CATEGORY - PAYMENTS

What is Payment Processing? How it works and its benefits

Payments - 25 Sept, 2024

Table of Contents

What is payment processing?

Payment processing is the electronic transfer of money between a buyer and seller. It involves checking the buyer’s payment details, confirming the transaction, and moving funds from the buyer’s bank to the seller’s bank, usually within a few seconds.

Key Players in Payment Processing

Customer: The individual or entity making the purchase.
Merchant: The business selling the product or service.
Payment Gateway: A software application that facilitates online payments.
Payment Processor: An entity that handles the technical aspects of payment processing.
Issuing Bank: The bank that issued the customer’s payment card.
Acquiring Bank: The bank that processes payments on behalf of the merchant.
Card Network: A global network that connects issuing and acquiring banks (e.g., Visa, Mastercard, American Express).

Steps in Payment Processing

Customer Initiates Payment:
- The customer selects their desired payment method (e.g., credit card, debit card, digital wallet).
- They enter their payment details on the merchant’s website or app.
Payment Data is Sent:
- The merchant’s website or app sends the customer’s payment information to the payment gateway.
Payment Gateway Processes Request:
- The payment gateway encrypts the payment data to protect it from unauthorized access.
- It routes the request to the appropriate payment processor.
Payment Processor Authorizes Transaction:
- The payment processor communicates with the issuing bank to verify the customer’s card details and available funds.
- The issuing bank responds with an authorization code.
Payment Processor Sends Response:
- If the transaction is authorized, the payment processor sends a positive response to the payment gateway.
- If the transaction is declined, the payment processor sends a negative response.
Merchant Updates Order Status:
- The merchant’s system receives the authorization response and updates the order status accordingly.
Settlement:
- After a period of time (typically daily or weekly), the acquiring bank transfers the funds from the issuing bank to the merchant’s account, minus processing fees.

Importance of Payment Processing for Businesses

Efficient payment processing is essential for every business’s smooth functioning and prosperity. It is the foundation for simplifying monetary transactions, improving efficiency, and boosting customer approval. Listed below are the main advantages:

Helping Transactions: Safe and effective payment processing allows consumers to effortlessly buy products with credit cards, debit cards, and digital wallets. This removes the necessity of dealing with physical money and manual tasks, thus conserving business time and resources.
Improving Customer Experience: A smooth payment procedure helps boost customer satisfaction and loyalty. Businesses can establish trust and encourage customer loyalty by providing different payment choices and guaranteeing a safe transaction process.
Ensuring Financial Stability: Robust payment processing systems have advanced security features, such as encryption and fraud detection. These features secure customer financial information and help prevent fraudulent transactions targeting businesses.
Speeding up cash flow: Improved payment processing leads to faster access to funds. This enhances a company’s cash flow, enabling improved financial strategizing and investment in growth opportunities.
Facilitating Business Scalability: Payment processing solutions that can scale enable businesses to adjust to expansion. They can easily manage rising transaction volumes without sacrificing security or efficiency.

Payment processing enables businesses to function more effectively, deliver outstanding customer experiences, and succeed in the changing market.

Critical Components of Payment Processing Systems

Consider online shopping as a theatrical performance. You, the purchaser, and the seller are involved in the transaction. However, a proficient team works backstage to ensure the show goes off without a hitch. These essential elements function similarly to the stage manager, costume director, and lighting technician, collaborating harmoniously to produce a cohesive experience.

Business’s Merchant Account: A specialized bank account that collects funds from customer transactions. The company establishes a relationship with a collaborating bank.
Payment Processor: It functions as a helpful aide in ensuring proper order. They receive approval from your bank (the issuing bank) to verify that you have sufficient funds, then transfer the money to the company’s account (after deducting a small fee).
Checkout portal: The secure payment gateway on a website or app where you input your credit card information. It securely transmits this information to the payment processor.
Bank that acquires: This financial institution collaborates with companies to provide merchant accounts and manage their transactions. They accept a slight risk of fraud and transfer the money into the company’s account.
Bank of Issue: The bank that provided your credit or debit card. The payment processor contacts your bank to inquire about your account balance and confirm funds availability. Your bank will respond with either a positive or negative answer.

All these components function cohesively, similar to a finely tuned mechanism. When you make a purchase, the payment processor securely processes your payment details during checkout. The processor verifies with your bank to make sure everything is okay. When your bank approves, the money (less a fee) is transferred to the business’s bank.

This system ensures the safety of your information, verifies your funds availability, and enables businesses to receive payments efficiently. Collaboration among team members is essential for maintaining success.

Different Payment process methods

Knowing different payment processing methods helps select the most appropriate one for every transaction.

