What is Payment Processing?

Payment processing refers to the series of operations that make it possible for users and merchants to conduct digital transactions while making payments online or cashless. This process is meant to guarantee the safe transmission of money for things like mobile payments, debit or credit card transactions, digital wallet transactions, cryptocurrency transactions, and so forth. The creation and upkeep of a payment processing system is a labor-intensive, resource-intensive process governed by tight regulations. However, it is imperative that custom software include current digital payment methods for all kinds of enterprises. Given that the retail e-commerce sector is expanding quickly and is predicted to reach 8.1 trillion dollars in 2026, it is particularly significant.

Three general categories can be applied to all digital payments:

Digital commerce refers to the use of credit cards or online payment processors like PayPal in transactions conducted through websites or mobile applications. Online shopping is the most prevalent type of digital commerce activity. Customers shop for products and services and make payments straight through a website or app.

Generally, mobile point-of-sale (POS) purchases need the use of smartphones equipped with mobile wallet apps or other NFC-capable gadgets, including fitness trackers, smartwatches, etc. These days, a lot of eateries, retail establishments, and other outlets employ terminals that support these contactless payments.

A new form of sending money across nations called digital remittances has a number of benefits over traditional techniques. Customers can use websites or mobile apps that offer a safe, practical, and less expensive alternative to banks and other financial institutions by paying less for transactions and exchanges.

Key Components in Payment Processing

The efficient processing of payments necessitates the coordinated efforts of multiple parties. Below is a synopsis of these elements along with a glossary of terminology that are pertinent.

• The Dealer.The person who takes the customer’s money in exchange for delivered or requested products or services is known as the merchant.
• The client.The person who pays for or guarantees to pay for products or services rendered by the relevant merchant is known as the customer.

• Method of Payment.The payment mechanism includes digital wallets, credit or debit cards, and other ways to make a payment.
• Gateway for Payments.From the linked point of sale system, the payment gateway is a specialized service that accepts, encrypts, and securely transmits payment-related data to the acquirer or the payment processing business.

• Processor of payments.The payment processor is a middleman business that handles all technical transaction tasks and maintains control over them. These elements comprise required security protocols including data validation, permission, and so forth. Since Stripe and PayPal are currently the most widely used online payment processing platforms, custom software solutions most frequently integrate them.

• Point-of-sale systems (POSs).The point-of-sale system is a hardware and software combination made to take payments from customers at different points of sale, like restaurants and retail stores. Beyond only taking payments, point-of-sale (POS) systems typically manage and track inventory, employees, sales, and other activities.

• Purchasing Bank.The financial institution that maintains a business’s account and accepts payments from its clients’ accounts is known as the acquiring bank or merchant acquirer. An acquirer works with the issuing bank of a customer and the merchant’s payment processor to get the monies from a commercial transaction.

• Network Card.The card network is the supplier of payment services that facilitates communication between the participating institutions and handles credit card transactions. Certain card networks, such as Mastercard and Visa, permit their affiliated financial institutions to issue debit or credit cards that are linked to those networks. Other card networks, such as American Express and Discover, on the other hand, solely issue and serve as acquirers of their own cards.
• Issuing Bank.A credit card or debit card is issued by the issuing bank as a means of payment in addition to holding the customer’s account. Based on the request from the acquiring bank and the account details, the issuer approves or rejects a transaction. In the USA, there were 85 companies that issued credit cards in 2022, according to IBISWorld.
• Security of Payments.In order to safeguard payment information and confirm its legitimacy, payment security is comprised of a number of laws, initiatives, and pertinent technology. The Payment Card Industry Data Security Standard (PCI DSS) primarily regulates this element. Several large card networks collaborated to create this standard because they needed a better solution than independent security solutions to protect user data and stop fraud. PCI DSS is updated and modified on a regular basis to address the industry’s current problems and create safer payment processing procedures. The most recent version, PCI DSS 4.0, was released in March 2022 and includes 360 pages of detailed descriptions of the 12 primary standards.

How Does Payment Processing Work?

When a consumer makes a purchase from a business using a digital payment method, the transaction process can be broadly broken down into five parts. This is a condensed explanation of how payments are processed.

1. Interaction with the POS System

The consumer uses contactless or credit card swipes to engage with the point-of-sale system at the merchant’s location. This transaction can also be completed, for instance, by entering the customer’s credit card information and CVV code on the online store’s checkout page. The POS system then uses the payment gateway to send data to the acquiring bank that includes the necessary amount and the card information.

2. Making Contact with the Issuing Bank

After receiving the information from the previous phase, the acquiring bank gets in touch with the customer’s issuing bank. The issuer is notified about the transaction by the acquirer via the applicable card network.

