Priority understands that payment processing is a critical component of modern commerce. After all, it’s how our company got its start in the FinTech industry.
Whether you’re buying a product online or paying for a service, payment processing is the $100 billion dollar industry behind-the-scenes, ensuring the transaction goes smoothly. But how does it work? Let’s take a closer look at the payment processing process and explore the various parties involved.
The payment processing process
At its core, payment processing involves four main steps:
Authorization: When a customer initiates a payment, the payment processor contacts the customer’s bank or credit card issuer to obtain transaction authorization.
Capture: When the payment processor receives authorization, it captures the funds and holds them until the transaction is complete.
Settlement: After the transaction is complete, the payment processor settles the funds with the merchant’s bank or payment gateway.
Funding: Finally, the payment processor transfers the funds to the merchant’s account, minus any fees or commissions.
The exact process can vary depending on the payment method and the parties involved. Of course, each step involves more details. Let’s look at each one.
The payment processor first needs to obtain authorization from the customer’s bank or credit card issuer when initiating payment. This occurs through a series of messages between the payment processor and the bank, using a protocol called the Payment Card Industry Data Security Standard (PCI DSS).
As part of the authorization process, the payment processor sends the customer’s payment details and the transaction amount to the bank or credit card issuer. The bank or issuer then checks if the customer has sufficient funds or credit available and sends an approval or denial message back to the payment processor.
Upon receiving authorization, the payment processor holds funds from the customer’s account until the transaction is complete. A record of the transaction is created, the funds are deducted from the customer’s account, and they are held in a temporary account until the transaction is settled.
After the transaction is complete, the payment processor settles the funds with the merchant’s bank or payment gateway. Settlement involves transferring the funds from the temporary account to the merchant’s account, minus any fees or commissions charged by the payment processor.
Finally, the payment processor transfers the funds to the merchant’s account. This process is known as funding and typically takes 1-2 business days. Before transferring funds to the merchant, the payment processor may also deduct any fees or commissions.
Payment processing involves several parties:
- The customer: The person paying.
- The merchant: The person or organization receiving the payment.
- The payment processor: A company that facilitates payment transactions between the merchant and the customer. The payment processor connects to payment networks, such as Visa or Mastercard, and processes payment information.
- The Merchant Acquirer: A financial institution that enables merchants to accept payments from customers using credit or debit cards. The merchant acquirer works with the payment processor to authorize, settle and fund transactions.
- The bank or credit card issuer: The organization that holds the customer’s funds or credit and approves or denies the transaction.
- The payment gateway: The technology that connects the payment processor to the merchant’s website or point-of-sale system.
- The acquiring bank: The bank that processes the transaction settlement and funding.
Payment processing is a complex and essential part of modern commerce. From authorizing transactions to settling funds, payment processing involves multiple parties and carefully orchestrated steps. By understanding how payment processing works, merchants and customers can make informed decisions about how to handle their financial transactions. This will ensure the smooth and secure processing of their payments.
Priority’s extensive experience means we’re an outstanding resource for merchants in the SMB space who need a reliable, transparent, and future-facing payment processing partner. Whether you’re an ISO/Reseller, or a merchant looking to launch a business or switch processors, Priority’s MX™ Merchant platform provides a payments ecosystem perfectly customized to your specific needs.