Credit cards are a handy choice for purchasing goods without needing immediate funds. You borrow funds from a lender and repay it later, usually with additional interest. Consider using credit cards to build a credit history or make large purchases. They can also help you manage payments effectively.
Debit cards are like using your cash electronically. You pay for things immediately, and the money comes directly from your bank account. This makes them great for everyday purchases and keeping your spending in check.
UPI apps have transformed digital payments in India by allowing immediate money transfers through a virtual payment address (VPA). They have easy-to-use interfaces and frequently connect with mobile wallets to provide a smooth experience. Utilize UPI for fast person-to-person transfers, settling bills, and online purchases in India.
Purchase now, pay later (BNPL): This up-and-coming choice enables you to divide your payment into smaller payments, frequently with no interest. It provides flexibility in handling payments, particularly for more expensive transactions. Consider using BNPL for scheduled purchases to divide the payments without accumulating debt from high-interest credit cards. Make sure you comprehend the repayment conditions and charges linked to BNPL services.
Mobile wallets let you securely store your credit, debit, and other payment info on your smartphone. Shopping is a breeze - tap or scan your phone to pay in stores or online; no physical card is needed. Mobile wallets add an extra layer of security to your everyday transactions.
Bank Transfers: This conventional approach involves moving funds electronically from one bank account to another. It may be appropriate for more significant transactions or sending money to people needing access to other digital payment choices. Bank transfers help send money to loved ones or for high-security transactions.

Selecting the Ideal Payment Processing Solution?

Getting through the various options for payment processing solutions may feel like a longer task. Key factors to take into account when selecting the ideal match for your business include:

Ensure the solution integrates smoothly with your current business systems, shopping cart platform, and accounting software for compatibility and seamless operation. This will reduce the need for human work and improve the efficiency of your payment processing system.
Security is of the utmost importance, and robust security measures are vital. Seek a resolution that prioritizes data safeguarding with encryption, utilizing anti-fraud measures, and complying with security regulations such as PCI-DSS.
Understanding the costs associated with different types of transactions (such as credit cards and debit cards) and any regular monthly fees. Having transparent and readily available pricing is crucial for effectively organizing and budgeting for costs.
Customer service and SLAs are essential for handling technical problems and meeting troubleshooting requirements. Assess the service provider’s SLA to comprehend their dedication to ensuring uptime, quick responses, and resolving issues.

Advantages of Implementing Payment Processing System

Are you currently willing to accept payments? You require a system that provides customers with a simple and secure experience. Using payment processing systems can significantly boost your business’s success.

Enhanced Customer Satisfaction: Payment processing systems provide a range of convenient choices, such as credit cards, debit cards, and mobile wallets. This addresses customer preferences and simplifies the payment procedure, ultimately boosting customer satisfaction and loyalty.
Higher Sales and Revenue: Implementing payment processing systems to simplify the payment process increases spontaneous purchases and improves conversion rates. Moreover, providing more payment options can attract more customers, increasing sales and profits.
Best security: Modern payment processors have advanced security features, like scrambling data and catching suspicious activity, to protect your financial information from fraudsters.
Effective Operations: Manual payment processing is time-consuming and prone to errors. Payment processing systems streamline tasks like transaction approval and balancing, freeing up significant resources for focusing on core business functions.

Payment processing systems generate crucial data on customer spending habits and transaction patterns, which provides valuable insights and analytics. Analyzing this information allows for a deeper understanding of customer likes and helps improve products to boost potential earnings.

Deciding to invest in a payment processing system strategically enables you to provide excellent customer experiences, enhance security, and ultimately increase business growth.

How to add Payment Processors to Your Website?

Allowing safe online transactions can turn your website into a profitable center. Here are the basic steps from Easebuzz for integrating payment processing.

Compatibility with Platforms: Choose a payment processing solution such as Easebuzz which works with any of your site’s platforms (e.g., Woocommerce, WordPress, Shopify, WIX, ZOHO, Tally).
Establish a merchant account with a payment processor to manage transactions and receive payments. Select a safe payment gateway that connects your website with the payment network while securing sensitive customer information through encryption.
Personalization: Modify the payment choices shown on your site to align with your business requirements and desired audience. Standard options consist of credit cards, debit cards, and digital wallets. Ensure the checkout process is easy for a seamless customer experience.
Comprehensive testing is essential to ensure that all payment features are thoroughly tested before the launch. Test transactions using different payment methods to guarantee smooth processing and detect possible security weaknesses.
Staying Compliant: Understanding payment processing regulations like PCI DSS is essential. This standard outlines how to secure customer information. Implementing security measures ensures you’re compliant and protects your business.

Conclusion

The smooth transfer of funds and promotion of business growth has made payment processing crucial in today’s commerce. It enables businesses to:

Conveniently receive payments by providing options like credit cards, debit cards, and digital wallets to accommodate various customer needs.
Improve security: Strong systems protect sensitive financial information and stop fraudulent transactions.
Increase sales and revenue by improving checkout processes and offering a comprehensive range of payment options to enhance conversion rates and sales potential.
Obtain valuable information: Examine transaction data to comprehend customer actions and enhance offerings for improved outcomes.
Simplify processes: Use automation for tasks such as authorization and reconciliation to allocate resources for crucial business operations.

FAQ's

How long does it take for transactions to be processed?

Processing time for transactions can vary depending on the processor and method used. Credit cards are usually immediate, whereas ACH transfers (bank transfers) may require 3-5 business days.

What are payment processing fees, and how are they calculated?

Payment processing fees cover the costs of handling transactions. The fees can be a fixed amount per transaction, a percentage of the total sale, or a combination of both. Rates vary based on the payment processor and the chosen plan.

How can businesses choose a secure payment processor?

Selecting a secure payment processor involves evaluating platform compatibility, transaction fees, features like recurring billing, security measures, and customer support. Explore and consider different choices to discover the most suitable option for your business requirements.