How Does the Payment Processing Industry Work? Understanding the Infrastructure and Process
Have you ever thought about what goes behind the scenes when an online payment is made? If you are just getting started with the eCommerce business and online payments – or if you are just curious about the process – it can be exciting for you.
This blog post outlines today’s online payments processing landscape: how the payment processing infrastructure works, what the latest technology is integrated, and who the major players are.
In addition, it highlights some trends in consumer behavior that are likely to impact the future of the payment processing industry.
The Payments Ecosystem
The payments' ecosystem comprises a combination of players that align with each other during the payment transaction process. Such entities play particular roles in the payment processing cycle.
Players.
Players in the payment industry consist of the following:
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The Merchant.
To accept digital payments via credit or debit card from online customers, the merchant needs to partner with some key players. As a business owner, probably you’ll need a merchant bank (sometimes referred to as an acquirer) that receives payments on your behalf and deposits them into a merchant account they provide.
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The Customer.
Similarly, to enable your customers to pay for your goods and services, they need a credit or debit card. The bank that approves them for the card and provides them the cash for payment is referred to as the issuing bank.
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The Technology.
In between, there are two technologies that let you and your customer transact. The foremost is the payment gateway, software that integrates your site’s shopping cart to the processing network. The second is the payment processor, which performs all the major processing: transferring the payment via the processing network, sending you a billing statement, and working with your bank. Usually, your merchant bank is also your payment processor, which helps facilitate things.
Payment Processing
The payment processing cycle is complex and consists of different stages. When a user swipes their debit or credit card at a payment terminal, the merchant provides the purchase transaction details to the payment processor used by its acquiring bank via a payment gateway. The transaction typically takes a fraction of a second—but the process itself comprises multiple steps and involves several players that connect with each other.
What is a Payment Gateway?
A payment gateway is a software platform that facilitates the communication of transaction information.
How Does a Payment Gateway Work?
Payment gateways are software and servers that transfer transaction details to acquiring banks and replies from issuing banks (For instance, a transaction is accepted or declined). Basically, payment gateways facilitate communication within banks.
Security is a critical component of all payment gateways; sensitive data such as credit card details need to be protected from any fraudulent moves. The card associations have drafted a set of rules and security standards that need to be followed by anyone with access to card details, including gateways. These pre-defined rules and security standards are known as the Payment Card Industry Data Security Standard (PCI-DSS or PCI).
Many eCommerce merchants utilize online Payment processing Service Providers to acquire access to payment gateways and hence be able to accept payments. In such a situation, the Payment Service Provider will ensure the gateway functionality is available for the merchant and its customers.
What is a Payment Processor?
A payment processor is an institution or enterprise authorized to process credit card transactions between buyers and sellers.
How Does a Payment Processor Work?
Payment processors allow merchants to accept debit or credit card payments online by integrating them with an acquiring bank. These processors perform multiple functions, such as assessing whether transactions are genuine and approved. In addition, they put anti-fraud measures in place to ensure that a purchase transaction is initiated by the authority it claims to be.
Processors are maintained as per the standards and regulations set up by credit card associations. These standards comprise rules regarding fraud, chargebacks, and other related threats.
Pricing.
We’ve discovered how payments come in, but what about the other side of the coin? What will it cost? You might be aware of this or not that everyone who is linked with the transaction process wants to get paid, including the credit card association (Visa, MasterCard, etc.), the issuing bank, the merchant bank, and the payment processor.
Simply put, every time you carry out a sales transaction, you pay four fees:
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A percent of the transaction amount
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Another percent of the transaction amount
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Yet another percent of the transaction amount
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A dollar amount for every transaction processed
What’s Next?
Although it has complexities and a diverse array of technologies, the payment industry is continuously evolving in the innovation landscape. And increasingly, the industry’s ability to adopt cutting-edge solutions is enabling this industry to drive continuous investments and a rising number of mergers and acquisitions.
Even as new technologies and assets disrupt the payment landscape, though, one thing is guaranteed: the online payment processing industry will continue to do all it can to provide the payment processing cycle as seamless as possible.
