Ecommerce has opened up a very wide and interconnected network within our work, and there are many businesses and people now playing an array of roles. However, with humans monitoring transactions errors can be made, and this is where the importance of payment processing comes in.
If you are new to payment processing though, it is recommended you read our complete guide to processing payments in addition to this article.
Most customers have no idea how many different players are taking part in purchases that they make. This fact alone is a testament to just how smooth payment operations run. Another reason the importance of payment processing is so key, is as this is what any successful business is doing.
What Is Payment Processing?
Payment processing is done via payment processors, which work as a middleman between the merchant party and the customer’s bank in a purchase.
When a customer uses a bank card to pay for a purchase, this payment processor will get the transaction information from the merchant, and they will carry this information over to the bank who issued it.
Should the issuing bank not be able to authorize the purchase based on whatever data has been given, perhaps if the card has expired, if the billing address is not correct, or if there are insufficient funds in the amount, the processor will then relay this information to the merchant seller.
Unless this is the case, the transaction should go through smoothly, and then when the merchant settles the transactions for the selling day, the processor facilitates the funds from the bank and to the merchant.
Whenever a payment processor is processing the transaction they do charge a fee to do so, including the fees which are paid to the card network, and to the issuer, as tell as the transaction fee.
Payment processors are basically just financial managers to ensure that transactions go through smoothly. And, therefore, the processing is simply the procedure of the transaction going through from seller to buyer.
Payment Processing: How It Actually Works
We have explained to you the basics of payment processing, however, for a more in depth understanding of how this process happens, let us look a bit deeper.
When payments are processed, information will be transmitted to the processor, which will then connect with the bank through the credit network to authorize the pending transaction to go through.
If any authorization is received then a process similar to this will happen again in order to proceed with the literal transfer of these funds.
Even in the most simple purchase, there is a lot that is going on. Here is an example of what happens:
- Cardholders pay for purchases.
- Payment gateways transmit data to the processor.
- The payment processor connects to the issuer via the network of the card in order to authorize said transaction.
- The card’s issuer will send a response that says decline or approve through the card network.
- The processor will transmit the response to the gateway for payment which will indicate if the transaction has been declined or approved.
- If the payment gets approved, the issuer gets contacted by the processor to confirm the transaction and move the actual transfer forwards. This could be immediate or later.
- The funds will then be transferred to the person/business acquiring via the network.
- The acquirer will be depositing the funds into the account of the merchant, completing the payment.
Importance Of Payment Processing In Businesses
Businesses, including independent businesses and small businesses often send a great deal of invoices each year. Since there is a great deal of money at risk it is absolutely critical that payments are made correctly.
So many businesses still use paper invoices, but payment processors are always a better option as they take the risk of human error out of the equation, and every transaction is checked over multiple times in many ways.
But, why is it so important for businesses to use?
Saving On Time
One of the main benefits that come with payment software programs is that it provides both medium and small businesses with a great deal of opportunities to save time on the whole process of managing payments.
You can accept payments, and it just speeds up the whole process.
With all the information associated with the payment processor, this means you can organize it so that it will come straight to the payment software. Thus, the transaction data just flows into the system without any need for interaction from the owner of the business or employees.
There is no need to cross-reference on Excel.
Payment processing just reduces the whole cost.
Reduction Of Human Error
For any of the many processes used in the business world, having any human element in business can enhance the chance of an error. These errors could arise wherein any data could be registered wrongly, any data could be applied to the incorrect account, or entries would be duplicated.
Whether it is due to billing in excess or not, getting payments applied to the incorrect person could bring about incorrect taxing, if this happens, it can be tricky to trace errors.
With payment processing softwares this means that data would flow easily from where the payment happens to the ledger, or it could even happen straight away if there is credit which is against an invoice.
There is also a security benefit of this. A majority of people will install online payments due to concerns over security. This is indeed a priority, so checking with invoicing softwares to get a secure system which adheres to the standards of security.
Of course there are also SSL certifications which can confirm if websites are protected, having this for your website can increase your reputation online. It also tells everyone that information such as credit or debit card information is protected.
Online payment softwares allows different elements to improve the security, such as address verification.
Does It Cost For Payment Processing?
There are some fees for payment processing that merchants do face. You can face interchange fees, these are wholesale fees that banks must pay to the issuing bank per transaction.
You also face assessment fees which are wholesale fees which go to the card’s issuing bank.
Then you face markup and discount rates, which is how the payment processors make their money.
Payment processing is the process finances must go through as part of a transaction between a merchant and a customer. This process goes through a third party. Most of us are totally unaware of this process happening, but it is a key part of secure and proper transactions in business.
If your business hasn’t tried payment processing yet, it is well worth a try! It is good to get a basic understanding of how it all works. You can check out our helpful resource page to learn more.
Frequently Asked Questions
How To Explain Payment Processing?
Payment processing is the overall process of how businesses complete debit and credit card transactions. These services will expedite payment gateways and expedite card transactions.
How Can I Improve My Payment Processing?
There are several things you can do, including: stop using paper invoices, budget properly, look at discounts, build up cash reserves, look at your relationship with who your suppliers are.
Paul Martinez is the founder of EcomSidekick.com. He is an expert in the areas of finance, real estate, eCommerce, traffic and conversion.
Join him on EcomSidekick.com to learn how to improve your financial life and excel in these areas. Before starting this media site, Paul built from scratch and managed two multi-million dollar companies. One in the real estate sector and one in the eCommerce sector.