What is Online Payment Processing and How Does it Work?

What is online payment processing? Learn all you need to know about how payment processing works with this easy-to-understand guide for merchants.

Online payment processing may seem like a simple concept on the surface. But a lot is going on behind the scenes that merchants need to understand in order to run a successful business. 

In this post, we’ll get you up to speed on the fast-changing world of online payment processing so you can understand how processing works and how you can optimise your payments to boost your revenues. Here’s what we’ll cover:

  • What does payment processing mean?
  • What are the key terms and methods of payment processing? 
  • How does payment processing work?
  • Types of payment processing services
  • Examples of Payment Processing Companies
  • How to optimise your online payments to grow your revenue

What does payment processing mean?

Payment processing is a general term used to describe the sequence of processes that enable the completion of electronic transactions initiated from debit and credit cards or any other digital payment method. 

What are the important terms and methods of payment processing? 

As a merchant selling a product or service online, you need to be familiar with several key terms and online payment processing methods. Here is a list with the most important terms you need to know about.

  • Credit card processing - is a system that enables credit card data to be transmitted through an electronic card network to approve a transaction and move money between accounts. 
  • Debit card processing - is a system that enables debit card data to be transmitted through an electronic network to approve a transaction and move money between accounts. While appearing the same, debit card processing is less complex than credit card processing and takes place on different networks. However, merchants can usually accept both debit and credit card transactions using the same hardware or software. 
  • ACH Processing - Automated Clearing House (ACH) is a network run by the National Automated Clearing House Association (NACHA) that enables the routing of payments between banks.
  • Mobile wallet processing -  refers to payments made with a mobile device using a mobile wallet. A mobile wallet is a software application that stores credit card or bank account information and enables purchases via a mobile device.
  • Payment processor - is a company that facilitates online payments that get processed for merchants. When a customer enters their credit card information, a processor takes the information and sends it to the credit card network. The card network checks for fraud and if the customer has the necessary funds to purchase. The processor then sends an approval or denial back to the merchant. If approved, the processor communicates with the credit card network to go back to the customer’s bank, collect the transaction and deposit the money into your account. 
  • Payment gateway- is an online version of a point of sale (POS) terminal. It’s a front-end software application on a merchant’s website that enables online payments. Payment gateways capture and send credit card data to a payment processor and communicate approvals or rejections to you, the merchant, and your customers.
  • PoS (Point-of-Sale) - is a system consisting of hardware and software that enables brick and mortar merchants to manage orders and inventory, store customer data, and process credit and debit transactions. The hardware components of a PoS usually include a computer terminal and several connected devices such as receipt printers and card machines that connect to the central computer terminal through cables or wirelessly. 
  • Merchant bank (acquirer) - is a financial institution used by a merchant to accept customers’ debit and credit card payments. In the past, opening a merchant account was required to accept online payments. Today, it’s possible to accept credit and debit card payments without having to apply for a merchant account using a third-party provider known as a payment aggregator.  
  • Card issuers - are financial institutions that provide credit and debit cards to end consumers and merchants on behalf of card networks such as Visa, Mastercard, and American Express. Card issuers have a variety of factors when deciding who is allowed to have their cards and earn money from charging various fees. 
  • Credit card networks - are the companies that facilitate the connectivity between the merchant bank and the card issuers. These companies set the governing rules and prices and take charge of clearing and settlement that makes it possible to pay with a card. There are four main card networks: Visa, Mastercard, Discover, and American Express.
  • Address Verification System (AVS) - is a service provided by Visa, Mastercard, Discover, and American Express to verify whether a cardholder’s official billing address in the card issuer’s system matches the billing information entered by a customer. The AVS cross-checks billing addresses and zip codes to detect and reduce online payment fraud and chargebacks.
  • ACH Payments (Automated Clearing House) - is a network run by the National Automated Clearing House Association (NACHA) that enables any entity to electronically send or receive money. ACH transfers are becoming increasingly popular as they provide businesses with another payment option and eliminate the need to send paper checks or manually handle recurring billing.

How do online payments and payment processing work?

To know how to accept online payments, you’ll need a payment service provider. A provider lets you accept payments online just like a payment terminal does in a physical store. When a customer completes the checkout process on your website, the payment service provider collects the card information and passes it onto the processor (acquirer). The acquirer asks for authorisation from the issuer and then checks to make sure the payment information is valid and that there is money in the account and either authorises or declines the payment. The payment services provider then communicates this back to you. If the transaction is approved, the issuer takes money from the consumer and the acquirer sends the funds to your designated account.

Payment processing step-by-step

Whether you’re a small mom-and-pop shop, e-commerce store, or enterprise, payment processing is integral to doing business. The good news is that understanding the mechanics of how payment processing works is much easier to grasp than you might think. Here’s how it works:

  1. A cardholder swipes or taps their card in a store or enters their card details online to pay for something.
  2. The PoS or gateway relays the card information to the payment processor.
  3. The payment processor transfers this transaction information to the credit card network to verify the customer’s details are correct.
  4. The card network then requests authorisation to release the funds with the customer’s issuing bank. After checking for sufficient funds and verifying that the transaction isn’t fraudulent, the issuing bank sends a response to the card network stipulating whether the transaction has been approved.
  5. This information is sent to the payment processor, which requests funds from the issuing bank. Funds are transferred to the merchant account and then onto the business’s bank account by the payment processor. 

