How Does Payment Processing Work?

A payment processor handles transactions between two factions. The two most important parties involved in the payment processing are the merchant and the customer. The payment processor handles the data provided by the customer, such as credit or debit card details, to complete the payment processing to the merchant’s preferred bank account.

But there can be other parties involved in the payment processing, as we have explained in this article.

In most conventional forms of payment processing, payment processors include the following parties:

  • The customer
  • The customer’s bank or credit card company
  • The business organisation
  • The entrepreneur’s bank
  • The payment processor
  • The payment gateway (if it is not already a part of the payment processor)

Both business organisations and customers must understand the role of the payment processor to avoid any impediments to payments. Let’s take a deeper look into the function of everybody involved in payment processing.

The Customer

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Customers can purchase online products and services from a merchant’s website. A customer is redirected to the business’s secure website to enter their payment details (with the “HTTPS” prefix, the ‘S’ stands for secure). On the secure webpage, customers enter their payment details. This information includes credit or debit card information, in addition to any other required information to complete their order.

The customer’s personal and payment information is encrypted and is sent either to a Payment Gateway or Payment Service Provider authorised by the merchant to accept payments. The merchant completes the customer’s order once the transaction approves via Credit Card Authorisation.

The Customer’s Bank Or Credit Card Company

An Issuing Bank uses card associations with various vendors to issue credit or debit cards to their clients.

The issuing bank is also responsible for ensuring that its clients pay off the debt accumulated by the line of credit by their clients. When a customer performs a transaction, the issuing bank receives a card authorisation request. The issuing bank will approve or decline the transaction based on their client’s current financial standing.

The Business Organisation

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A business organisation is an individual or company that sells products or services. A business organisation works in coordination with an acquiring bank to operate a merchant account. The merchant account allows the business organisation to sell its products and services to customers and receive payments from its clientele. The first question that comes to mind is, what is an acquiring bank?

What Is An Acquiring Bank?

An acquiring bank is a bank that is a registered member of a card network such as Visa or MasterCard. The acquiring bank approves transactions for a business organisation in coordination with the credit and debit card networks. The acquiring bank allows the business organisation to accept credit and debit cards by issuing them a merchant account.

What Is A Merchant Account?

An acquiring bank issues a merchant account to a business organisation. The business organisation must accept the terms and conditions set by card associations such as Visa or MasterCard to complete an application for a merchant account.

The business organisation receives a unique account number to identify the business organisation and act as the owner of the transactions associated with the business. Business organisations must pay various fees to maintain the privileges of their merchant account.

A business organisation can pay the merchant account fees as monthly billing, a percentage on each transaction, or both. Every customer’s transaction made on the merchant account is forwarded to the acquiring bank.

The acquiring bank connects with the appropriate card association network to complete the transaction in coordination with the card holder’s issuing bank. The card holder’s issuing bank approves or declines the transaction based on the funds available in their client’s account.

Ensuring Security Through Payment Gateways While Processing Payments

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Merchant accounts access payment gateways to complete a transaction. A business owner processes transactions by submitting payment information through a payment gateway to its acquiring bank with the selected payment processor.

How Does A Payment Gateway Ensure Transaction Security?

A payment gateway is a software or a server that retrieves transaction status after a payment request is sent to the business owner’s bank. UK’s card machines act as payment gateways between the cardholder and the bank.

Payment gateways maintain security by protecting vulnerable data from fraudulent activity, such as credit card numbers and other information. Payment gateways implement traditional rules and security standards known as the Payment Card Industry Data Security Standards (PCI-DSS or PCI) to ensure the security of payment information.

What Is A Payment Service Provider?

Most eCommerce business owners must pay a per-transaction fee to acquire the services of Payment Service Providers (PSP). A payment service provider facilitates business owners to access payment gateways successfully to perform transactions.

The business owner’s customers complete the transaction on the secure HTTPS webpage with the help of a payment service provider. The payment service provider ensures that all transactions meet the established security protocols to ensure maximum transaction approval rates.

Business owners gain access to additional services with the help of a payment service provider. Some of these services include compliance with Payment Card Industry Data Security Standards, language translation services, processing transactions in different currencies, and protection against fraud.

The payment service provider accesses the payment information, provided by the customer, from the payment gateway and forwards it to the payment processor.

The Role Of The Payment Processor

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The payment processor implements rules and regulations established by specific credit card associations. These regulations include rules associated with chargebacks, fraud, and identity theft. The payment processor ensures that all transactions meet the necessary requirements set by the relevant credit card association.

The payment processor can transmit payment information directly to the credit card association to verify the transaction’s status.

How Does Card Authorisation Take Place?

Card authorisation is a mandatory check of the cardholder’s account to see if it has adequate funds to complete the transaction. A card authorisation initiates whenever you purchase a product or service using a debit or credit card.

The business holder’s acquiring bank requests card authorisation to check the customer’s issuing bank for the funds for the transaction. The cardholder’s issuing bank decides to approve or decline the transaction based on the cardholder’s available funds or line of credit.

The transaction is declined if there are insufficient funds in the cardholder’s account. The funds in the cardholder’s account are placed on hold if the transaction is approved. The cardholder receives a receipt of the transaction after the price is paid and the business owner’s acquiring bank is credited the amount of the transaction.

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