What Is A Payment Processing Company & How It Works
Updated: Nov 13, 2021
With online businesses taking over from brick and mortar shops, payment processing companies’ need keeps increasing.
If you run an e-commerce business, then you have already worked with a payment processing company. But if you are thinking about starting an online business, you need to know a lot about payment processing and payment processing companies.
So what is a payment processing company? And what is the payment processing business model? Well, that’s what we will talk about here.
We at the ZED Network work with online businesses and provide them with custom payment processing solutions. So we have ample experience working with payment processing companies, which puts us in a unique position to provide you with in-depth knowledge of how it works.
According to Zed Founder and entrepreneur Alan Safahi, knowing what the payment processing business model is and what these companies are will help you make crucial decisions on your business functions.
We will talk about the business infrastructure and payment terminologies used in the industry and how it all comes together to enable global eCommerce transactions. So let’s talk about what a payment processing company is.
What Are The Main Parts Of A Payment Processing Company?
Four main aspects make up a payment processing company. These four parts make up the entire infrastructure, but it’s not that simple.
Each part consists of layers, and we will address them all in the following passages. So here are the four parts of a payment processing company:
Banks & Transaction Settlements
Now that you know what the parts are let us discuss what they are and how they work. So let’s get into that.
What Is A Merchant?
Well, as the name suggests, the merchant or business is the individual who offers goods and services for sale online. These businesses work with acquiring banks where they apply and open up a merchant account.
An acquiring bank is a financial institution that is a registered member of card networks like Visa and Mastercard. It works as an intermediary between the network and the merchant when transactions happen on the website.
The merchant account works as an agreement between card networks and the merchant. When a transaction happens, the banks communicate and verify the transaction details before sanctioning the transaction.
When a business opens a merchant account, they agree to conditions and terms set by the banks and networks on transactions that happen.
It can range from monthly billing or a percentage of each transaction, or both. The merchant account also works on other payment methods like digital wallets, e.g., Google Pay and PayPal.
The Shopper Or Customer
The shopper or customer is the person who buys products and services online and is a vital part of the payment process. Whenever customers buy something, they have to put in their card or wallet information on the website’s cart page.
That information is usually encrypted, and it goes through another secured step when the Payment Service Provider or payment gateway sends the information to the card networks and banks.
When the transaction goes through from the customer side, the merchant will fulfill the order they placed.
Processing The Payments
The payment process is what we will talk about now. This is the process that binds the entire online economy together.
So the payment process is when the transaction information is sent from the website to the payment processor used by the acquiring bank via a payment gateway.
There are three things to talk about here: the payment processor, the payment gateway, and the payment gateway service providers. So let’s talk about what these mean and their role in the payment process.
What Are Payment Gateways & How Do They Work?
Payment gateways are software that links up with servers and ensures a clean and safe path for transaction information exchange between banks.
Digital security is one of the biggest priorities for a payment gateway to be trusted. Because payment gateways handle sensitive data, this software needs to meet a set of rules and security standards considered market standard.
According to Alan, the standard that payment gateways need to meet is the Payment Card Industry Data Security Standard (PCI-DSS or PCI). HTTPS protocols are one of the safest and secure options to protect the shopper’s personal information.
Payment gateways usually charge a per-transaction fee for these types of transactions. For the payment process to succeed, you, as a merchant, need to work with a payment service provider who can set your payment gateway up correctly.
You can say that the payment gateway service providers are one type of payment processing company we discuss. The payment processing company’s business model is to set you up with the software or the payment gateway and the infrastructure for transactions.
The infrastructure includes the Payment Card Industry Data Security Standard (PCI) compliance, fraud protection, and the ability to process different currencies and translate different languages.
Now that we covered the payment service providers let’s move on to the payment processing companies.
What Are Payment Processing Companies & How They Work?
Payment processing companies allow businesses to receive debit or credit card payments online by connecting the merchant to the acquiring bank. These companies use various anti-fraud measures to evaluate the validity of transactions.
Payment processing companies follow strict standards and regulations that the credit card associations set up. All the regulations and measures that have been set cover everything from fraud, chargebacks to identity theft.
So payment processing companies ensure the validity of the transactions and transmit valuable information to both sides. That’s about it for processing payments now; let’s look at the transaction’s last step.
Banks & Transaction Settlement
This is the last step in the whole payment process for an e-commerce business. There are five different aspects of this last step. Here they are:
Issuing Bank: The issuing bank is the cardholder or customer’s bank or whatever financial institutions they are using. They process the payment request and approve or decline the request depending on the customer’s financial capabilities.
Acquiring Bank: This is the bank on the merchant’s side that is registered on the network. The acquiring bank will connect with the issuing bank to verify the transaction information through the card network. The acquiring bank will match the information, and then depending on the validity of the information; it will approve or decline the transaction.
Card Authorization: It’s the process where the card issued on the purchase is checked for validity and sufficient funds. When the purchase is initiated, an authorization request from the acquiring bank and associated payment processing company is requested to verify the purchase. This step ensures that the cardholder has the funds and that the cardholder is the one who initiated the purchase.
Credit Card Interchange: This happens when the transaction is approved. Once approved, the acquiring bank works on clearing and settlement of records between payment system participants.
Transaction Settlement: So, this is the final step of the payment process. Here the payment processing company and the banks work on settling all the dues. They ensure that the money goes where it needs to and that both parties, the shopper and the merchant is aware of the transaction going through
Work With The Right Payment Processing Company
So that about covers it for today. We discussed the inner workings of the e-commerce payment process. We broke down all the terminology and parts of the payment process and tackled what a payment processing company is and how it works.
Hopefully, you learned what you needed to know about the payment process and payment processing companies’ functionalities. Armed with this knowledge, we believe you will be able to make better decisions for your business.
However, this is not a “how-to” on starting a payment processing company. That is something different entirely. We will hopefully cover that shortly.
Now, if you have any more queries regarding payment gateways and payment processors, then feel free to contact us. Our developers will be more than happy to answer all your queries.
You can also ask us questions in the comments below or hit us up on our social channels. Hope to hear from you soon, and we will come back with something new as fast as possible. Until then, see ya!