The Arctic climate system includes numerous highly interactive small-scale physical processes in the atmosphere, sea ice, and ocean. During and since the International Polar Year 2007–2009, significant advances have been made in understanding these processes. Here, these recent advances are reviewed, synthesized, and discussed. In atmospheric physics, the primary advances have been in cloud physics, radiative transfer, mesoscale cyclones, coastal, and fjordic processes as well as in boundary layer processes and surface fluxes. In sea ice and its snow cover, advances have been made in understanding of the surface albedo and its relationships with snow properties, the internal structure of sea ice, the heat and salt transfer in ice, the formation of superimposed ice and snow ice, and the small-scale dynamics of sea ice. For the ocean, significant advances have been related to exchange processes at the ice–ocean interface, diapycnal mixing, double-diffusive convection, tidal currents and diurnal resonance. Despite this recent progress, some of these small-scale physical processes are still not sufficiently understood: these include wave–turbulence interactions in the atmosphere and ocean, the exchange of heat and salt at the ice–ocean interface, and the mechanical weakening of sea ice. Many other processes are reasonably well understood as stand-alone processes but the challenge is to understand their interactions with and impacts and feedbacks on other processes. Uncertainty in the parameterization of small-scale processes continues to be among the greatest challenges facing climate modelling, particularly in high latitudes. Further improvements in parameterization require new year-round field campaigns on the Arctic sea ice, closely combined with satellite remote sensing studies and numerical model experiments.