How Credit Card Processing Works in the UK: A Complete Guide

In today’s market, an inability to accept credit and debit card payments will lead to lost sales and disappointed customers. With over three-quarters of all payments now being made by card, and contactless payment becoming the new norm, a business’s failure to process them can make it feel outdated.

The complexity of merchant accounts, point of sale (POS) systems, provider contracts, hidden fees and PCI compliance can feel intimidating, potentially leading to overpaying for a system that doesn’t fit your needs. In this guide, we’ll cut through the jargon to explain how credit card payment processing for small businesses works, break down the costs and provide a clear path to selecting and setting up the right system for your business.

What Is Credit Card Processing — and Should You Offer It?

Credit card payment processing is the electronic system that facilitates the transfer of funds from a customer’s credit card to a merchant’s bank account following a purchase. It’s the behind-the-scenes technology that authorises the transaction and ensures the money reaches you securely.

Offering this payment option has become less of a luxury and more of a necessity for UK businesses of all sizes. The primary benefit is meeting fundamental customer expectations — consumers are now accustomed to the speed and convenience of contactless payments and chip-and-PIN, and many simply don’t carry cash.

By accepting cards, you remove a major barrier at the point of sale, which can boost sales, reduce abandoned purchases, and even increase your average order value (AOV). Additionally, it improves security by reducing the amount of physical cash you need to handle, store and bank, which decreases the risk of theft.

Not accepting cards is a potentially significant loss of business. If a customer is unable to pay with their preferred method, they may abandon their purchase entirely. Similarly, your ability to sell online, by telephone or by mail will be severely limited. Processing credit cards is no longer optional — it’s a requirement for competing effectively in the modern market.

Types of Credit Card Processing for Businesses

The best small business credit card processing solution for you depends on how you sell to customers. The main types include:

• In-store/point-of-sale (POS) processing: For brick-and-mortar merchants, this comprises a fixed countertop terminal or an integrated POS system (like an iPad-based register) that connects to a card reader. These systems can manage high transaction volumes and often include integrated software for inventory, sales reporting and employee management.
• Mobile/card reader processing: Ideal for market traders, delivery drivers, pop-up shops and service-based businesses. These systems use a small portable card reader that connects to a smartphone or tablet via Bluetooth.
• Online/ecommerce processing: For businesses selling online, a digital payment gateway is required. This is a virtual terminal that securely captures card details entered by the customer during checkout. The gateway secures the data via encryption and communicates with the processor to authorise payment.
• Mail order/telephone order (MOTO) processing: This involves manually entering a customer’s card details into a computer. It’s essential for taking orders over the phone or by postal order. These transactions typically carry higher processing fees due to an increased risk of fraud.
• Hybrid/omnichannel processing: Many modern providers offer solutions that combine some or all of these channels. For example, a retail POS system might also generate an ecommerce site and provide a virtual terminal, allowing you to manage both in-person and online sales from a single dashboard.

How Credit Card Processing Works

The credit card payment process involves several key players, including the customer, the merchant, the acquiring bank (your bank), the issuing bank (the customer’s bank) and the payment processor.

So, how does credit card processing work? Let’s break down an example of a typical chip-and-PIN or contactless payment transaction:

1. The customer presents their card: At your terminal, the card is either tapped (contactless), inserted (chip-and-PIN) or swiped (less common now).
2. The payment info is encrypted and transmitted: Your payment terminal encrypts the card’s sensitive data and sends the transaction details to your payment processor.
3. The processor communicates with the acquiring bank: The processor routes the request through the relevant card network (Visa, Mastercard, etc.) to the customer’s issuing bank.
4. The issuing bank authorises or declines the transaction: The issuing bank checks the account for sufficient funds and verifies the card isn’t blocked. It then approves or declines the transaction instantly and sends an approval code back through the chain to your terminal.
5. The transaction is settled and funds are transferred: At the end of the business day, your system batches all authorised transactions and sends them for settlement. The processor facilitates the transfer of funds from issuing banks, minus fees, to your merchant account. Funds are typically deposited into your account within one to three working days.

Debit card transactions follow a similar path, but they often have lower interchange fees as the funds are drawn directly from a bank account. Security is incredibly important throughout this process — encryption protects data, and adherence to the Payment Card Industry Data Security Standard (PCI DSS) is mandatory for any business handling card data, to prevent fraud and breaches.

Credit Card Processing: Core Requirements

How do small businesses set up credit card processing? To start accepting credit card payments, you’ll need to consider each of the following:

Hardware

The type of hardware you need is dictated by how your business operates. Options include:

• Countertop terminals: Wired devices that are ideal for checkout counters. They generally include a simple screen and card reader.
• Mobile terminals: Small, portable card readers that process transactions via Bluetooth or Wi-Fi. These are perfect for market sellers, tableside service, house visits and pop-up shops.
• Integrated POS systems: A wired, full-service checkout solution, typically with a large screen and an integrated or connected card reader. These systems can also include tools like a receipt printer, barcode scanner or cash drawer.

