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How Does the Payment Processing Industry Work

E-commerce sites and many websites have become highly involved with online payment methods so it is important to know how the payment processing industry works.

It is usually a third-party service that is actually a system of computer processes that process, verify, and accept or decline credit card transactions on behalf of the merchant through secure Internet connections.

Payment Processing Industry Work

This process contains some components we will discuss as follow:

The Merchant

A merchant is a person who trades in commodities produced by other people. Some wholesale merchants only organize the movement of goods rather than move the goods themselves. A retail merchant or retailer sells merchandise to end-users or consumers including businesses, usually in small quantities. A shop-keeper is a retail merchant and A retail store owner is an example of a merchant.

A merchant account is a type of bank account that allows businesses to accept payments by debit or credit cards. So a merchant account is an agreement between a retailer, a merchant bank and payment processor for the settlement of credit card and/or debit card transactions.

Once the merchant has obtained a merchant account, whenever a customer purchases an item with a credit or debit card, the merchant submits the purchase transaction information to its acquiring bank, which will then submit it through the card association network to the card holder’s issuing bank. The issuing bank will approve or decline the charge and bill the cardholder the amount due to the merchant.

The Shopper

a person who is buying things from a shop or a number of shops. When shoppers buy online, they will typically place an order for a product or service on a merchant’s website. They will enter their payment details credit/debit card details or other payment methods on the secure web or cart pages, after which the information is encrypted by the web browser and sent to either the merchant’s servers or to a Payment Service Provider or payment gateway that the merchant uses to accept payments.

payment processing

The most important thing in this process is choosing a payment gateway which is a merchant service provided by an e-commerce application service provider that authorizes credit card or direct payments processing for e-businesses, online retailers, bricks and clicks, or traditional brick and mortar. The following steps show how a payment gateway works:

Step 1: At the checkout, merchant use payment gateways. Once the payment form has been completed, the gateway encrypts and store this information under the strict security measures PCI-DSS, and sends it to merchant‘s acquiring entity/bank.

Step 2: The encrypted information arrives at the payment network, where it is handled by the acquiring bank or entity and sent to the processing centre.

Step 3: At this point, the processing centre checks the payment with the corresponding credit card issuer entity confirm that everything is in order, and provides a response to the payment gateway for approval or decline of the transaction.

Step 4: Once the transaction has been approved by the credit card issuing entity, the response is sent to the payment gateway, which sends it back to the e-commerce website, informing the customer that his payment has been successfully completed.

 Payment Service Provider (PSP)

It offers shops online services for accepting electronic payments by a variety of payment methods including credit card, bank-based payments such as direct debit, bank transfer, and real-time bank transfer based on online banking.

Payment service providers partner with acquiring banks and their payment processors to offer merchants the capability to accept payments. The PSP sends via the payment gateway the transaction information, initiated by the shopper with the merchant, to a payment processor used by the merchant’s acquiring bank.

Payment Processor

It is a company often a third party appointed by a merchant to handle transactions from various channels such as credit cards and debit cards for merchant acquiring banks. They are usually broken down into two types: front-end and back-end.

A cardholder begins a credit card transaction by presenting his or her card to a merchant as payment for goods or services.  The acquiring bank or its processor capture the transaction information and routes it through the appropriate card network to the cardholder’s issuing bank to be approved or declined.

card association

It is a network of banks that process a particular brand of payment cards. The card association will either approve or decline the transaction directly.

Banks and transaction settlement

the process by which a merchant will receive funds from a customer for a transaction. Once a customer buys a service or goods, the issuing bank will send the funds to the payment processor used by the seller.

Once all authorizations have been made and all approvals received by the involved parties, the issuing bank of the buyer sends funds to the seller’s acquiring bank, via that bank’s payment processor. The acquiring bank will then take those funds and deposit them in the merchant’s account. This is called a settlement pay or settlement.

Payment Gateway Vs Payment Processor