What Square and Stripe do, step by step

Square and Stripe are payment processors—they sit between your customer's bank and your business bank account, taking the transaction apart, checking it's real, moving the money, and putting it back together. Neither one holds the money or makes the final decision about whether to approve a charge. That work is split across four separate entities, and understanding which one does what explains why refunds take time, why some transactions fail, and what you can actually control.

Here's the actual sequence: A customer enters a card number on your website or in-person terminal. Square or Stripe receives that data and when ready sends it to an acquiring bank—the bank that holds your business account. The acquiring bank forwards the request to the customer's bank (the issuing bank) through a network like Visa or Mastercard. The issuing bank says yes or no based on available funds and fraud rules. That answer comes back through the same path in seconds. If it's yes, Square or Stripe deposits the money into your account, usually within one to three business days. If it's no, the transaction fails at the point of sale.

Square and Stripe make money by taking a percentage of each successful transaction—typically 2.2% to 2.9% plus a flat fee per transaction, though rates vary by business type and payment method. They also charge monthly for features like invoicing, payroll, or advanced reporting. The processor's job is to move the data reliably and fast, not to decide whether you should get paid.

Key Takeaways

  • Square and Stripe do not approve or deny transactions—the customer's bank does, based on available funds and fraud signals.
  • Money moves from the customer's bank to your bank account through the processor, usually arriving one to three business days after the transaction.
  • Refunds reverse the transaction at the processor level but still require the customer's bank to send the money back, which adds another one to three business days.
  • Chargebacks and disputes are handled by the customer's bank and the card network, not by Square or Stripe, though the processor provides the evidence.
  • Fraud detection happens at multiple points—the processor screens for obvious patterns, but the issuing bank makes the final call on whether to block a card.

How the four entities divide the work

A single transaction involves four separate organizations, and confusion about who does what is the main reason people think processors are slower or less transparent than they actually are.

Your acquiring bank holds your business account and is responsible for settling funds into it. They also set the rules for what kinds of transactions you can process—some banks won't work with certain industries like cannabis, gambling, or high-risk goods. If your acquiring bank decides you're too risky, they can terminate your account, and Square or Stripe cannot override that decision. Your acquiring bank is also the one that can freeze your account if they suspect fraud or money laundering.

The customer's issuing bank decides whether to approve the charge based on the cardholder's available balance, spending patterns, and fraud rules they've set. If the customer's bank sees a transaction that looks unusual—a charge from a different country, a purchase much larger than normal, or a pattern matching known fraud—they can decline it without telling the processor why. The customer then sees "declined" at checkout, and that's the end of the transaction.

The card network (Visa, Mastercard, American Express, Discover) is the infrastructure that carries the message back and forth. They also set the rules that both banks must follow—how long a refund can take, what counts as a valid dispute, what fees can be charged. The network does not move money; they move information.

Square or Stripe is the messenger and the record-keeper. They format your transaction data so the acquiring bank can understand it, send it to the network, receive the response, and log everything in your dashboard. They also run basic fraud screening—checking for obviously stolen card numbers, mismatched addresses, impossible transaction patterns—before the request even reaches the acquiring bank. If they catch something suspicious, they can decline the transaction themselves, but this is rare and happens only when the risk is very high.

Why refunds take longer than charges

A charge appears in your customer's account within hours because the issuing bank is just checking a balance and saying yes or no. A refund takes longer because money actually has to move, and it moves through the same four entities in reverse, each one taking time to process and verify.

When you issue a refund through Square or Stripe, the processor sends a reversal message to your acquiring bank, which forwards it to the customer's issuing bank. The issuing bank then has to credit the customer's account. This process typically takes one to three business days, though some banks take up to five. The delay is not Square or Stripe holding the money—it's the banking system itself. Once the processor sends the reversal, they have no control over how fast the issuing bank moves.

If you refund within 24 hours of the original charge, some processors can mark it as a reversal instead of a refund, which is slightly faster because the money never fully settled into your account in the first place. After 24 hours, it becomes a standard refund, and the full banking timeline applies. You can see which path your refund took in your processor's dashboard, but you cannot speed up the issuing bank's side of the process.

Fraud detection and who stops what

Fraud prevention happens at three separate checkpoints, and understanding which one catches which type of fraud explains why some scams slip through and others are blocked when ready.

Square and Stripe run the first screen. They check whether the card number is in a known-stolen database, whether the billing address matches the card's registered address, whether the transaction amount is wildly out of proportion to the merchant's typical sales, and whether the same card is being used for multiple transactions in impossible locations within seconds. This screening is automated and happens in milliseconds. If the processor flags something, the transaction is declined before it reaches the acquiring bank.