Software

Necessary software tools include:

• A payment gateway: Software that secures data via encryption and transmits that data via the internet.
• POS software: The centre of your operation, allowing you to process payments efficiently. Many providers also offer inventory tracking, customer relationship management (CRM), sales reporting and integrations with accounting software.

Other considerations

It’s crucial to ensure your hardware and software are compatible with your other operations tools. Integrations with accounting software, for example, can save you significant time and money. Most importantly, your chosen terminal and software must work with your processor and bank.

Additionally, maintaining PCI DSS compliance is a legal necessity. This involves following a set of security standards designed to protect customers’ card information. Regular software updates are an important part of this process, as they fix security vulnerabilities and help maintain terminal reliability.

Credit Card Processing Fees

Understanding processing fees is important for maintaining your budget and profitability. These fees aren’t a single flat rate, but a combination of several charges.

This simple credit card processing fees guide breaks down the costs:

Hardware costs

You can often acquire hardware outright or through a lease arrangement from your provider. Some providers may also charge subscription fees.

• Basic mobile reader: £19 – £60 depending on the brand. Some providers may offer a free reader with certain plans.
• Simple tabletop system: £99 – £170+ (depending on brand and features).
• Full POS terminal: £400 – £800+ (depending on brand and features).
• Leasing cost: Typically £10 – £40 per month, depending on your setup.

Software costs

• POS subscription: Generally between £5 and £80 per month, depending on feature set.
• Free options: Some providers offer a free POS app, although features are limited and credit card information generally must be hand-typed.

Processing fees

• Interchange fees: Typically between 0.7% and 3.4% of the transaction value, depending on the credit card type and transaction method.
• Processor markups: Varies by processor, but typically ranges from 0.2% to 0.6% of the transaction.
• Flat fees per transaction: A fixed fee that generally ranges from 10p to 20p per transaction.
• Other fees: Monthly service fees, PCI compliance fees, and chargeback fees, all of which are relatively small and vary by processor.

Comparing Costs Across Top Providers

How To Select a Card Processor for Your Small Business

Choosing a provider is a significant decision and it’s important to consider your options, rather than selecting the first one you find or the one with the cheapest advertised rates. Consider these factors:

1. Pricing model: Understand the difference between a simple blended rate, such as 1.5% per transaction, and a more complex pricing model, such as an interchange fee and a fixed markup. The latter can actually be cheaper for high-volume businesses, but may be less predictable.
2. Contract terms: Try to avoid long, locked-in contracts, if possible, instead opting for a modern provider that operates on a flexible, month-to-month basis. Similarly, early termination fees are a red flag to look out for.
3. Hardware and integration: Ensure the hardware suits your needs, and ideally, the POS software integrates with your existing tools, such as accounting software or an ecommerce platform.
4. Features and extras: Look for value-adding services, like detailed reporting, inventory management, customer loyalty programmes and 24/7 support.
5. Customer support and reliability: Read reviews from other small businesses. When your terminal goes down on a Saturday afternoon, you need a provider with responsive, UK-based support.

How to set up a credit card processing system

Once you’ve chosen the right provider for you, follow these five key steps:

1. Order equipment: Order the right card reader or POS system for your needs. A mobile app can also work if you want to get started right away.
2. Configure software: Set up the POS app or online payment gateway, adding your inventory, tax rates and customising the checkout.
3. Link bank account: Connect your business bank account using your sort code and account number to receive deposits.
4. Run tests: Process small test transactions, like £1, and issue refunds to ensure the system works. Test discounts as well.
5. Train staff and go live: Train your team on the new system, check your Wi-Fi stability and display accepted card logos at your checkout.

How to start accepting payments

Once your system is live, processing payments is simple. Here’s a walkthrough of the most common transactions:

• In-person (card present): For a chip-and-PIN transaction, the customer inserts their card and enters their PIN. For contactless, they simply tap their card or device on the reader. The terminal will display an ‘Approved’ or ‘Declined’ message and provide a receipt.
• Online (ecommerce): A customer enters their card details on your website’s secure checkout page. The payment gateway encrypts this data and authorises the payment behind the scenes before confirming the order.
• Over the phone (card-not-present): You manually enter the customer’s card number, expiry date, and security code (CVV) into your provider’s virtual terminal — a secure portal on a computer or tablet. These transactions typically incur a higher processing fee due to the increased risk of fraud.

Regardless of the payment method, it’s important to maintain PCI DSS compliance. This set of security standards mandates that you use approved equipment, never store sensitive card data (like CVV numbers), and complete an annual self-assessment questionnaire to ensure you’re protecting customer information.