Premier Payments Online understands the importance of understanding how a payment is processed. With the constant evolution in technology and the digital world, online payments are getting simpler. This means that the small processes behind the entire payment process are getting more complex to understand. We have curated a detailed guide to answer your questions like how is payment processed, who is involved, and why it’s important.
Let us first help you understand what is the exact meaning of payment processing and why it is essential in businesses.
What Is Payment Processing?
Payment processing is an important part of any financial aspect of the business. It helps the smooth transfer of funds between the payers and payee. In this generation of digital payments, it is important to understand the steps in the payment process in order to ensure the transaction is valid and secure.
There are several parties involved who work together to carry out the payment and ensure it is done correctly and smoothly. You will understand different parts of the process from clicking on “checkout” to the generation of an electronic invoice as you keep reading.
Payment Processing: The Main Components
Before getting into the entire system of payment processing, it is important to know the main components involved in this system. Here are some of the terminology you should get acquainted with.
The Customer
This individual could either be a person or an entity that launches the payment prompt for any kind of goods or services on the website or online portal.
The Merchant
This individual is a business that provides the goods or services for which they accept the customer’s payment.
The POS System
POS stands for Point-of-sale. This refers to the platform be it physical or digital where the payment is processed. Examples of POS are stores(online or physical), mobile applications, etc.
Payment Gateway
A payment gateway is a program that accepts the transaction or the payment. It acts as the middleman between Point-Of-Sale and payment processor.
Payment Processor
The payment processor is responsible for performing a sequence of small processes that are in turn responsible for the technical aspects of the entire payment processing system. It helps manage any kind of communication between the customers’ and merchants’ banks.
The Payment Method
This is the method of payment that the customer uses while carrying out the transaction. Some of the payment methods commonly used are credit/debit cards, bank transfers(netbanking), digital wallets, etc.
The Acquirer
The bank accepts the payments on the business or merchant’s behalf and transfers the money to the account of the seller.
The Issuer
The issuer helps allow or decline any withdrawal requests from the customer’s account depending on the payment method opted. In most cases, the issuer is a bank.
The Card Network
If the customer holds a card, it would belong to a card network such as Visa or Mastercard. They have their own set of rules and regulations applicable to the payment process.
Payment Processing: The Breakdown
We have gone through the basic terminology for payment processing. Now let’s help you understand exactly how a payment is processed.
Payment Is Initiated
The process of payment begins when the customer initiates the payment. This step starts the intricate process of the transaction. It involves the authorisation and verification process of several data to help carry out the transfer of funds.
Data Sent To Payment Processor
After the payment is initiated by the customer, the intermediary program known as the payment gateway then encrypts the sensitive information related to the payment. Then the data is transmitted to another intermediary program known as the payment processor.
The payment gateway and payment processor are either provided by the same company or compiled into a single system.
Data Sent To Card Network
The merchant’s bank receives the sensitive data sent from the payment processor. The bank then submits the authorisation request to the card network. Some of the card networks are Visa, Mastercard, American express, etc.
Validation Of Data
The card network inspects the details related to the transaction. It performs regulatory checks to ensure all the details are valid and legitimate. The data has to be encrypted correctly and the merchant must be authorised to accept the specific card. The card network also has to look out for potential fraudsters.
The card network will only go forward with the payment if all the checks are fulfilled.
Approval Or Rejection
The issuing bank then checks the customer’s account for sufficient funds or available credit to carry out the transaction. Based on this the bank will approve or decline the payment and send back the status to the card network.
If the payment is approved, the customer’s payment is successful and if it is declined then the payment is deemed to be failed and the merchant may suggest an alternate payment method.
Settlement
The payment process may seem over here but there are more steps to this. The next step is settlement. Settlement involves the actual transfer of funds from the customer’s bank to the merchant’s acquiring bank.
Some transactions may appear pending and not to worry, most payments aren’t settled till the end of the business day.
Credit
After the payment is processed and the settlement is completed, the bank credits the merchant’s acquiring account. Based on the settlement terms, the bank transfers the funds to the merchant’s account.
The steps explained above depict the payment process in most scenarios. It remains mostly the same even for digital wallets or Buy Now Pay Later(BNPL) applications. Digital wallets require more security measures, like tokenization to protect sensitive information.
BNPL requires the intervention of third party applications to communicate with banks to manage the payment plans. The processes of verification, authorisation, and settlement will always remain the same no matter the payment method.
Benefits Of Implementing Payment Processing Systems
There are several benefits to implementing a payment processing system in your business. Let’s go through some of the advantages down below:
Increase Efficiency
Waiting time can be tedious during payment processing. Implementing a payment processing system can reduce the wait time and the secure channels are used to authorize and complete online payments.
Cost Cutting
Offline payments usually have high processing fees and businesses are impacted due to the disposal charges as well. Digital payments and implementing payment processing systems do not have any disposal charges.
Increase Security
When a payment is processed, many safety and security practices are used. It can provide a secure environment without damaging customer data.
There are modern solutions like Intelligent Payment Routing which uses machine learning to send transactions to the customer’s bank to accept them. It can help businesses process payments in a more efficient manner and reduces rejection.
Improved Customer Experience
Introducing payment processing services into your business can boost the experience of your customers. A business that provides multiple payment options will eventually lead to higher customer satisfaction.
Match Industry Standards
Implementing a system for payment processing helps your business boom and as it grows, it is essential to meet industrial standards.
The PCI-DSS certification for security compliance is the gold standard followed by businesses on any scale. This certification ensures that the business complies with the practices of data handling. You can read about the PCI-DSS cost on our page.
Automated Clearing House Payments is also one of the most commonly used solutions in the industry that allows ACH payments. The ACH payment visual is mostly used for transfers between banks and credit unions.
How Can We Help?
Premier Payments Online can help you simplify your business and ensure smooth payment processing. We help businesses just like yours optimize their payment processing systems. Our consultants can help you find the balance of high-quality services, low fees, effective and functional tools.
When you get into business with us, you can take a sigh of relief because you will have a partner who has been an innovator and leader with providing high risk solutions for over 30 years.
