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Payment processing system – Know the definition, how does payment processing work, players in the payment industry, types & more in just one click. Check now!
More consumers are switching from cash to online payments in today’s fast-paced digital world. But this ease also raises a recurring issue for companies and their clients: Is my transaction really safe?
To do business worry-free, it is essential to choose a payment processing system that supports you at every stage and promptly resolves complex issues. Collaborating with a reliable partner that adds substantial value to your business and offers you and your clients a smooth, safe, and satisfying debit and credit payment experience is also essential.
With a tremendous increase in online shopping, choosing the right payment partners for payment processing, managing queries, and taking care of all ancillary services is more vital than ever before. This article explores the meaning of payment processing, how it works and what the benefits of payment processing are for your business.
What is a Payment Processor?
Have you ever wondered what happens behind the scenes to make your debit or credit card payment go through successfully? This is where a payment processor acting as your middleman between your merchant, customer, and the bank comes into the scene to ensure every transaction done on your portal is secure, thereby providing a smooth experience to your customers.
When every payment is processed successfully from the customer’s account to the merchant’s, it truly feels proud to see the payment processor working in perfect harmony.
The payment processor is also responsible for cross-checking the validity and transaction limits of the credit card, as well as the overall transaction security. It enables the transaction to take place between the buyer and the merchant.
Example: When you buy an article online, the payment processor checks with your bank to ensure you have enough funds. Once confirmed, the payment processor transfers the amount to the merchant’s account securely within a few seconds.
Major Players in the Payment Processing System
Understanding the “payment processed” meaning is essential before exploring the major players in the payment processing ecosystem.
The Merchant (Seller)
For a merchant to accept payment, they need to partner with a payment gateway company that they can trust with their every transfer. A merchant cannot accept card payments without partnering with some key players. So if a merchant wants to incorporate cashless transactions in their business, they must partner with an acquirer or a merchant bank. A merchant account with an acquirer will enable them to approve and disburse payments.
The Customer (Cardholder)
For a merchant to receive secure payments, someone must be willing to pay. A merchant needs a customer with a working credit/debit card for payment to be processed from an issuing bank. A customer is someone who knows about the existence of the merchant and how to reach them. Only then can they pay for the merchant’s services/products. A customer will not trust the merchant unless he/she can trust the payment gateway system on the merchant’s platform.
The Card Network (Visa/Mastercard)
Visa and Mastercard are the world’s most renowned payment processing networks. It offers customers a wide range of prepaid, debit, and credit card options worldwide. It is a card network that connects merchants, their customers, and the banks associated with both.
Issuing Bank (Customer’s Bank)
An active customer account is essential to be able to send money to a merchant’s account. Once your bank verifies your details and the bank balance, it lets you transfer funds on NPCI’s request to the acquiring bank.
Acquiring Bank (Merchant’s bank)
The acquiring bank is entrusted with the job of crediting the receiver’s account on NPCI’s request. Once the amount is credited to the merchant’s bank account, the customer’s order is completed, and payment is processed successfully.
Payment Processors
A payment processor is an entity that takes on the responsibility of securely transferring the due amount from the customer’s bank account to the merchant’s bank account.
Common Payment Types of Payment Processing Systems
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Card Payments
Card payments like credit/debit cards allow customers to make a payment that is cashless and contact-free. A debit card payment is made by taking money straight out of your bank account and transferring it to the merchant’s account. On the other hand, a credit card payment is made by borrowing money from the customer’s bank, and then the customer is required to pay the bank back.
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E-Wallets
Digital wallets, often known as e-wallets, allow quick payments with just a tap and safely save your card information. They provide increased convenience, improved security, and simple spending tracking. E-wallets make money management simpler and more structured with built-in budgeting tools and thorough transaction records.
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Scan & Pay
Scan and pay is one of the most used and effortless modes of payment in the digital world today, especially when shopping outside. All you need to do is simply scan the merchant’s QR code, and the payment processing happens instantly, deducting the amount directly from your bank account. It’s fast, secure, and perfect for everyday payment processing.
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Bank Transfers
A bank transfer is a digital method of directly moving money from one bank account to another. It is regarded as one of the safest and most dependable ways in the payment processing system. Bank transfers are perfect for both high-value transactions and regular payments since they provide excellent transparency, direct settlement, and low processing costs.
Advantages of Incorporating Payment Processing
To streamline operations, a reliable payment processor is essential. A payment processor that can help reduce manual errors and ensure the business has as little as possible cart abandonment due to payment issues. Below are some of the advantages of incorporating a payment processor into your business.
1. Fast & Secure Transactions
Every payment is completed swiftly and securely with a dependable payment processing system. This lowers the chance of chargebacks, fraud, and unsuccessful transactions. Faster settlements help organizations keep accurate accounting records and enhance cash flow, which is a key financial priority.
2. Builds Customer Trust & Credibility
A seamless checkout process boosts client confidence. People are more likely to finish the purchase and return when they fully understand the significance of payment processing, which is the safe transfer of their funds from their account to the merchant’s. Customers and companies alike benefit financially from secure processing.
3. Supports Various Modes of Payment
Businesses may accept UPI, cards, net banking, e-wallets, and more thanks to modern payment processing. These instances of payment processing aid in expanding the clientele and lowering reliance on cash transactions. Better financial management and more revenue are the results of this flexibility.
4. Better Financial Monitoring and Efficiency
Through digital records, real-time dashboards, and automatic reconciliation, a strong payment processing system helps organisations manage their finances more precisely. It provides instant insights into consumer transaction behaviour, earnings, and settlements while streamlining bookkeeping and reducing manual error rates.
