What Is Payment Processing?
Payment processing is the sequence of steps involved in the flow of payments from customers to merchants when purchases are made. As you already understand, payment processing is a core of online shopping, which serves as the bridge between parties involved in each digital transaction. Generally, payment processing is somewhat of a sequence of processes. It includes banking data gathering, verification, authorization, and approval before making an actual money transfer between a buyer and a merchant. All these processes are instant for a payer, whereas it may take hours for the receiver.
Types Of Payments
Universal payment gateways can process different types of payment methods to serve as many customers as possible. Here is the list of the most popular payment methods that payment process systems deal with:
Debit and credit cards
One of the most popular online payment methods is bank cards. The majority of adults worldwide own a debit or credit card. Hence, all online merchants should accept them. To pay, the buyer should enter the card number, expiration date, and CVV code. The most widespread bank cards in the world are Visa, MasterCard, and American Express.
Digital wallets
This payment method quickly gains popularity. The younger generation commonly uses it because such payments are faster. Thanks to digital wallets, one does not have to enter any banking data. With digital wallets, all the necessary information is already inside your mobile app. Hence, you only need your biometric data to make a payment. It can be FaceID or fingerprint technology.
Bank transfers
Direct bank transfers are slowly becoming an outdated payment method but remain a must-have for online merchants. Such a payment method is similar to credit card payments. Yet, in this case, customers instruct their bank to transfer a certain amount of their funds to the recipient’s bank directly. It is a transfer between bank accounts rather than between the credit card balance and the bank account.
Electronic checks
Electronic checks or e-checks are basically a digital version of the old, well-known paper checks. With e-checks, the payment processing system directly transfers funds from a customer's checking account to the merchant's business bank account, as in simple direct transfers. But, with electronic checks, an Automated Clearing House (ACH) is used.
The Importance Of Payment Processing For Business
The primary goal of every business is to bring steadily growing revenue. To grow, merchants, apart from other methods, try different strategies to make sure the customer retention rate is high. In the case of online business, clients become regular thanks to competitive prices, simple website interface, and seamless payments.
In order to satisfy clients at the stage of the payment, you must have a payment processing integration, which enables different ways to pay. It also must be compliant with data security regulations so the customers will know that the fraud risk is minimal. In summary, payment processing is about enabling online trade, supporting e-commerce, increasing customer retention rates, and growing your company.
How Does Payment Processing Work Exactly?
On the example of the best payment process, customers know how fast and simple payments can be. Yet, from the technical point of view, it is a complicated multi-level process involving multiple parties. So, let’s dive into the details of what is happening behind the curtain of e-commerce transactions.
Main Elements
First of all, we should explain which parties are exactly participating in the payment process. Also, before proceeding to explain how the payment processing works, there are a few terms you should learn first:
- The customer. Any person or entity that launches the payment for goods or services on the website.
- The merchant. A business that provides goods or services and therefore accepts the payment from the customer.
- The point-of-sale (POS) system. The platform (physical or digital) where the customer executes the transaction. POS can be a retail store terminal, mobile app, or e-commerce website.
- The payment gateway. An actual payment solution that accepts the transaction. It’s an intermediate between POS and payment processor.
- The payment processor. It performs a sequence of processes that handle the technical aspects of the transaction. The payment processor manages the communication between the buyers' and merchants' banks.
- The payment method. The method a customer uses when paying. It can be a credit card, bank transfer, digital wallet, etc.
- The acquirer. The bank accepts payments on the merchant’s behalf and transfers funds to the account of the seller.
- The issuer. The bank that holds the customer's account or has issued the credit card, etc. The issuer is responsible for allowing or declining any withdrawals from the customer's payment instrument.
- The card network. The holder of the payment infrastructure (for example, Visa or Mastercard). The holder is responsible for setting rules and standards for payment processing services.
Process Breakdown
Now that we have settled all the terminology, we can proceed to the payment processing breakdown. What exactly happens between the time a customer initiates a payment and when the merchant receives the payment? Read on to learn how payment processing actually works.
Customer Initiates Payment
First of all, customers select goods or services they would like to buy and proceed to the payment gateway or POS to pay for it. Here, they are asked to provide payment information like credit or debit card details.
Payment Gateway Encrypts Data
After all the necessary data is entered, the gateway securely transmits it to the payment processor. So, the function of the payment gateway is the collection, encryption, and transfer of this data.
Processor Validates And Sends To Bank
At this stage, payment system processing receives the data from the gateway and validates its authenticity. Then, the processor notifies the acquiring bank that the customer wants to make a transaction. The acquirer sends the received information to the card network for further steps.
