers for a structural reason, not because something went wrong.

How the deduction happens changes your reconciliation more than it changes your cost. Under gross settlement, the acquirer deposits full sale amounts and debits fees separately, usually once a month. Under net settlement, fees come out of each deposit as it is made. The total is the same; the bank statement is not, and a merchant moved from one to the other without noticing will spend a month convinced the pricing changed.

How does Interac debit routing differ from the credit card rails in Canada?

An Interac Debit transaction does not use the credit card rails at all. It is authorized against the cardholder's deposit account and switched through Interac's own domestic network rather than through Visa or Mastercard, and Interac prices it as a flat amount per transaction rather than as a percentage of the sale. The sequence has the same shape; the network, the source of the funds and the basis of the cost are all different.

That flat structure is the practical difference at the counter. On percentage-priced credit, cost scales with basket size. On Interac Debit, a large sale and a small one carry a similar per-transaction cost, so a business with large debit tickets and a business with small ones face opposite incentives — and both will misread a single blended rate that averages the two together.

Many Canadian debit cards are also co-badged with Visa Debit or Debit Mastercard, which is what lets them work on foreign websites where Interac is not accepted. In person, the domestic application is normally the one selected. Which network a transaction runs on determines which fee schedule applies to it, so debit routing is a cost question and not only a technical one, and your reporting should show debit and credit separately rather than as one blended line.

The Code of Conduct for the Payment Card Industry in Canada governs the acceptance side of this. Among the merchant protections it sets out, a merchant may accept a payment card network's domestically issued credit cards without being obligated to accept that same network's domestically issued debit cards, and the reverse. Acceptance is not a bundle you are required to take whole, which is worth knowing before a renewal conversation.

How long does each stage take, and why can nobody quote you a single number?

Authorization is interactive and finishes while the customer is standing there. Everything after it is batched. Capture typically happens at the close of the business day for in-person sales, clearing and settlement run on the network's own cycle, and funding lands on whatever schedule your acquirer contracts for. The order never varies. The elapsed time does, and it is set per acquirer and per merchant rather than published as one industry figure.

So the honest answer to how long it takes is: read your own merchant agreement. Funding timing is a commercial term, not a technical constant. It moves with your acquirer, your risk profile, whether a reserve applies to your account, your bank's own posting times, and whether the day in question is a business day for the clearing system at all.

What you can rely on is the ordering, and the ordering is what reconciliation actually needs. A deposit corresponds to a batch, a batch corresponds to a set of captures, and a capture corresponds to an authorization approved earlier. If a deposit cannot be traced back along that chain, the break is in one of those links — it is not a timing mystery.

One consequence for cash-flow planning is worth stating plainly. The money is not yours when the card is approved, and it is not yours when the batch closes. It is yours when the acquirer funds you. Forecasting from the authorization date rather than the funding date is the most common way a fast-growing merchant surprises itself, and it is entirely avoidable.