Payment Processing: The Ins and Outs You Need to Know

As a business owner you know the importance of payment processing and ensuring that your clients’ money is secure. But, do you know how the process works and who is involved in the process?

This blog takes you through the whole process and explains what payment processing is and why it is important to onboard with the right service.  

What is a payment processor?

A payment processor is a facilitator that acts as a mediator between the merchant and a financial institution. It makes use of software and databases to authorise and transfer the funds between the two parties in a timely and painless manner. 

Usually a payment processor creates a service that can be integrated with your website to allow your clients to pay for products or services online. Once they have entered their card and personal information, the payment processor communicates with their bank to process the transaction. 

A great advantage of the payment processor is that it first verifies if the client has enough funds in their account to complete the transaction.

This alleviates the possibility of someone trying to purchase goods or services without the needed funds. 

Through the years more payment processors have become available to businesses, some more recognisable than others. Essentially they all work the same, but might have some differences when it comes to what they offer. 

How then, should you decipher what type of payment processor is right for your business needs? 

Who forms part of the process?

Firstly, it is helpful to understand how the process works. It can be confusing to know who exactly forms part of the payment process and how exactly the funds are transferred between the two parties. Here is a breakdown to explain how this process is handled. 

The merchant 

The first part of the process is the merchant – the person/business that sells a product or service. For this process to start, the merchant must have an active merchant account with a financial institution. This allows funds to be transferred into the account. 

Some payment processors, like PayPugs, offer you an account as well as the integration of the payment processor on your online platforms.

Though, it is important that the merchant makes use of an acquiring bank – a traditional bank or financial institution that is a registered member with a card network, such as Visa or MasterCard. 

Once the merchant has created their account, the transactions can start. 

The shopper 

For a merchant to be successful, they need to attract shoppers. Since the start of the pandemic e-commerce has become the preferred method of purchasing products and services. According to Statista, e-commerce grew by $4.9 trillion dollars in 2021 and the industry is predicted to be worth $7 trillion dollars by 2025.

This affirms why it is important for merchants to offer shoppers the option to purchase your products or services online. How does it work? 

Simple, with the help of a payment gateway shoppers simply enter their card and personal information on your website. 

But, keep in mind that safety is the number one concern for purchasers when shopping online, so be sure that your website is a secure space for your shoppers’ personal information.

Always make sure that your SSL certificate (this ensures an encrypted and safe connection) is up to date and that the payment processor that you use is trustworthy. 

The payment processor 

Implementing a payment gateway and making use of a payment processor is only possible once the merchant has obtained a merchant account with a financial institution. It is also important for the merchant to have a secure and encrypted connection to keep the data of their clients secure. 

When a payment gateway has been set up on the merchant’s website, it is easy to receive payments from shoppers, whether they prefer to pay with debit or credit cards, or even virtual wallets. 

The payment processor submits the purchase information to the shoppers bank and verifies that they have enough funds. Once that is successful the transaction is then able to be processed and the money is transferred to the merchant’s account. 

What is the procedure for payment processing?

Authorisation

Authorisation is the most important step of the payment process. It ensures that both parties are able to process the transaction. It verifies that the merchant has an active account and that the client has enough funds. 

Authorisation works in the following stages:

  • Firstly, the client provides their card information to the payment processor on the merchant’s online platform. 
  • The payment request is then forwarded through the payment gateway to the clients’ financial institution or online wallet. The information is then forwarded to the payment processor.  
  • The transaction request is then sent to the relevant card association, with the issuing bank as the endpoint.
  • When the issuing bank receives the authorisation request from, it checks that it has all of the relevant information such as: 
    • The card holder’s personal information 
    • The card verification value (CVV)
    • The expiration date
    • The address verification services (AVS).
  • Once everything has been confirmed, the bank either issues or rejects the transaction. A transaction may be rejected for the following reasons
    • Insufficient funds on the credit card
    • Payment date has passed
    • The cardholder’s account is invalid or has expired.
  • A notification of approval or rejection is sent to the payment processor and then eventually to the merchant bank.

This sounds like a lengthy process, but thanks to the advancements in technology, it can take less than a minute to process a transaction. 

Settlement and funding

The notification to the merchant bank does not mean that the funds are credited to the merchant account. Settlement and funding is the last stage in payment processing where the merchant receives the funds. 

Payment processors handle the settlement of the funds in the following way: 

  • Firstly, the merchant sends authorised payments to the payment processor.
  • Then, the payment processor forwards the transaction information to the related card association.
  • Once the card association has received the information, they notify the relevant issuing bank within their network of the requested debit.
  • After that the issuing bank debits the cardholder’s account with the requested amount for the payment.
  • Next the requested funds are transferred to the merchant bank by the issuing bank. (This is also where bank and exchange fees are paid).
  • Lastly, the merchant bank credits the merchant account with the funds that the client paid. 

This process is not always quite so quick and can take up to five business days to be completed. Though, the notification serves as guarantee that the merchant will indeed receive their funds.

What are the benefits of payment processing for businesses?

In the digital era, people enjoy the comfort and convenience of doing online transactions rather than physically visiting a store to make a purchase. The pandemic has been a massive driver for the growth of the e-commerce industry, and the market continues to grow. 

For any business, offering online payment options increases the opportunity to gain more clients and even attract online shoppers from around the world. 

Payment processing makes transactions quick and easy for both parties. Have a look at what PayPugs can offer your business. We are a financial service that customises according to your needs. Book a call with us today and see how we can help you build your online business. 

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