How Does the Electronic Payment Processing Cycle Actually Work?


    Key Takeaways

    • Key Players: Merchants, customers, online payment gateways, payment processors, card associations, issuing banks, and acquiring banks.
    • Merchant Account: Obtained from an acquiring bank to facilitate electronic payments.
    • Customer Role: Authorizes the transaction by presenting a card for payment.
    • Online Payment Gateway: Channels card details to acquiring banks and ensures security.

    As a business owner and merchant, understanding the payment processing cycle allows you to choose the best solution for your needs. Being familiar with the inner-workings also helps you find the best credit card processor. Or maybe you are curious as to what happens behind the scenes when you process a customer payment? Whatever your reason, read on to learn more about the payment processing cycle from start to finish.

    Payment Processing Key Players

    1. The Merchant

    A merchant refers to a business owner selling products or services to consumers via the internet or within a brick and mortar store. To facilitate electronic payments, a merchant account obtained via an acquiring bank is a must-have.  An acquiring bank is a financial institution registered as a card network member, such as MasterCard or Visa, and accepts payments on behalf of merchants.

    Every merchant gets a unique merchant identification number, or MID, from an acquiring bank. This number also identifies the transaction owner as details send back and forth within the payment processing cycle. To maintain a healthy merchant account, a business owner must adhere to specific policies implemented by card associations and bodies governing the payment processing industry.

    Whenever a credit card or debit card is presented for the payment of goods or services, the merchant submits the transaction to the acquiring bank. From here, the cardholders’ issuing bank either approved or declines a transaction.

    2. The Customer

    The role of the customer in the payment processing cycle is simple. They authorize the transaction by presenting a card for payment and receive a good or service in exchange for the payment. This can be done either via a merchant’s online site or in-person within a physical store.  During the checkout process, the merchant sends card details through the electronic payment gateway.

    3. Online Payment Gateway

    As mentioned earlier, an electronic payment transaction is sent to the acquiring bank through an online payment gateway. Payment gateways channel card details to acquiring banks and subsequent issuing banks. Think of the gateway as the payment highway sending Payment Processing Cycle, Credit Card Processing, Merchant Accountinformation back and forth to the appropriate parties until either an approval or decline is received. Since payment gateways ferry sensitive information, security measures are paramount. Electronic payment security standards, such as the Payment Card Industry Data Security Standard (PCI-DSS), responsible for ensuring merchant compliance.

    4. Payment Processors

    Merchant service providers, or payment processors, present electronic payments on behalf of their clients – the merchants. Processors assist merchants with accepting payments. They do so by providing an essential link between the merchants and an acquiring bank. Payment processors provide numerous services. For instance, they evaluate the validity of transactions, provide anti-fraud measures, and offer knowledgeable merchant support.

    5. Card Association

    Card associations approve or decline electronic payments based on a customers’ fund availability. The big four card brands include Visa, Mastercard, American Express, and Discover.

    6. Issuing Bank

    Financial institutions issuing debit or credit cards to customers are known as issuing banks. They indeed approve or decline payments depending on a cardholders’ fund availability. Cards decline for a variety of reasons apart from unavailable funds; read more here.

    7. Acquiring Bank

    As previously discussed, an acquiring bank provides the ability for a merchant to accept card payments. Acquiring banks and issuing banks connect via the card network in an electronic environment. They receive approvals or declines from an issuing bank and take on the full risk of processed transactions should there be chargebacks or fraudulent activity.

    Card Authorization and Transaction Settlement

    Card authorization requests check if appropriate cardholder funds are available. If approved, the issuing bank places a hold on the requested funds and communicates an approval code to the processor through a payment gateway. However complicated this payment cycle seems; the process completes within seconds from start to finish.

    The last step in the payment processing cycle is transaction settlement. This process transfers funds from the customer’s card to the merchants’ bank account. Depending on your merchant account structure, funds are available to the merchant within 1-3 business days after payment is initially processed. Typically high-risk merchants receive a lengthier delay on receiving funds. This helps mitigate fraud and reduces the acquiring banks’ risk.

    As you may assume, merchant accounts are subject to specific fees accrued from processing payments. These fees can be paid daily or monthly, depending on your setup. The rate paid and additional fees associated with processing payments are set with your payment processor. Some providers, such as Payment Savvy, offer a solution to process payments without a hefty cost to your business. This compliant and secure payment model is worth looking into if you wish to keep more money within your company.

    To conclude, our payment glossary is jammed packed with merchant account terms seen and heard within the payment processing cycle. Check it out to familiarize yourself with key definitions. If you’re looking to become fully knowledgeable on all the ways money is moved, check out our article on SWIFT. Interested in learning more about our payment solutions? Our savvy squad is available to answer all your questions, build a custom payment solution for your business, or provide a no-hassle quote for merchant services.

    Responsible for keeping Payment Savvy running like a well-oiled machine, Eli has extensive experience with everything related to technology and financial services. Maintaining back-end operations efficient and productive isn't his only strong suit, Eli is also a key component of our sales team and is in constant pursuit of perfection. In charge of ground-breaking partnerships, he is always on the lookout for the next innovative product offering for our Savvy clientele. Eli's knowledge of the payment processing cycle and critical compliance standards ensure our customer base always has an educated and expert opinion if needed.


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