Understanding the Payment Processing Process: A Step-by-Step Guide
Being able to accept electronic payments like credit cards, debit cards, and digital wallets makes a big difference for your business. But to do this, you'll need to enlist the help of a payment processing service. Payment processors act as a bridge in financial transactions to move money from your customer's account to your business's merchant account. Every time you've tapped or swiped your credit card at a store, you've been using a payment processor, and you might be surprised to learn that these lightning-fast transactions involve seven steps. Here, we break down each of these parts of the payment processing process so you understand how it works and how payment processors can help your business.
What Is Payment Processing?
Payment processing is the process of transferring funds from a customer to a business, typically when using an electronic payment method like credit card payments or debit card payments. This complex process involves several parties and technologies, including:
- Financial institutions: The payment processor acts as a bridge between the customer's bank account and the business's merchant account. These are the issuing bank (payer) and the acquiring bank (payee).
- Payment gateway: The gateway is the physical device or virtual terminal used to transfer information electronically and securely.
- Card network: The card network is what payment processors use to facilitate secure payments from credit card issuers to businesses.
7 Steps of the Payment Processing Process
When you partner with a payment processor, any time one of your customers makes an electronic payment, the same process plays out. It looks like this:
- Initiation: First, your customer initiates a payment by providing payment information, like a credit card or digital wallet, at your checkout counter or online checkout screen.
- Payment gateway: After your customer submits their payment information, the payment gateway securely moves the encrypted transaction data between the customer, your business, and the payment processor, ultimately delivering the information to the payment processor or acquiring bank.
- Authorization: When the payment processor receives the transaction data, it validates the information and forwards it to the acquiring bank, which then sends the information to the card network to authorize.
- Response: The card issuing bank then sends an approved or declined authorization response through the card network to the acquiring bank, depending on whether or not the account has sufficient funds. The bank then sends the response to the payment processor. The processor then sends the authorization to the payment gateway, which sends the approval status to your point-of-sale system or online platform.
- Settlement: At the end of the day, your business automatically sends approved transactions to the payment processor or acquiring bank for settlement of funds. That happens when the acquiring bank requests the funds from issuing banks through the card network.
- Completion: The transaction is finally completed when the acquiring bank deposits the money in your business's merchant account, which typically occurs within a few business days.
- Reconciliation and reporting: Finally, your business reconciles all settled transactions with its sales records, along with any transaction fees, and receives a transaction record, like a receipt or account statement.
Enhance Your Payment Processing Process
While the payment processing process is always the same, not all partners are. There are plenty of questions to ask a payment processor and considerations to take into account. Find a payment processor that provides security measures throughout the payment processing lifecycle and adheres to compliance standards like PCI DSS to protect sensitive data and prevent fraud.
For more resources and guidance for your small business, check out U.S. Bank's Small Business, Big Ambition program.
