Payment Processing Meaning

Payment processing refers to automating payment transactions between a shopper and a merchant. In simpler terms, it describes how a customer pays for the goods or services they buy from a seller; it’s the checkout process of an online shop, such as Paypal, Stripe, or another similar service.

On the flip side, businesses must understand the players and layers of payment processing and types of ecommerce marketing tools available to ensure that every transaction made is safe and secure and that any value exchanged goes through the proper channels until it reaches the correct account. If they are an ecommerce store they will need to see what payment providers are supported by the platform they use. Be sure to check out our Wix Ecommerce vs. Shopify post for more information.

What Is Payment Processing?

Payment processing means providing an individual the means to charge or debit accounts through a payment channel, including transmitting transaction data, authorizing payments, and transferring funds from one account to another. It’s usually assigned to process, verify, and accept or reject transactions on behalf of the merchant. Payment processing often involves a third-party service that connects the buyer and the seller. 

There are three key players in payment processing:

Customer

The customer adds items to their shopping cart (or recovers an abandoned cart), then checks out to purchase the goods and services they intend to acquire. To do this, they must have a debit or credit card, online bank, digital wallet, or other sources of funds to complete the transaction. The bank that approves this is called the “issuing bank”.

Service Provider

Though it’s possible, especially with help from a bank service, most businesses use third-party service providers to initiate the payment process for safer and more secure transactions. Typically, these involve a payment gateway and a payment processor.

A payment gateway is a front-end technology that securely sends a customer’s payment information to the merchant’s account from an issuing bank. It communicates whether the transaction is accepted or declined, similar to how an online point-of-sale (POS) works.

On the other hand, a payment processor does the actual heavy lifting. They are the mediator between the issuing bank and the merchant, and they validate the payment, facilitate the transfer of funds, and issue the bill.

Merchant

The merchant is the seller that accepts payments for goods and services, which requires a merchant account for the funds from the customer’s issuing bank to ultimately be deposited. They can sell either directly with a partner bank or financial institution (called an “acquirer”) or a payment service provider (PSP) to accept payments. Usually, card transactions are the concern for the former and non-card transactions for the latter (for sites with low-card use rates).

How Does Payment Processing Work?

Payment processing starts when a customer fills their shopping cart and continues until the fulfillment of the order (i.e., payment is made). Let’s take a closer look at each step.

Step 1: Add To Cart

The customer starts the order by skimming through the merchant’s site and adding items to their shopping cart.

Step 2: Checkout

Once the customer has finished filling their cart, they check out and fill in their payment data on a secure order form. A customer can pay using a credit or debit card, e-wallet, bank transfer, electronic check, or other local payment methods depending on the payment processing features of the site.

Step 3: Sale Is Authorized (Or Not)

The payment gateway sends the payment data, the order details, and the shopper’s information to the payment processor. The payment processor verifies the transaction with the issuing bank. Once approved, the payment processor receives a code and then transmits it to the payment gateway to communicate approval.

Step 4: Funds Transfer

The issuing bank transfers the funds to the merchant’s bank, then both the customer and the seller receive confirmation that the transaction is complete.

How Long Does Payment Processing Take?

Thanks to advanced financial technology, payment processing can happen almost instantly. However, it can still take 24 hours or up to three days for some transactions, particularly larger ones that need several security layers for approval.

How To Choose A Payment Processor

There are several payment processors out there, some of the most well-known ones being PayPal, Stripe, and Square. Each one has its strengths and weaknesses, but it’s essential to consider the following when choosing which one to use for your ecommerce site:

Fees

Some payment processors incur fees per transaction. These added payments can rack up a hefty bill for your business expenses, making the service unsustainable. Even worse is if the customers directly face these fees; this might deter them from buying in the first place.

Payment Options

Not everyone has a credit or debit card, so it’s best to have flexible payment options for customer convenience. Look for a payment processor that accommodates multiple payment channels, including non-card transactions.

Security

Payment processing deals with sensitive information, so it’s necessary to use a payment processor that has strong security features and a robust fraud prevention system.

Conclusion

It’s essential for any ecommerce business owner to understand the ins and outs of payment processing and, more importantly, to choose a suitable payment processor. Taking the time to make the right decision ensures that the checkout process is easy and secure, which builds trust with customers. Plus, it guarantees that payments reach their destination, a crucial step in adequately managing finances.