5. Lowers Operational expenses
Errors are decreased when billing and reconciliation reports are generated automatically. This saves time and also increases productivity.
How Does a Payment Processor Work?
Here is the mechanism of a basic payment processing system explained for a card transaction:
- The customer initiates the process by adding chosen products to the shopping cart and heading over to the checkout page.
- The customer enters the card details, and the information is transferred to the payment gateway. The gateway then transmits the information to the payment processor.
- The payment processor transfers the transaction details to the card provider for verification.
- Once the verification is complete, the payment processor requests the provider to process the payment.
- The card provider verifies if there is enough balance in the account. After confirming other details, it approves or declines the request. This information is communicated to the payment processor.
- If approved, the payment processor requests the issuing bank to transfer funds to the merchant’s account.
How Does a Payment Processor Work for Card Transactions?
Here is the mechanism of a basic payment processing system, explained for a card transaction:
- The customer initiates the transaction by adding selected products to the cart and proceeding to the checkout page.
- The customer enters the card details, and the information is transferred to the payment gateway. The gateway then transmits the information to the payment processor.
- The payment processor transfers the transaction details to the respective bank of the customer for verification.
- Once the verification is complete, the payment processor requests that the provider process the payment/deduction from the customer’s account.
- The card provider verifies if there is enough balance in the account. After confirming other account details, it approves or declines the request. This information is communicated to the payment processor.
- If approved, the payment processor requests the issuing bank to transfer funds to the merchant’s account.
Please note that all the above six steps are completed at lightning speed.
How Does UPI Payment Processing Work?
- The user chooses a UPI-enabled app and installs it. They begin their UPI journey by registering on the app using the mobile number linked to their bank accounts.
The app generates a device fingerprint to authenticate the user for easy usage in the future. - The user sets up a unique UPI ID and connects it to their bank account. The bank verifies the number provided using an SMS code.
- The user selects their bank account from the list of options, and the app sends a request to NPCI. The user enters card details, and once verified, the user sets a 4–6 digit UPI PIN. (Note: This PIN is unique to you and is not stored by banks; banks are meant only to store an encrypted hash.)
- The issuing bank confirms account details, and the NPCI shares the details with the merchant’s bank, and the bank updates its database by linking the user’s UPI ID to their bank account.
How Does E-Wallet Payment Processing Work?
There are so many well-known and reliable UPI apps available, like PhonePe and Paytm. E-wallets are known to store your money and allow you to easily use it as and when you wish. The best part is that e-wallet payment processes are super efficient and faster than the traditional way of deducting the amount every now and then by entering the PIN when needed. Simply add an estimated amount to your e-wallet, and make quick and easy payments instantly.
How do businesses offer wallets as a payment method to customers?
Well, businesses use payment aggregators or payment gateways that offer wallets as a payment mode. Tagging it as one of the fastest modes of payment.
In such a scenario, the payment processor itself acts as a wallet. E-wallets have been designed to improve customer convenience by making payments faster, simpler, and completely contactless. Here, the funds already exist in the wallet’s bank account. So, when a customer makes a transaction, the funds are debited from their ledger internally. In other words, there is no external stakeholder. Consequently, the transaction gets settled at the end of the day to the merchant’s business bank account.
How Can You Apply for Payment Processing?
There are multiple entities offering payment processing services. Traditional options like banks and modern ones, like online providers, are available. Most of them provide multiple-tier pricing.
When you are picking a suitable payment processor for your business, carefully study the services on offer. Some factors you should keep in mind: fees, customer support, add-on services, and payment type support.
Traditional providers are likely to charge less, but their services will only include the basic amenities. On the other hand, a new-age payment processor will add on a host of additional, valuable services that will help you augment your overall business.
Wrap Up
The modern online customer demands versatility. Lack of options often deters them from completing a purchase. A robust payment processing structure and a reliable payment gateway will ensure that you give them the requisite leeway. The more options you offer, the higher the chance of converting a visitor to your store into a customer.
There is a significant difference between online transactions and in-person payments. The choice of payment processing partner and the payment gateway decides matters a lot. So you must do thorough research and select the one that suits your business model the best.
FAQs On Online Payment Processing
What is a merchant account?
A merchant account allows the business owner to receive and process electronic payments via card transactions. A merchant acquiring a bank can provide such an account for your business. Essentially, it is a link between the payment processor and the merchant bank to process card transactions seamlessly.
How to choose a payment processor?
Any online business needs a payment processor to ensure seamless integration with its accounting, invoicing, and other tools. It must be able to manage several system loads and be extremely compatible.
Strong security is crucial since processors handle sensitive customer data; for optimal protection, choose PCI DSS Level 1-compliant gateways. Select a processor with a settlement cycle that works for your company, since, despite the fact that clients see fast payments, processors frequently retain money for up to seven days. Consider all costs, including setup, monthly, and transaction fees, to ensure the payment processing system stays within your budget.
Can I use my trusted analytics software with the payment processor?
It depends on the analytics tool you use. Most payment processors support popular software, and if yours isn’t compatible, discuss potential solutions with the vendor. Today, many payment gateways provide automated dashboards with real-time insights, reducing the need for separate analytics tools.
Is it necessary to have a payment processor in my business?
Yes, if you plan to do an online business and wish to accept payments through multiple modes, then you surely need a payment processing system. So, choose a payment processor that is fast, accurate and secure in order to reduce cart abandonment and increase cash flow.
