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Payment Processing Services

Updated on :  

08 min read.

Every business, online or offline, has a payment gateway and payment processing service providers that offer improved customer experience and business reputation by ensuring the smooth processing of transactions. The complete process of debit or credit card transactions is a lot more complicated than just swiping the card on a POS machine. Payment processing services are multi-step processes including parties such as:

  • Customers
  • Business/merchant
  • A payment processor
  • Payment gateway
  • Bank/credit card/debit card company
  • Business bank/merchant account

What is a Payment Processing Service?

Businesses offering payment options through credit and debit cards necessitate payment processing service providers collaborating with all parties involved to ensure an efficient and smooth payment process for both the businesses and customers. They are responsible for performing all the functions required for a non-cash transaction. 

Payment processors are a crucial part of the global financial chain as they operate as a mediator between merchants, businesses, customers, and financial institutions processing transactions. They synchronise paperless transactions by validating every piece of information and delivering funds to businesses/merchants upon the completion of a purchase. The network possessed by payment processors enables them to accommodate data flow between all included parties.

How Does Payment Processing Work?

Payment processing services deal with the authorisation, funding, and settling of a transaction. When a customer makes a purchase and the payment is made using a card at the point of sale, the completion of the transaction takes a few seconds. However, the process behind this transaction is complex. 

The business/merchant requests the payment processor to authorise the transaction. The payment processor then performs the following tasks:

  • It sends the transaction to the card association linked to the issuing bank
  • The transaction is either accepted or rejected based on specific criteria
  • The issuing bank then sends an approval or rejection status to the merchant bank and then to the merchant.

Upon the completion of authorisation, the funding and settling occur wherein the transaction is deposited into the merchant’s account. After the merchant sends the authorisation request to the payment processor, the payment processor sends the details to the card association. Since the card association is linked with the issuing bank, the bank receives the details and performs the following functions:

  • It charges a sum from the cardholders for the transaction
  • It then deducts the interchange fee and transfers the rest of the amount to the merchant bank
  • The merchant bank then transfers the amount to the merchant’s account

How to Select a Payment Processor?

Businesses must consider the following points before selecting a payment processor:

  • Enhanced customer service
  • Fraud risk management solutions
  • Flexibility in transactions
  • Tools aiding business growth

Businesses need to understand that every payment service provider does not process all types of transactions. While some may be good at online processing, others are good at in-store processing.

Types of Payments Processed

Online payment processes offer individuals a wide variety of payment options. Some of the commonly used ones are:

  • Debit/credit cards – In this widely used payment method, the bank details provided by the customer are sent to the payment processor.
  • Bank transfers – This method of payment, mainly used in B2B transactions, offers complete control of transaction authorisation to the customers.
  • e-Wallets – Customers using this payment method must sign in for the e-wallet using their bank accounts or credit/debit cards.