How Does Payment Processing Work? Everything You Need to Know

Payment processing is an integral part of any business that offers online transactions. Whether you are selling goods or services, payment processors allow your customers to buy what they want with a click of a button. Payment processing is the process of receiving online payments and completing them on behalf of a merchant. There are many different types of processors, but they all have one thing in common – they charge fees for their services. These fees can be either flat or percentage-based, depending on your needs. With that said, when a customer makes a purchase online, there is a long list of steps that need to be completed before the transaction can be finalised. So, how does an online transaction work?

This is a question that many people ask, but few know how to answer. That’s where this blog post comes in handy! We will talk about the online payment basics and how online transaction works. So, keep on reading.

Payment Processing Participants

There are six key participants in an online payment transaction: customer, business owner, payment aggregator, acquiring bank, card networks and issuing bank. They all play different roles with one goal – to complete a successful purchase.

The first participant is your customer who wants to make a purchase from you. Next up we have you (the business owner) and your bank that work together on processing the payment request sent by your customer’s credit card issuer or other financial institution such as PayPal. Your role is to ensure that all steps of the process go smoothly while at the same time protecting yourself and your money against fraudsters trying to set up fake transactions using stolen information like credit cards numbers, etc. Finally, there is an aggregator, which takes care of sending requests to acquirers and ensuring that transactions are completed.

This is how an online transaction works with the help of the players involved. Let’s take an in-depth look at how these entities work to make the online transaction process smoother.

1. Customer: A customer is someone who wants to make a purchase from you. So, he/she is the primary entity of an online transaction process.
2. Business owner: This is you! You are the second participant in an online transaction process. You have to work together with your bank on processing a payment request sent by your customer’s credit card issuer or other financial institution such as PayPal.
3. Payment Aggregator: An aggregator is something that takes care of sending requests to acquirers and ensuring that transactions are completed. Also known as a ‘payment gateway,’ an aggregator is software that allows you to accept online payments for your business.
4. Acquiring Bank: Acquiring bank is the next participant in this process, which acts as a liaison between payment aggregators and issuer banks. It manages a merchant’s accounts receivable, handles disputed transactions, and most importantly, ensures that merchants get paid for the products/services they sell.
5. Card Network: This entity acts as a middleman between acquiring banks and payment aggregators or issuing banks in facilitating online transactions. It also helps businesses identify fraudulent efforts by cardholders when making purchases on their websites. For example, Mastercard uses its MATCH list of compromised address information to help fight against fraud while Visa has VbV (Verified by Visa) program offering security measures such as Verified Identity. This entity takes care of creating rules that govern how transactions are processed among various parties involved in an online transaction process.
6. Issuing Bank: Issuer banks are the ones who actually issue credit cards to customers. They also maintain a record of each transaction with your business, which means they will be able to provide you with accurate data on card spending and outstanding payments. There is an issuer bank for every unique credit or debit card number out there. So, it’s very important that you keep track of this information when accepting online transactions from customers using their respective cards. This way, if ever something goes wrong in processing payment requests sent by acquirers, such as incorrect expiration dates or CVV codes (the three digits found on the back of all India-issued Visa/Mastercard cards), then issuers can quickly flag them before fraudsters get a chance to steal your customers’ money.

How does Payment Processing work?

Now that you know the entities involved in payment processing, let’s take a look at the steps involved in how a payment is processed.

1. Transaction Verification: The first step of an online transaction process is verification, where acquirers confirm that your business and issuer bank are authorised to accept payments from customers using their respective cards.
2. Payment Request Authorisation: Once this validation takes place, you can receive authorisation for the requested amount from acquiring banks by sending them all necessary information such as billing address, card number or expiration date, etc., so they can forward it on to issuers for approval. In some cases, when frauds have been reported against a particular credit card number – which will be flagged by issuing banks – acquisition requests sent by acquiring banks may also get rejected due to lack of proper authentication required at the time of processing online transactions.
3. Transaction Settlement: Once the transaction is authorised, it gets settled immediately or in a few days by acquirers on your behalf, depending on how you have configured your account with them. Issuers will also get notified of this settlement process, which means customers’ accounts are debited and merchants’ accounts credited accordingly in real-time/after some delay. This phase involves the actual transfer of money from the customer’s card to the merchant bank account for the successful completion of an online payment transaction.

In case any disputes happen regarding a particular purchase made using credit cards (such as when a product received by a consumer doesn’t match what was advertised), then banks may hold funds until all parties involved negotiate amicably about their grievances or go through legal proceedings to settle such disputes. This process is known as a chargeback, and it can potentially harm your online business credit worthiness if there are too many of these happening repeatedly with different customers.

Simply put:

1. The customer pays the merchant via credit card.
2. The merchant forwards the request to the payment aggregator.
3. The payment aggregator sends an authorisation request to the card issuer.
4. If the transaction is approved by the issuing bank, the customer’s card is debited and the money is transferred to the acquiring bank.

What are Chargebacks?

A chargeback occurs because cardholders may dispute transaction charges that appear on their monthly statements for any number of reasons (such as receiving defective or wrong products). Banks then start an investigation into the matter by contacting merchants involved in both cases – where they ask how exactly a certain purchase was processed so they can come up with a verdict about whether all transactions were properly authorised. If found guilty, you will have to pay back double the actual amount charged from your merchant account balance which gets deducted instantly once this happens. They also levy additional fees for processing chargebacks, which can quickly accumulate if you have a high volume of transactions.

Conclusion

You can now go ahead and implement this payment processing system into your business to make it more profitable while also protecting yourself against fraudsters at the same time.