The customer's issuing bank runs the second screen. They have years of data on that specific cardholder's spending patterns, geographic location, and purchase history. If a charge looks inconsistent with that history—a person who never buys online suddenly making a large online purchase, or a card being used in two countries simultaneously—the issuing bank can decline it. This is why the same transaction might be approved for one customer and declined for another, even if both are using the same processor.

The card network runs the third screen, though this is mostly about monitoring trends and updating fraud rules rather than blocking individual transactions. If Visa detects a pattern of fraud across many merchants, they update the rules that issuing banks use, which then affects future transactions.

Chargebacks and disputes are different from fraud prevention. A chargeback happens after the transaction has already been approved and settled. The customer contacts their bank and says they didn't recognize the charge, the item never arrived, or the merchant charged them twice. The issuing bank then pulls the money back from your acquiring bank and gives it to the customer. Square or Stripe can provide evidence that the transaction was legitimate—receipts, shipping confirmation, customer communication—but the final decision rests with the issuing bank and the card network's dispute rules.

What you can control and what you cannot

Understanding the limits of what a processor can do for you prevents frustration and helps you focus on what actually reduces fraud and chargebacks.

You cannot control whether a transaction is approved—that decision belongs to the customer's bank. You can control the data you send: accurate billing addresses, clear descriptions of what the customer is buying, and good record-keeping all reduce the chance of disputes and chargebacks. You can also set rules within Square or Stripe, like declining transactions above a certain amount, blocking specific countries, or requiring a CVV match.

You cannot speed up refunds once they leave your processor—the banking system's timeline is fixed. You can issue refunds faster by setting up automation or by training staff to process them quickly, but the customer won't see the money any sooner than the issuing bank's standard timeline allows.

You cannot prevent chargebacks, but you can reduce them by being clear about what you're selling, shipping quickly, communicating with customers about their orders, and keeping receipts and proof of delivery. If a chargeback does happen, you can dispute it by providing evidence to your processor, who will pass it to the card network. The network then decides whether the evidence is strong enough to overturn the chargeback. This process typically takes 30 to 90 days.

You can control your processor choice based on your industry, transaction volume, and the features you need. Different processors have different fraud screening rules, different acquiring bank relationships, and different fee structures. If you're in a high-risk industry or have high chargebacks, some processors will work with you and others won't.

How fees work and what you're actually paying for

Square and Stripe charge in two ways: a percentage of each transaction and a flat monthly or per-transaction fee. The percentage typically ranges from 2.2% to 2.9% depending on how the customer pays (in-person card swipes are cheaper than online keyed-in transactions, which are cheaper than international cards). The flat fee is usually $0.30 per transaction, though some plans bundle this differently.

These fees cover the cost of the acquiring bank relationship, the card network fees, fraud screening, customer support, and the processor's own profit. You cannot negotiate these rates with Square or Stripe directly unless you process very high volume—most small businesses pay the published rate. The acquiring bank also charges fees to Square or Stripe, which the processor passes along to you as part of their percentage.

Some processors offer lower rates for specific industries or transaction types. Nonprofits, for example, sometimes get discounted rates. In-person transactions are cheaper than online because there's less fraud risk. Recurring subscriptions are cheaper than one-time charges because the setup cost is lower. Understanding which of your transactions fall into which category helps you predict your actual costs.

Frequently Asked Questions

Why does a charge show up when ready but a refund takes days?

A charge is just the customer's bank saying yes or no to a balance check—that answer comes back in seconds. A refund is actual money moving from your bank to the customer's bank, which requires both banks to process and verify the transaction. The processor cannot speed this up; it's the banking system's standard timeline.

Can Square or Stripe reverse a chargeback?

No. Once a chargeback is filed, the card network and the customer's bank make the decision. Square or Stripe can help you gather evidence and submit a dispute, but they cannot overturn the chargeback themselves. The network decides based on the evidence you provide and the card network's rules.

What happens if my acquiring bank closes my account?

You lose the ability to process payments through that processor until you open an account with a different acquiring bank. Square and Stripe work with multiple acquiring banks, so you might be able to switch processors and keep processing, but some industries or high-risk profiles make it difficult to find any acquiring bank willing to work with you.

Can I process payments without Square or Stripe?

You need some processor to connect your customers' banks to your acquiring bank. Square and Stripe are the most common, but you can also work directly with an acquiring bank or use a different processor like PayPal, Authorize.net, or a processor specific to your industry. The core work—moving data between banks—is the same regardless of which processor you choose.

Why was a transaction declined if the customer has money in their account?

The customer's bank declined it based on their fraud rules, not because of available balance. This could be a new card, an unusual purchase pattern, a geographic mismatch, or a spending limit the customer set. The customer should contact their bank to ask why, not the processor. The processor only sees that the bank said no.