As a merchant, it’s important that you understand the basics of online payment processing. This knowledge is key in helping you choose the best payment gateway, payment processor, and merchant account for your business, as well as helping you to better understand why you need solutions in place to protect yourself from fraud and chargebacks.
There are two basic components to online payments:
- Card authorization
- Transaction settlement
Card Authorization
This is the only step in the process in which your customer is directly involved. Essentially, your customer provides their credit card details, typically by filling out an online payment form that requests the name on the card, the card type, the card number, the CVV, the expiry date, and the cardholder’s address. When your customer clicks Submit, this information is transferred by your payment gateway to the credit card issuer for confirmation and verification. During this process, the customer’s card details are verified, including checking to ensure the cardholder has sufficient funds to pay for the purchase. A message is then returned to your payment gateway and displayed to your customer either approving or declining the purchase.
If the purchase is declined, it can be because the customer made a mistake while entering their data, or the card has expired, or the cardholder does not have sufficient funds to pay for the purchase. Alos, the purchase could be considered suspicious and the payment gateway has flagged this as potential fraud risk.
If the purchase is approved, your payment gateway/website should send an automatic confirmation email to the cardholder confirming the purchase details.
Transaction Settlement
This is the crucial step during which the purchase is processed, and ultimately approval is made to credit your account. Your payment gateway has managed the first step for you and now your payment processor handles the transaction settlement.
Your payment processor submits the transaction details to your bank. (Depending on your system, this can happen for every single purchase or in a batch mode at the end of your business day.) When your bank receives the transaction notification, it forwards it to the appropriate credit card company (Visa, MasterCard, Discover, etc.) and waits for a second confirmation from the cardholder’s bank. Once this is approved, the issuer sends your bank a credit which your bank then uses to deposit a payment into your merchant account. Finally, the cardholder is charged and their credit card statement is updated with this charge.
This is it. You will notice that there are two key solutions involved in processing online payments: the payment gateway and the payment processor. Read our whitepaper titled: How to Choose the Right Payment Processing Partner to gain valuable insight into online payments and what you should look for in a processing partner.
What is a payment gateway?
A payment gateway allows you to accept online and traditional face-to-face sales, charging your customer’s credit card, debit card, or gift cards and checking accounts. This payment gateway is invisible to your customers and operates behind the scenes to process and validate payments.
Using secure communication methods and tokenization, payment gateways communicate between your online store/website and your bank. Customer data is collected, validated, approved, and then the payment is accepted, debiting your customer’s account.
When researching payment gateways, make sure you select one that supports global worldwide processing networks. This allows you to ensure uptime and protects your revenue while minimizing processing costs through intelligent and flexible transaction routing. The Verifi platform supports a global payment network, including a wide range of domestic, international, and ACH/eCheck processing networks.
What is a payment processor?
A payment processor works behind-the-scenes to connect your payment gateway and merchant account. The payment processor is responsible for the transaction settlement, ultimately ensuring that you receive payment for the cardholder’s purchase. Typically, payment processors work in partnership with payment gateways to ensure smooth transaction processing.
When researching payment gateways, we suggest you look for a company, such as Verifi, who has deep partnerships and relationships with the leading payment processors. Having this established relationship helps to ensure a safe and secure payment experience from end-to-end.
What is a merchant account?
A merchant account allows you to accept payments from credit and debit cards. In order to use a payment gateway to manage the credit or debit card authorization during online payment processing, you must have a merchant account. Also, to have the funds transferred to your merchant account, you must also have a relationship with a payment processor.
Your payment gateway or payment processor might have the capability to provide you with a merchant account, or you might need to open such an account with a bank.
When learning about your merchant account options, it’s important that you understand the fee structure. The fees you pay for your merchant account are typically based on the type of account you have, the number of transactions you’ll be accepting, and your merchant account provider. We suggest you review our Knowledge Base article titled Here is how to get a merchant account to learn more about this critical component of online payment processing.
URLs used for research:
https://www.chasepaymentech.com/the_basics.html
https://en.wikipedia.org/wiki/Payment_processor
https://en.wikipedia.org/wiki/Merchant_account