3. Verifying the Transaction Details

The credit card number, CVV code, and card expiration date are among the details that the issuing bank verifies are accurate. Additionally, it determines if there is sufficient credit or money on the customer’s account to complete the payment. The issuing bank uses the same card network to transmit the authorization code to the acquiring bank in the event that this verification is successful.

4. Performing a Sale

When a transaction is approved, it indicates that the issuing bank has set aside the necessary amount on the customer’s account and is getting ready to move those funds to the merchant’s account at the receiving bank. Even when the money hasn’t yet been sent to the merchant, it is currently presumed that the customer has paid for the items or services they bought.

5. Forming a Batch and Settling the Transaction

Batch processing is used for approved transactions. The acquiring bank or the payment processor receives the daily batch of transactions from the merchant together with their authorization numbers. The issuer transfers funds from the customers’ accounts to the merchants’ accounts after the acquirer requests the amounts specified in the batch. Additionally, during this process, the relevant payment processing costs are gathered.

Importance of Payment Processing for Businesses

Although processing payments is a straightforward process for customers, business owners must handle its more complex and technical side. All business owners who have already put in place a payment processing system, however, can list at least a few concrete advantages they experience with each and every money transfer. These are only a handful of the benefits that payment processing offers to clients and companies.

Better Service and Customer Experience

One technology that can cut down financial transaction wait times from days to seconds is a payment processing system. Every electronic transaction’s completion and quality are simultaneously under the system’s control.

As a result, customers only need to make a few taps or clicks on their smartphones to complete a purchase. The enhanced ease of chargeback or refund procedures is perhaps the most practical aspect of the payment system processing.

 

Enhanced Security

For business owners across all industries, handling sensitive data such as a customer’s credit card number and other personal information can be a source of worry. Use of trusted third-party or bespoke payment processing systems is safe since they are built with the necessary compliances (such PCI certifications) that guarantee the security of client data from all forms of unwanted access.

Encrypted channels are used by trustworthy payment processing systems to prevent fraudulent transactions. Multi-factor authentication, or MFA, and other features protect consumers and the companies they do business with when they make digital payments.

Cost Reduction

Sending and receiving money involves extra steps when dealing with cash and paper cheques. Regarding businesses, they frequently have to deal with bank fees, secure disposal fees, and other expenses when handling paper checks, which, let’s be honest, should really be a thing of the past as a form of payment.

Business owners can reduce the number of accounting employees to one or two specialists and avoid hiring staff altogether by using a properly integrated payment processing system.

Better Analytics and Reporting

Platforms for third-party payment processing provide businesses with sophisticated reporting and analytics features. This application lets you keep track of every single transaction, keep an eye on performance and trends, and spot issues and irregularities. Customized payment processing software can be equipped with every functionality a firm could require to optimize its payment-related operations.

Ensuring that payment processing is incorporated into a platform by knowledgeable and experienced people is crucial for any organization. A badly designed and/or integrated payment processing system can cost you money, time, clients, and goodwill.

Challenges and Solutions in Payment Processing Development

For developers creating and integrating payment processing systems, maintaining the greatest degree of security and regulatory compliance presents the biggest barrier. The ongoing updating of fraud detection systems to stay up to date with emerging threats is another difficulty. And lastly, for contemporary organizations, software developers want to offer a variety of payment options. Offering many payment options to customers enhances their experience and creates new business prospects.

The PCI-DSS is a unified standard created by the payment processing industry that offers advice and guidance on how to handle security-related issues. The main responsibility of software developers that include payment processing services into their custom solutions is to ensure compliance with this standard. Although banks, credit card networks, and payment processors are equipped to handle the aforementioned difficulties, software developers ought to incorporate extra security features in specially designed solutions for companies.

Conclusion

When installed and connected correctly, payment processing systems can be a blessing for organizations; when not, they can be a curse. You have two options, depending on how big your company is: either create a custom payment processing system from scratch with the aid of a reputable and certified software development firm, or employ an already-made one like Stripe.

Intellectsoft is the right team to work with if you need to design a custom one for your organization or want to correctly integrate one into your business software. We have been offering solutions to companies of all sizes for more than 15 years, from early-stage startups to SMBs and Fortune 500 companies. More than 600 business solutions in the domains of healthcare, fintech, eCommerce, logistics, hospitality, and automobiles have already been successfully supplied by us to our clients.

Please view our most notable Case Studies to find out more about our proficiency with payment processing and other services.

Please do not hesitate to contact us and share your requirements with us so that we can provide you with the most effective and economical solution, whether you’re searching for a team to tackle your payment processing integration problem or need specialist software to increase productivity and improve your processes.