The success of merchants operating within the retail set-up largely depends on their efficiency and effectiveness to process cashless payments. With a modern payment gateway, businesses enable customers to make any purchase at any time and from any location through their methods of choice.
This guide addresses the basics of payment processing and a description of how the system works.
Basic Terminology
Merchants and business owners must be fully aware of the various elements of payment processing to maintain a competitive edge in the business payments arena. Here is a quick glossary of the basic online payment processing system.
Merchant Account
Merchant accounts are a type of bank account specially set up to accept payments online as processed via credit and debit cards. Basically, these accounts function as a linkage between card swiping and the settlement of funds. This means that funds transferred from the customer’s account to your business are first deposited in this type of account before they are settled in your ordinary business account. Merchant accounts are created, provided, and serviced by merchant service brokerages or established financial institutions.
Payment Processor
A payment processor is a company responsible for the transfer of transactional data between acquiring and issuing banks. The institution acts as an intermediary between merchant accounts, card networks, and the involved banks using a payment gateway. They are also in charge of all payment-related claims, including chargebacks and transactional oversight. Notably, payment processors are mandated to ensure safe payment procedures by complying with the global PCI standards.
Payment Gateway
This is a technology designed to read, validate and transfer payment data from the cardholder to the acquiring bank for processing. It is the backbone of the card processing system. Essentially, for a merchant to accept payments from its customers, there must exist an integration between the cardholder and the business. This integration is established through a payment gateway.
Who Is Involved in the Process?
Payment processing follows a chain of commands, instructions, and approvals by multiple participants. Who are they, what do they do, and why are they important in the online payment landscape?
Customers/Cardholders
The cardholder is the initiating player of the payment processing flow. Basically, cardholders are customers interested in purchasing goods or services and paying for them using a credit or debit card.
Merchant/Business
Think of the merchant as the end point of the card payment process. To accept payments electronically, businesses must have what is known as a merchant account, into which funds are settled by the acquiring bank.
Banks
There are three types of banks involved in the card payment process, including the acquiring bank, issuing bank, and merchant service provider. The acquiring bank is the financial institution that settles card payments on behalf of the merchant. On the other hand, the issuing bank is responsible for providing customers with credit or debit cards.
Traditionally, merchant account providers were banks that issued businesses with merchant accounts. Today, various large companies within the card networks are slowly dominating the merchant service sector.
Payment Processor
This is the intermediary applying a payment gateway to transfer transaction data from the cardholder to the involved banks.
Card Networks
These are companies established to supply the industry with the necessary electronic infrastructure to enable card payments.
What Is Included in the Process?
Here is an outline of what happens throughout the card payment process.
Step 1: The customer pays the business by swiping a card at the merchant’s offline or online POS.
Step 2: The payment gateway captures and validates the cardholder’s data. This data is then transferred to the acquiring bank.
Step 3: The acquiring bank seeks authorization to pay from the issuing bank through the card network.
Step 4: The issuing bank verifies the transaction and the cardholder’s account details, then authorizes the acquirer to settle the payment.
Step 5: The acquirer deposits the funds to the business through the merchant account. Usually, the settlement of funds happens instantly. However, depending on the account type and the payment provider involved, sometimes depositing funds can take a few business days.
The Most Common Methods of Payment Processing
Businesses can integrate their enterprises with either of the following processing channels for payments.
Credit Card Processing
This is the acceptance of payments using credits. In credit card processing, the issuing bank has to decide whether they will offer the customer credit before authorizing the acquirer to settle payments. As a result, credit card processing takes longer than most payment processing channels.
Debit Card Processing
In debit card processing, the online payment originates from the customer’s bank account using their debit card. Since the process does not require credit approvals, debit card payments are faster and less risky.
Localized Processing
There is a wide range of other payment methods that require payment processors to complete transactions. Notably, localized payment channels are accepted in various regions globally as means of buying goods and services. They include digital wallets, crypto wallets, gift cards, open invoicing, and local debit networks.
Conclusion
Payment processing is a prerequisite for businesses to accept payments. As a result, merchants must procure a full-service merchant account to extend card payments to their customers. Depending on the merchant service provider involved, the process can take a few seconds or, in some cases, a few business days.
