How Does Payment Processing Work? Understanding the Industry and Process

    I have been working in the payments industry for a long time. Back,

when I first started you had to convince merchants to accept cards.  It was

a different time.  Now, when you find a person or business owner that

does not accept cards, you feel shocked. As an experiment, let’s see if I can

make since of our industry.

 Let’s start by looking behind the curtain to see how it all works. if you are

just taking your business online in in eCommerce and online payments.

You will need to at minimum have a basic understanding of the payments

industry to survive and thrive.

  In this post I will explain the main frames relationship to main street

and then take you across the seas to the world that awaits.

Checkout what’s available for free in eCommerce online business.

 the payments professionals call business owners merchants. The merchants bring goods and services to the main street market. Sometimes the market is in a business district and sometimes the services are sold online.

A merchant banker assigns the business owner or merchant to an acquiring bank. The merchant applies for and receives a account to process payments. The payments are deposited into a local regional bank chosen by the merchant.

A lot of people start to get confused because of the differing types of banks in the banking system. In the card service industry the are two types of banks. One type of bank is the Acquiring bank. The acquiring bank processes the transactions and deposits the proceeds into a merchant account at a local bank. Furthermore, a second type of bank in the cardsevice industry is the Issuing Bank. This is a type of bank that issues credit cards to consumers through member banking institutions such as your local main street bank. Both banks are members of card networks, such as Visa or Mastercard.

Businesses Merchant Account

A business merchant account is issued by the Acquiring bank. It allows the cards to get accepted by the local merchant.

Merchant accounts are identified by account numbers issued by acquiring

banks. It identifies the owner of the transactional information used to

process the transaction and make deposits into the business owners

account. The owner receives the funds as a result of having agreed to

follow the rules set by the Issuing banks (card associations).

Merchant banks charge fees for the process. These fees are debited

monthly, or daily. The fees are charged as a percentage of each

transaction.

There are generally 2 types of customers. A customer that shows up in

person or a customer that orders online or by phone. A customer that

presents a card in person costs the merchant less than a customer who is

not present. Customers that buy online and by phone are considered

higher risk transactions. Therefore, the fees charged to process these

transactions cost higher fees.

Payment processors come in many shapes and sizes. But they all do the

same thing. Some do better than others. The only time this is important is

when the anomaly of a bad transaction occurs. The payment processor

works with the gateway to process transactions. Once the customer

interacts with the POS system at the store owners location the

information is submitted to a payment gateway through the payment

processor.

Let’s call your local bank your issuing bank. It issues credit cards, and

bank cards as a franchise of the card associations. The card associations

run the card networks that communicate between bank associations.

The issuing bank will receive a request for authorization and will either

accept or decline the transaction. Depending on the health of the account

of the card holder.

More on authorization. When a card interacts with a POS Terminal an

authorization occurs. A authorization is a request for acceptance of a

charge being generated by the card holder.

Interchange is the movement of data such as records that need to be

cleared and processed. the term includes the fees and costs associated

with the movement of this data. Think of these networks as a series of

road ways with tolls. depending on the type of transaction, different tolls

are generates by the interchange network. Banks charge fees for the

movement of these transactions to settlement. Card based fees are paid by

the aquiring bank or the business’s local bank, and on to the customers

banks and issuing bank.

Transactions are submitted to the acquiring banks for a small fee. The

payment processor receives this batch at the end of everyday. If not all

transactions get charged as not present transactions and are charged the

higher card not present fee. The transactions are then settled at all the

customer banks.

As members of the card networks, Acquirers, uphold the sanctity and

regulation of the payment networks. The companion relationships

guarantee the smooth settlement the trillions of transactions needed to

drive the global economy as well as the main street local economy.

So there it is the story of the Payment processing and how it works.