How Payment Processing Works
The Steps of Payment Processing
1
Customer Initiates a Payment
The process begins when a customer purchases something and provides their payment details online or in-person (credit card, debit card, ACH, digital wallet, etc.).
2
Merchant Captures Payment Info
The merchant captures the customer’s payment details using a payment terminal (in person) or a payment gateway (online), which securely encrypts the information.
3
Payment Gateway Transmits Data
The payment gateway forwards the encrypted payment data to the payment processor. This is the “middleman” that connects the merchant with financial institutions.
4 & 5
Processor Routes Request to Issuing Bank
The processor sends the payment details through the member bank to the issuing bank (Chase, Capital One, AMEX, etc.)
6
Issuing Bank Verifies & Approves
The issuing bank verifies:
-
Is the card valid?
-
Is there enough balance or available credit
It then approves or declines the request.
7
Authorization Response Sent Back Through the Chain
The issuing bank sends the approval/decline message back through the member bank, then to the processor, then to the gateway, and finally to the merchant.
8
Funds Deposited Into Merchant Account
account.
9
Settlement
Funds remain in the merchant account and are released once transactions are grouped and settled in daily batches.
10
Funds Transfer to Business Bank Account
Funds move from the merchant account to the designated business bank account, usually on a daily or weekly schedule, depending on the processor’s funding terms.
Key Players
When a customer makes a purchase, a network of key players works together behind the scenes
to move money securely from their account to the merchant’s. Each has a specific role in ensuring the transaction is authorized, settled, and funded smoothly:
Cardholder/Consumer: The customer making the purchase.
Online Shopping Cart: A software tool on eCommerce websites that lets customers select products, view totals, and complete their purchase. It connects to the Easy Pay Direct gateway to securely process payments.
Payment Gateway: A software service that captures and encrypts customer payment info (like credit card details) and securely sends it to the payment processor. Think of it as the digital cash register for online transactions.
The Payment Processor: The middleman tech system that routes payment data between the gateway, banks, and card networks.
Member Bank: A bank that is part of Visa/Mastercard networks and underwrites the merchant account.
Merchant Account: Where the merchant receives the funds.
Card Issuing Bank: The customer’s bank. The one that issued their credit or debit card. It approves or declines the transaction and pays the money to the Member Bank.
Card Brands (Visa/Mastercard): Not shown in the diagram but they act as the governing association over the rules and brand protection.
Important Industry Terms
The payment processing industry comes with its own language, and understanding these terms is essential for merchants
Authorization: Real-time check to approve the transaction.
Settlement: Movement of actual funds after approval.
Batch: A day’s approved card transactions (the batch) are finalized and the funds are transferred to the merchant’s bank account (settlement).
Merchant Account Provider: Another term for the ISO/Processor.
Association: Refers to card brands like Visa and Mastercard.
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