Types of payment processing services

In order to accept different online payment methods from your customers, your business will need to have the right systems and payment processing capabilities in place.

Accepting credit card payments online

Accepting credit card payments online has never been easier, thanks to payment gateways such as Pay.com that take care of the security and PCI compliance issues inherent in accepting credit card payments on your website. To accept online credit card payments, you’ll need to sign up for an online gateway like Pay.com which processes your customers’ card payments. One key advantage of accepting credit cards is that they are widely used in many countries worldwide and can be processed relatively quickly, with money appearing in your business account within a few days. 

Accepting mobile payments online

Mobile payments are payments made via a mobile device rather than a credit or debit card. The critical advantage of accepting mobile payments is that they enable your customers to purchase without having to pull out a credit card or search for their bank account routing number and manually enter their payment details on an online form. To accept mobile payments online, you’ll need to work with a payment gateway that connects to various mobile wallet providers like Apple Pay, Samsung Pay, or Google Pay.

How to optimise your online payments to grow your revenue?

As online payments grow exponentially, the best businesses will always be looking for ways to enhance their revenue growth. Here are a few key ways to optimise your online payments to increase your revenue.

Enhance your mobile payments experience

As we begin 2022, the trend for online payments is clear — it’s mobile. According to the Global Mobile Shopping Study from Verto Analytics and Yotpo, 36% of mobile users in the United States have made an online purchase using their mobile in the last six months. Nearly 40% of those users made a mobile transaction every week during that time. At Pay.com, we understand this. That’s why we enable merchants to create a custom-designed mobile checkout page. With Pay, you can format your visuals, text, and overall design for the mobile screen and ensure the checkout experience is consistent with other channels and your brand. You can also offer mobile-centric payment methods that eliminate the need for lots of typing and effort.

Speed up the payments process

Today’s consumers expect a fast and easy way to purchase products and services online. Yet, according to the Baymard Institute, most sites can reduce the number of form fields displayed by 20 to 60%. With Pay, you can securely store your customer’s payment preference and details so returning customers don’t have to reenter all their payment information. By doing so, you can create a more personalised and faster online payment process that increases your conversion rates and revenues.

Smart routing

As a merchant, every transaction is vital to your revenues, customer relationships, and your business’s overall success. Using a payment gateway like Pay.com that utilises an intelligent routing system, you can automatically select the most optimal and cost-effective route for every transaction. With Pay’s smart routing system, you’ll be able to increase your approval rates and reduce fraud rates while minimising transaction fees and costs.

Emphasise on security

As more and more people switch to purchasing goods and services online, it’s becoming increasingly important for consumers to feel safe when paying for something. In fact, a lack of visible security is one of the leading causes of cart abandonment. Merchants must, therefore, communicate a secure payment experience and build trust during the checkout process. Pay.com includes a 3D secure protocol that provides an additional layer of security. By doing so, your customers will have greater protection. But you can also show the 3D secure symbol and other security logos throughout the checkout process to increase trust and confidence.

Provide a range of payment options

Offering different local payment options is an excellent way to build trust with customers and increase your sales. While credit cards like Visa, Mastercard, and Amex may be popular in the US, this is certainly not true in other markets like China and parts of Europe. With Pay, you can win more customers and increase conversion rates by providing a wide range of popular local payment methods in each market you operate. Pay works with many of the best payment providers and constantly adds new methods that you can easily add in just a few clicks. 

Collect and analyse data

In today’s competitive market, every merchant needs access to customer insights to help identify trends and preferences among their customers and identify weak points. Pay gives merchants the ability to view real-time data and intuitive analytics on an easy-to-understand dashboard. With access to detailed customer data, merchants can better understand which areas need to be focused on to increase revenues and make more informed business decisions that reduce costs and increase customer satisfaction, retention and profits.

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How do I decide which payment processor to use?

Choosing the most suitable payment processor can be a difficult task. The key to making the right decision is knowing what you need, understanding how different payment processors stack up and identifying the factors influencing your decision. That said, top considerations include flexibility, the ease of customising your checkout design and adding payment options, payment analytics, security, and fraud protection.

Is credit card processing secure?

Yes, at least for the most part. However, the answer to this question varies depending on your business and the specific processor you choose. Ensuring your provider is PCI DSS compliant, employs end-to-end encryption, and upholds the highest security standards is critical to reducing your risks.

Will my business qualify for a merchant account?

It depends. Not all businesses automatically qualify for a merchant account. If you’ve experienced past bankruptcies or have a bad credit report, you may struggle to get approved. However, if there are no significant problems with your credit history and you can provide all the required information, you should have no issues opening a merchant account.

How much will payment processing cost?

Generally, credit card processing fees will cost your business between 1.5 and 3.5%, with around 2% considered pretty standard. It’s best to minimise your costs by choosing a payment processor with reasonable rates because fees can end up significantly eating away at your bottom line over time.

What payment types can I accept?

The number of payment methods your business can accept is growing by the day. To boost your sales and give customers the best possible experience, consider using a payment processor that enables you to easily add new and popular types.

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