A Comprehensive Guide to Payment Processing

Any business that accepts payments must invest in payment processing. As a merchant, you need to understand how the system works to ensure it serves customers as necessary. Keep reading to learn the fundamentals of processing transactions for your online or offline enterprise.

What is Payment Processing?

It refers to the automation of transactions between buyers and merchants. The process consists of several stages that happen in a logical series to facilitate payments. Using different technology, information moves from the customer at the point of purchase to the bank and back. Businesses get payment processing solutions that provide the required tools. Therefore, you must work with a processor that meets your objectives. Payment processing covers different methods, from credit cards to virtual wallets to ACH payments. Online payments don’t rely on hardware as much as offline transactions do. In-person payments need equipment such as card readers as part of the processing. So, the types of transactions you handle determine the merchant services to get.

Key Terms Related to Payment Processing

As you find the best way to accept payments from customers, learn some of the common words you will encounter. Here are a few:

Payment Processor

Several steps connect customers, merchants and banks when handling transactions. Payment processors are the entities that deal with the logistics involved. When you receive credit card or debit card payments, the processor handles the request. It’s responsible for verifying the validity of customer details. Think of a processor as an intermediary between customers, merchants and banks. It tells you if a transaction is approved or denied. Processors are companies themselves and offer a range of services tailored to varying business demands.

Payment Gateway

When a buyer pays at the point of sale, a payment gateway reads and transmits the data to the merchant account. It facilitates communication between the different systems involved in processing payments. The electronic system is responsible for securing transactions, mainly through encryption. It also delivers transaction reports, billing services and management services. In most cases, payment gateways are built into POS systems. PayPal, Square and Stripe are examples of gateways.

Merchant Account

It refers to the account that holds merchant funds after a transaction goes through. A bank or other financial institution can host the account. Merchant accounts collect funds from credit card, ACH and bank account payments. Merchant service providers have different types of accounts. They can be card-present or card-not-present, depending on whether a merchant takes physical cards during transactions.

Processed Payments

After transaction requests have been through verification, funding and settlement, they become processed payments. The term refers to the funds available after the processing is complete. Processed payments stay in merchant accounts for 24 to 72 hours before moving to a business bank account, where they are available for use.

Who is Involved in the Process?

One way to understand the different stages in this process is by learning the key players. When you know who does what during payment processing, you can ensure the system runs smoothly.

• The consumer is the first part. A customer provides payment details, which could be a credit card, bank account or e-wallet.
• You, the merchant, provide products and services and accept different payment methods for them.
• The issuing bank, or the customer’s bank, is responsible for approving or denying transactions.
• A payment processor routes the information from the consumer to the merchant to the bank.
• The acquiring bank is the institution holding your merchant account and, subsequently, your funds.

How Does Payment Processing Work?

For consumers, accepting online payments is easy because they only have to present a payment method and approve the transaction. However, a lot more goes on behind the scenes. After a customer pays, the merchant forwards the details to a processor through a payment gateway. A request goes from the processor to the issuing bank. Once the bank verifies the customer’s data, it checks if the account has sufficient funds for the transaction. If so, the request passes, and, if not, it bounces back to the merchant. An approved payment results in the bank debiting the requested money to the merchant’s bank. These series of events take seconds if the system is running efficiently.

What Types of Payments Can Be Processed?

When comparing payment processing solutions, choose the methods supported carefully. Offer the best alternatives to your customers because they influence the buying experience. Credit cards are one of the most popular means of transaction. These cards let users borrow money and pay later. Therefore, the issuing bank has to decide whether to cover a particular purchase. Some issuers refuse to pay for certain payments, such as online gambling. Debit cards are more straightforward because customers use money that is already in their accounts. For the same reason, processing debit card payments has a lower risk than credit card processing. Debit and credit cards are suitable for in-person and online payments.

ACH (automated clearing house) processing facilitates electronic money transfers. It doesn’t involve wire transfers, cheques or cards. ACH payments are suitable for recurring transactions. Digital and mobile wallets are other payment alternatives you can process. E-wallets leverage smart technologies, including smartphones, tablets and smartwatches. These options provide contactless transactions.

Conclusion

Payment processing is a make-or-break element for any business that handles transactions. When customers get to the checkout, they expect a smooth, reliable and convenient journey. So, the payment processing solutions you employ are critical. You need a system that aligns with consumer and business needs. For that, you must comprehend a few basics of processing transactions, whether you take offline or online payments.