How Does the Payment Processing Work?

Instant payments can appear neat and easy, with transactions being processed instantly right after clearing a live authentication. However, behind the scenes is a complex network of electronic signaling and encryption software that does the job for you. Beyond the software and the algorithms, how payments are processed and what parties are involved is pretty straightforward, and includes the customer, the bank, the merchant, and the credit card processing system.

An Overview of Payment Processing

Payment processing systems help a merchant organize and receive payments from their customers. It’s a streamlined and simple transaction that makes purchasing online or in-person easier.

Parties Involved In a Payment Processing System

It all begins with the merchant bank account owned by the retail company which a merchant must open to accepts sales. This is where the money is kept after a transaction has been processed. The payment processor is the financial institution that transfers the financial transactions between the customer’s bank and the merchant’s account. This processor handles the credit card validation, verifies funds available, and accepts a small fee. It also encrypts all of its transactions and keeps information secure. Charges that were done in error can also be fixed by the payment processor. They also manage fraud protection. This all happens through the point of sale system or payment gateway, which connects the merchant account with the debit card issuer, as information is not allowed to be transferred directly between banks. The payment gateway allows customers to pay for a product or service, where the payment processing system handles the transaction afterward.

Payment Processing Steps

This is the actual transaction process for payment from start to finish, involving all four parties.

  1. The customer is ready to purchase an item and uses their card to pay for the item.

  2. The business owner or merchant submits the transaction once taking in the card information.

  3. The payment gateway sends this transaction data to the payment processor.

  4. The payment processor approves the transaction after verifying it and signals the banking institution.

  5. The bank sends money to the payment processor, and this institution then alerts the payment gateway that the payment was successful.

  6. The merchant is alerted on the status of the transaction and receives the money.


Payment Processing Systems Work Efficiently and Safely

There are several benefits to using a payment processing system, and with the advance of technology, they only improve year after year. For example, they have personal data protection as well as guaranteed anti-fraud systems. This means that the financial data being transferred is encrypted. If fraud were to occur it would be detected and immediately investigated, protecting the customers. Typically, customers are refunded their money while the fraudster is tracked down. A level 3 credit card processing system allows businesses to save money on fees, and it is sometimes offered as a specialty within these payment systems.

Payment processing systems are typically available in many countries and can be integrated with shopping carts. They are also customizable and can provide multicurrency payment processing.

Not all payment processing systems are the same and have different rates and rules for the types of transactions the business needs. They are often more profitable than independent solutions, because of the flexibility, ease of use, as well as having a level of innovation that in-house payment systems can’t procure.

Find Out More Information About Payment Processing Systems

When hunting for the right payment processing system, consider a level 3 service, which can provide you the opportunity to process payments in B2B transactions without the massive cost of high processing fees. You can find out more information on what level 3 credit card processing can do for you.

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