What Does Payment Processing Mean and How Does It Work?

Completing your payments through a credit card may seem as simple as swiping the card at the POS or payment with a single tap of a button, but the actual payment processing steps are more complex. The payment processing procedure tells us what happens at the backend to process credit and debit card transactions. 

These payment processing companies are responsible for validating the card transaction so that money can be deducted from the customer’s bank account and get transferred to the merchant’s bank. The entire process is completed within a few seconds. The end result is the completed sale for the business and quick payment transfer for the customer.

What is Transaction Processing? 

A payment processing service acts as the intermediary between the merchant and the customers’ bank. The main role of a payment processor is to check and validate the transaction by connecting with the customer’s bank to see if:

  • The customer has sufficient funds in their account to pay for the requested goods
  • Their card is valid
  • Whether their credit card has any limits 

Once it has verified this information, the payment processor validates and transaction, and the money is transferred from the customer’s bank to the merchant’s bank account. The payment processor is used for both digital transactions and in-person payments.

Online payments are safe since the payment processors follow the PCI compliance standards to ensure maximum protection for customers and merchants. Your payment processor also takes care of the security protocols. It ensures that all payments are processed through encrypted connections and it also handles the recurring payments for those who are using the subscription-based models. 

How Does Payment Processing Work?

The customers swipe the credit cards or send the payment through these cards online. A series of processes take place in the backend electronically until the transaction is completed. The process involves a few parties, including the payment gateway, payment processor, merchant’s bank, a customer, and the credit card company. 

As mentioned earlier, processing even a single transaction requires all these steps. The process starts with the customers entering their credit card details to the payment gateway validating and executing the transaction as requested. The payment is either denied or accepted. Let’s understand the process in detail:

Point of Purchase

Point of Purchase is when the customer makes a purchase and chooses a payment method. It can be through credit card, debit card, cash payment, or money order. Since more and more customers are using online payment methods for transferring payments in-person and online, the demand for payment processors has increased rapidly. 

Merchants that accept online payments need to buy a payment processing service in order to validate and process online transactions safely.

Payment Gateway

The payment gateway is also used for validating the transaction, although its main role is to ensure the transfer of communication between the customer’s bank account to the merchant account. The payment gateway shows whether or not the transaction is accepted or denied. It is, however, the payment processor that executes the payment transfer process by collecting the customer’s credit card data from their issuing bank.

Payment Processor

The payment processor also transfers information from the customer’s issuing bank to the merchant account. It is the processor that validates the transfer after verifying the balance in the customers’ card and whether it is available for purchases. Once the processor has verified the transaction, the amount is sent to the merchant’s bank from the issuing bank.

Merchant Account

Once the transaction is validated and approved, the payment processing service provider facilitates the transfer of payment from the customer’s bank to the merchant account. Note that a merchant account and payment gateway are two different services. A merchant account holds the funds temporarily while the payment gateway transfers this money to the bank account. 

Is There a Difference Between Merchant Account and Payment Processor?

Yes, as mentioned earlier, merchant accounts and payment processors are two important elements of online transactions. Both are completely different. Your payment processor is responsible for verifying the card information and accepting or denying the transaction, while the merchant account holds this money for a short period until it is finally sent to the merchant’s bank account. It works as the landing pad for the merchant since it is the merchant account where the funds land. The money is transferred to the merchant’s bank within 3 business days (usually, within 24 hours). There is a reason why the payment is not transferred directly into the business account of the seller. If the customer requests a refund for a defective or poor-quality product, the merchant can issue the refund from their merchant account easily. 

What are the Common Payment Options for Online Banking?

If your business accepts online payment, there are quite a few options available for you to process the transactions online. They include:

  • Debit or Credit Card Payments: These are the most common payment methods used for processing online and in-person transactions. The money is transferred to the merchant through card swiping at brick and mortar stores. The customer enters their card details on the payments page if they are processing the payment online.
  • E-wallets: These are the safest and fastest payment options for customers. Payments made through e-wallets take only a few seconds to show on the merchant’s bank account.
  • Bank Transfers: For B2B transactions, a direct bank transfer is the most convenient mode of payment. The amount is transferred directly from the customer’s bank to the merchant account. Although it is not as popular as credit cards and e-wallet transactions, it is still used widely for online payments.
  • Crypto Payments: Only a few retailers have integrated crypto payments into their payment and banking services. Crypto payments are anonymous, meaning they do not reveal your identity or any financial information. 

Hope this post helped you learn more about the payment transactions online and transaction online processing systems. This is how the payment is transferred from the customer’s credit card issuing bank to the merchant account.

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