What Is Direct Credit Card Processing? Is It Right for You?

Some providers claim that direct credit card processing saves businesses time and money, but the way that card networks operate means this isn’t necessarily true.

You don’t need in-depth knowledge of the credit card processing ecosystem to choose the right solution for your business. But understanding how this processing works can help you avoid sales traps and make the right choices about the solutions your business needs to succeed. 

In this article, we’ll help you better understand credit card processing, as well as whether direct credit card processing has any benefits over the ‘standard’ method.


What Is Direct Credit Card Processing?

Direct credit card processing is sometimes also known as wholesale credit card processing. This transactional model is marketed as a time- and money-saving opportunity for businesses that accept credit card payments.

The claim is that the companies offering this model reduce the number of interactions and steps needed in order for transactions to be communicated with the card networks. Here, the suggestion is that your business will save on costs by cutting out intermediaries (i.e. processors).

How Does Credit Card Processing Work?

Whenever one of your customers makes a purchase with a credit card, signals are sent from your system in a bunch of different directions. These encoded messages share data between your system and your customer’s card, as well as between banks, merchant service providers, and the card network.

This entire process takes place at lightning speed. In the time between your customer entering their card details and you receiving the approval, these signals have darted all over the country (and possibly the world) to ensure that the transaction is valid. 

Credit Card Processing: The Parties

Before diving into a step-by-step breakdown of credit card processing, it’s a good idea to have an understanding of the parties involved in a credit card transaction.

  • Cardholder: The person who – as the name suggests – holds the credit card. They swipe, dip, or tap their card, or provide their card details (perhaps over the phone or via an online checkout page) to complete a purchase.
  • Merchant: This is you. Or any other seller of goods and services that has a card machine or other payment acceptance method that allows customers to purchase items using their credit card.
  • Acquiring bank: Also known as the merchant bank, this is the bank that holds your merchant account and enables you to accept money via credit card payments.
  • Issuing bank: The bank, credit union or other financial institution that issued the credit card to the cardholder via the card network.
  • Payment processors: Companies that connect merchants, issuing banks, and card networks to facilitate card payments.
  • Card network: These networks (e.g. Visa and Mastercard) communicate transaction information among the merchant, acquiring bank, and issuing bank.

Credit Card Processing: The Steps

Step 1: Authorization

Authorization is all about ensuring that the cardholder has sufficient funds in their account. Here’s how it goes:

  1. Cardholder presents their card or enters their card details
  2. Merchant sends a request to the card network via its payment processor 
  3. Card network forwards the request to the issuing bank
  4. Issuing bank verifies the transaction details (like the card number, expiration date, security code, and payment amount)
  5. Transaction is approved or declined by the issuing bank
  6. Issuing bank communicates its decision to the acquiring bank via the card network and payment processor

Step 2: Settlement

Once the transaction has been authorized, the issuing bank places a hold on the funds that are earmarked for the purchase. Although the cardholder will see a dip in their bank balance, the money hasn’t yet been transferred from the issuing bank to the merchant’s bank account.

At the end of the business day, all of the merchant’s transactions are summarized and sent to the card network by the payment processor. The card network communicates with the issuing bank to release the funds, collects their fees and routes the remainder of the cash to the acquiring bank.

This all happens relatively quickly, but the nature of credit cards means that you often won’t get the full sale amount from a credit card sale. If you have a merchant account, your bank will require that you keep a rolling reserve to store a small percentage of the transaction value in order to accept credit card payments.

Is Direct Credit Card Processing Better? 

In short: no. 

As the financial industry and credit card processing are so highly regulated, direct credit card processing is more of a marketing ploy than anything else.

The biggest claim made by companies that offer direct credit card processing – known as independent sales organizations (ISOs) – is that they are able to work directly with the card networks to get the lowest prices. 

However, only large banks and financial institutions are able to access these card networks directly. The ISOs must still use backend processors to handle credit card transactions.

The Benefits of Using Pay.com as Your Payment Service Provider

When you sign up with Pay.com, credit card payments are a natural start, but you also have the freedom to accept the payment methods that are most popular with your customers – like mobile payments. All you need to do is check the relevant boxes on your Pay Dashboard.

When your client makes a payment, we take care of all the comms to ensure that the funds from your sale land in your account as quickly as possible. What’s more, our flat-rate pricing structure works out to be far more cost effective compared to traditional banks.

Click here to get started with Pay.com now!

The Bottom Line

The bottom line is that direct credit card processing is really just a marketing tactic. Whichever merchant service provider you choose to work with, they will need to use a processor to handle your credit card transactions. 

Rather than opting for the provider that touts the cheapest processing fees, go with one that offers the right mix of services at reasonable prices. Choosing Pay.com, which offers a bundle of services at a flat rate, will give you the freedom to focus on what really matters: growing your business.


What's the best way to accept credit card payments?

Using Pay.com as your end-to-end payment service provider. The quick and easy setup will open up a variety of avenues for accepting payments (e.g. online, via mobile, or even over the phone) for a flat rate in just a few clicks.

What is a direct credit card processor?

Direct credit card processors are banks or other authorized financial institutions that work with card networks (e.g. Visa, Mastercard, Discover, and American Express) to handle credit card transactions.

What are the steps of credit card processing?

The two major steps of credit card processing are authorization and settlement. During authorization, the merchant’s bank or payment processor communicates with the card network and issuing bank to get approval for a transaction. Settlement involves the transfer of funds between the merchant and issuing bank.

Meet the author
Nicole Forrest
Nicole Forrest is a writer and editor who has been using storytelling to help build brands for more than a decade. With a special interest in fintech and a passion for creating compelling content, she focuses on making complex topics easy to understand.
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