As e-Commerce develops, the payment processing industry becomes more and more relevant. Many people who open their own online store or a company that will receive payment for their services do not fully understand how transactions are processed. In this article, we will start with a payments industry overview and tell you how this industry works and what the main parties and processes are.
First of all, you need to understand what a merchant is. A merchant is an individual or legal entity that acts as a seller. In the context of eCommerce, a merchant sells their goods or services over the internet. The merchant always works with the acquiring bank. A trading account must be opened in this bank, to which payments from bank cards are credited. Thanks to this, you are able to receive payments from buyers.
The bank account has a special number, which is individual for each bank account holder. It is specifically used to identify merchants who receive money for their goods or services. Merchants are required to work in accordance with the rules of payment systems such as Visa or MasterCard.
The merchant always pays a commission from banks or payment systems. Financial organizations can issue an invoice once a month or charge a percentage for each financial transaction. A combination of these two options is also possible.
After the online store owner has opened a merchant account, they can accept payments. Every time the buyer makes an order using a bank card, the seller sends the financial transaction details to the acquiring bank. The information goes to the issuing bank of the buyer’s card from the acquirer. For this, a card association network is used. Based on the information received, the payment card’s issuing bank approves or prohibits the financial transaction. If the operation is approved, the bank issues an appropriate invoice, debits the funds, and transfers them to the merchant’s account.
If the customer makes a payment through an electronic wallet (for example, Google Pay or Apple Pay) or through another payment method, the acquiring bank sends a request to the wallet provider and then to the payment systems.
Every time a buyer makes a purchase using a debit or credit card, the seller sends information about the transaction to the merchant payment processor. The information comes through a payment gateway – special software that simplifies data transfer on a financial transaction. The information is sent to the acquiring banks to determine if the transaction is approved, how much will be paid, etc. In fact, payment gateways are needed to simplify the exchange of information between financial institutions.
In addition, the payment gateway performs another important role – protecting user data during transmission. Card payment systems have developed a set of rules and security standards. Everyone who has access to payment card data must adhere to them, including payment gateways. All information is transmitted in accordance with the PCI DSS standard. Data transmission is carried out using the HTTPS protocol, which ensures secure transmission. In addition, the data is sent in encrypted form within the payment request.
A payment service provider is an intermediary that helps to make and receive payments. Providers cooperate with acquirers and their payment systems. They may also provide additional services such as fraud protection, currency exchange, etc. The payment provider sends the transaction information to the payment processor through the payment gateway.
Also, it’s important to know what is a payment processor. It helps merchants receive bank card payments. Through the payment processor, a connection is made to the acquiring bank. Payment processor companies perform a huge number of functions. For example, they prevent fraudulent activities, evaluate the correctness of financial transactions, approve transactions, etc. The payment processing systems also operate in accordance with PCI-DSS.
It is also important to know what a card association is. A card association is a network of banks that issue cards of a particular brand. To date, the most popular card associations are Visa and MasterCard. Somewhat inferior to them in terms of popularity are such associations as:
The card association has the important task of approving or rejecting financial transactions. In most cases, an application is made to the issuing bank, but self-approval is also possible. For example, American Express independently approves transactions. After the buyer has initiated a transaction, information about it is transmitted to the card association. Further, the association makes a decision or transmits data and waits for a response from the bank. If the bank approves a financial transaction, the card association also approves it.
Settlements for transactions are carried out between two banks – the issuer and the acquirer. The issuer is the bank that issued the card from which the payment is made. This party is responsible for ensuring that the client can pay off the debt (if credit funds are used). The issuer can approve or reject the buyer’s transaction. If approved, the issuer is obliged to guarantee the fulfillment of obligations by the buyer, that is, its client. After checking the card, the bank must ensure that the client has the required amount of own or credit funds. If everything is in order, the issuer is responsible for freezing the funds until the transaction is completed and transferring them to the acquirer.
The other side is the acquiring bank. The merchant account is open in this bank, and it accepts payment for goods or services. Acquirers are members of card systems and accept funds through them. The acquirer can also decline the transaction if it has any questions. This bank assumes all risk and liability for the financial transactions it processes. Therefore, its clients pay a commission for services. The size and structure of the commission may differ depending on the financial institution.
An important part of the process of paying for goods or services is card authorization – 3D Secure. This is a request to verify the card from which the payment is made. It is important to know whether the buyer has enough funds on the account, whether this card is blocked, whether the expiration date has expired, etc. The acquiring bank submits the authorization request through the payment processor to the address of the issuing bank. The issuer sends a response containing information on the card. If the transaction is approved, the required amount of funds are blocked in the buyer’s account until debited.
After that, the issuing bank sends its decision to approve (or reject) the payment to the acquirer, and then the information goes to the seller. If there were no problems during the check, and all participants in the process confirmed the information, the issuer writes off the required amount (which was previously frozen). The buyer accordingly receives a receipt for the credit. In turn, the seller fulfills the order. After the order is completed, the issuer will clear the funds’ authorization and settle with the acquirer.
Processing card payments is quite complex and involves several participants in the process. However, modern technology allows all parties to carry out all the necessary operations in a matter of seconds. The infrastructure is actively developing, reducing the time for processing transactions and commissions. We have described the general principle of the payment processing industry. However, certain nuances may arise in different banks related to the terms of crediting, checks, etc.