In any digital payment transaction, either in person or online, there are a lot of moving parts. Various different systems need to talk to each other in order to complete a transaction, and they all need to do it in a secure manner so that the information is safe. One of these systems is the payment processor.
The payment processor is the service that communicates card information between the buyers bank, the card network and the sellers bank, in order to complete the transaction. The seller is usually referred to as the merchant in these transactions.
When we swipe our credit card in a store, or we enter our card details online to make a purchase, it just takes a few moments for the transaction to be approved or not. In the background, however, there is a lot going on between several entities.
Once the final total has been determined either by the Point of Sale system in a physical store, or by the payment gateway in an online store, the buyer submits their card for payment, either in a physical machine or enters the card details online. This card information is given to the payment processor. This information can include the card number, expiry date and security measures such as PIN in a card present transaction, or the CVV number on the back of the card in the case of an online payment.
The payment processor then takes the card details and the transaction amount, and sends it to the card network as a request for payment authorisation.
The card network will in turn send the request to the issuing bank – meaning the bank where the buyer has the account that the funds will come from.
The issuing bank will then either approve or deny the request, and send the relevant message back to the card network. If the request is approved, a hold for the transaction amount will be placed on the buyers account.
The transaction may be declined for various reasons:
- There are insufficient funds in the buyers account
- The card has expired
- The CVV number is not correct
- The card number has been entered incorrectly
- The account has been closed or frozen
- The card has been flagged as stolen
- The card has been canceled
- There may be a technical issue at one of the entities that is preventing communication and authorization
The card network will then send either approval or denial for the transaction back to the payment processor,
The payment processor will then in turn send the result back to the merchant. If the transaction is approved, the merchant will provide the goods or services.
The merchant receives the money from the transaction in a process called settlement and funding. The approval notice for the transaction is sent back to the payment processor, and the issuing bank will transfer the funds to the merchants bank, who in turn will transfer the funds into the merchants account.
The settlement and funding process is not immediate, and can take several days, depending on several factors, including transfer times between different banks. Point of Sale systems frequently batch all the transactions of the day and submit them in a single process in the evening.
The merchant will pay various fees in the course of the process. Bear in mind that authorisation fees are usually charged regardless of whether the transaction is approved or denied.
So how do you choose a payment processor for your business?
In some cases, your merchant account, Point of Sale system or payment gateway may come bundled with a payment processor, or you may be required to use a payment processor of your providers choosing.
Alternatively you can shop around for a suitable payment processor provider. It is tempting to simply choose the provider with the lowest fees, however that should not be your only concern.
Consider the following:
- Do you need instore or online payments, or both? Does the provider cater for both?
- Is there any hardware required, and is it at an additional cost?
- Do they provide the payment options you require?
- What are the fees? Are they fixed fee, percentage based, subscription or tiered, or a combination?
- What are the setup costs?
- Is setup a relatively easy process?
- Are there hidden fees?
- Can the processor handle recurring payments if you supply goods or services on a subscription basis?
- Do they have good security?
- Do they have good fraud protection systems?
- Are they compliant to both local legal requirements and international governing standards such as the PCI Data Security Standard?
- Do they have easily accessible customer and technical support?
- What are the contract terms?
- What are the terms and conditions?
- When and how do you receive your funds?
- What happens to your funds if your account is terminated?
At Baer’s Crest we know that understanding how it all works and choosing a payment processor can seem overwhelming for small businesses or startups. That’s why we offer simple and transparent payment solutions, so that you can get on with doing business without the headaches of complex transactional systems. Talk to us about how we can help you with your payment requirements.