Bank Verifies Account And Approves/Declines
At this point, the network notifies the issuing bank that there is an inquiry on a certain sum and transfers all the gathered payment info. The issuer verifies the customer’s account status, checks the balance, and approves or declines the placed transaction.
Authorization Response Sent Back
Once the issuer has decided on the transaction, it sends a response to the acquirer using a card network. A card network also passes the bank's decision to the payment processing system and payment gateway. The customer can see if the transaction was successful or failed.
If Approved, Business Provides Goods/services
If the transaction is a success, at this point, the customer's journey ends as they receive the required goods/services. However, if, for some reason, the transaction has failed, the payment business will ask for an alternative payment method using a payment processing technology.
Business Sends Batch For Settlement
Closer to the end of the day, the merchant sends all the approved transactions to its bank (the acquirer) for settlements. Next, the acquiring bank sends the requests to transfer funds to different issuers using the card network.
Issuing Bank Transfers Funds
Afterward, the issuer transfers the money that was already debited from the customer’s account to the acquirer. The acquiring bank deposits the money into the merchant’s account, usually within a few business days.
Business Reconciles Transactions And Fees
Finally, the business completes the reconciliation process by synchronizing its sales records and money earned. As a result, the merchant and the customer will get their transaction records (invoices or receipts).
4 Best Payment Processing Companies
Since you are already familiar with all the technicalities behind each online transaction, you might be interested in how to choose the appropriate process payment solutions. Our team has selected the best companies with the most efficient solutions.
Adyen
Another popular payment processing company was launched in the Netherlands and now cooperates with such companies as Uber, eBay, Spotify, McDonald’s, etc. Adyen’s payment processing software allows merchants to accept payments with credit cards, digital wallets, mobile apps, and bank transfers within a single integration. Moreover, Adyen helps to reach customers across almost all regions in the world in more than 30 currencies. Even though there are minimum invoice amounts, Adyean offers comprehensive reporting tools.
PayPal
If you run a small business and would like a solution to get smaller payments processed, then PayPal is the provider to go. PayPal will only charge a small commission for implementing its payment gateway. Also, there are no monthly fees or minimum balance requirements.
Another advantage of PayPal is its strong brand recognition and global coverage. With this payment process solution, you will be able to accept payments in 26 currencies across 200 countries. Finally, of course, PayPal uses top-notch safety protocols to grant both seller and buyer protection against fraudulent activity.
Square
What is payment processing suitable for all sizes of businesses? It is definitely one of Square's solutions. Thanks to easy navigation and simple design, this payment gateway has become a favorite for many customers and merchants. There are also no set-up fees, as well as monthly fees, but no customer service via phone within the basic plan as well. Also, Square is PCI DSS compliant, and the seller never sees a customer’s full credit card number.
Stripe
Last but not least, the company our team considers a great payment solutions provider is Stripe. This American-based business offers a payment integration that accepts ACH transfers, credit cards, numerous digital wallets, and more. Furthermore, the payment process solution by Stripe is highly customizable with no fees within a basic plan. Also, the company offers 24/7 customer support via live chat, email, or phone calls. Finally, the payment processor setting up process takes only 14 days.
Choosing The Best Payment Processing System For Your Needs
These days, merchants do not lack the versatility of payment processing solution providers. We have already narrowed down the endless list of companies to the top 4. Yet, even selecting among them can be time-consuming for e-commerce entrepreneurs. So, when choosing the provider, consider the following:
Fees Structure
First of all, we recommend you examine the provider’s services cost closely. What are the membership plans? Are there payments per transaction or month/year? Check for set-up or termination fees or any other well-hidden commissions and compare them.
Banking methods compatibility
Before making a final decision, analyze the most popular online payment methods in the specific country/market where you operate. Compare the results with the list of supported payment methods by the payment processing software you have chosen.
Security coverage
It goes without saying that your product should be compliant with the Payment Card Industry Data Security Standard (PCI DSS). Also, check for the type of encryption and tokenization of the payment processing system.
Analytical tools and reporting availability
In order to control the cash flows efficiently, merchants need to stay in charge of all processes. The solution you have chosen must provide you access to transaction monitoring, report checks, and sales dynamic changes.
Customer support
The last piece of a perfect payment processor is sufficient customer service. By sufficiency, we mean an accessible, 24/7, multilingual team of professionals. Also, you should be able to access it via phone, email, and live chat.
Final Thoughts
Payment processing is a core of each marketplace that can be found on the web. Moreover, the payment stage is one of the most important components of the overall customer experience. So, every successful entrepreneur is interested in partnering with a fast, secure, and multi-currency payment processor.
Furthermore, without a sufficient payment gateway, it would be impossible to control the banking receipts and manage the bottom line. Therefore, take your time and examine this article to find the best payment processor for your business.
