How many key entities are there in payment processing?
This is an important question, as having an understanding of payment processing is a crucial element of running a successful business.
Payment processing refers to the process of accepting payments from customers or clients, while entitles is a term used to describe the main players or parties who will be involved in a transaction from beginning to end.
To help you obtain a better understanding of payment processes and systems, we have put together all you need to know about the key entities involved – read on to find out more, and gain a better understanding of one of the most important processes of your business.
How Many Key Entities Are There In Payment Processing?
In total, there are eight key entitles involved in the payment process, and we took a closer look at these below.
The Customer
Any payment process starts with the customer, and they are the first entity to be encountered.
The customer may be a person or company and will kick off the transaction or sale by choosing an item to purchase, and then making that purchase using your payment gateway.
This can be done online using a credit card, debit card, PayPal account, or any other form of electronic money transfer.
The payment gateway refers to a system that allows for the acceptance of payments.
It is usually provided as part of a merchant account package, but it can also be purchased separately if required.
A payment gateway is responsible for ensuring that the correct amount of money is received at the right time and that the funds are transferred into the right bank account.
The Business
The second entity in the chain is the business itself – this could be a retail store, restaurant, hotel, travel agency, or any other type of service provider.
They will accept payments from their customers, and then pass them onto the third-party payment processor.
The Credit Card Network
The fourth entity in the payment process is the credit card network, and this is where the actual credit card information is stored.
Once the payment has been verified, the credit card network will send the relevant data to the credit card issuer, who will then approve the transaction and issue a charge back to the business.
The Third Party Processor
This is the third entity in the payment process and is responsible for taking the payment details from the business and transferring them to the appropriate financial institution for verification and approval.
These institutions include banks, credit unions, and other types of financial institutions.
Payment Gateway
A payment gateway is a software application that sits between the customer and the merchant.
It is used to collect and process payments on behalf of the merchant.
Payment gateways are available as either hosted services (where the software runs on an external server) or as self-hosted solutions (where the software runs locally).
There are two main reasons why businesses use payment gateways: to reduce fraud risk and to offer additional functionality such as order tracking, loyalty programs, and gift cards.
When a customer makes a purchase using a credit card, the credit card company sends a message to the merchant asking for authorization.
This means that the merchant must check whether the customer actually owns the card and whether it is valid.
If the answer is yes, the merchant can authorize the transaction. However, if the answer is no, the merchant cannot complete the sale.
If the merchant uses a payment gateway, they can simply authorize the transaction without having to worry about checking the validity of the customer’s card.
The Merchant Account Provider
The fifth entity in the payment process chain is the merchant account provider, and this is where all the money collected by the credit card network goes.
The merchant account provider will take the funds from the credit card network, verify that they belong to the business, and then deposit them into the business’s own bank account.
The Customer’s Bank
The next entity is the customer’s bank, and this is where any charges made by the merchant account provider will be deposited.
If the customer does not pay the bill within the agreed timeframe, the merchant’s account provider will contact the customer’s bank directly to request payment.
The Business Bank
Finally, the last entity in the payment process sequence is the business bank.
This is where the business keeps its own cash reserves, and also handles all incoming and outgoing payments.
Understanding the eight entities involved in processing a payment is important because it helps you understand how the entire process works.
You need to know what each entity does, and when they do it; this will help you have a better understanding of how the whole system works.
Frequently Asked Questions
What Is A Payment Processor?
A payment processor is a company that processes electronic payments for businesses.
What Is A Key Entity In The Payment Process?
A key entity in the payment process refers to the steps involved in completing a transaction.
These include the merchant account provider, the acquirer, and the acquiring bank.
What Does An Acquirer Do?
An acquirer is responsible for taking money from a merchant’s bank account and transferring it into the merchant’s own bank account.
What Does A Merchant Account Provider Do?
A merchant account provider is responsible for providing a merchant with a bank account where they can receive funds from customers.
Final Thoughts
There are a wide range of different types of payment processors available today, but choosing the right one for your needs can be tricky.
That’s why it’s best to work with a professional who has experience working with these kinds of companies, and who can ensure the best for your business.
