Payment processors are companies that handle transactions that involve debit or credit cards. They act as mediators between the merchant and the bank. The payment processor handles information from the customer’s card to their bank and your bank if there are enough funds in the card for the transaction to go through.
The major participants in payment processing are:
- The cardholder
- The cardholder’s bank
- Merchant’s bank
- Payment processor
- Payment gateway
It’s crucial you know everyone involved. Business owners must understand the entire process, including interchange plus rates that are involved. In addition, it will help them know what to say to their clients if there are issues or errors in the systems. Financial information is very sensitive, and it is only proper to handle it in a good way.
1. Merchant Account
It is a bank account that accepts debit and credit card payments. When starting your business, you must get a business bank account and set up a merchant account. If you do not have this account, you cannot accept credit or debit card payments. The bank settles funds in the merchant account first, and later on, it pays them to the business account.
A merchant account is subject to varying fees. They can implement the fees as a percentage of every transaction or through monthly billing.
2. Payment Gateways
To understand the payment process, you have to know what a payment gateway is. A payment gateway is like a middleman between the credit card companies and the merchant account. It is the software that handles the technical part that transfers the information of the cardholder. If all the other elements are in perfect order and you do not have the payment gateway in place, you will be unable to receive payments from your clients.
3. Choosing A Payment Processor
When looking to choose a suitable payment processor, look out for the following key elements:
PCI DSS Compliance
This is the Payment Card Industry Data Security Standard. They are a set of practices that ensure that the cardholder’s information is stored, transmitted, and handled securely. Credit card companies govern the practices.
Ensure that the payment processor you are using is compatible with the e-commerce software you are using.
Security against fraud
Fraud is a significant concern with accepting payments. Go for a payment processor that has inbuilt fraud prevention measures.
Multiple payment options
You should be able to pick the services without worrying. When you have many options available, your customers will find something that works for them, increasing your sales.
When using a payment processor, you may encounter the following fees.
- Start-up fee
- Monthly statement fee
- Transaction fee
- Minimum monthly fee
- Discount rate
- Chargeback fees
- Address verification fee
- Gateway fee for an internet merchant account
- An equipment lease charge for processing credit cards
- Termination fees
4. How The Payment Process Works
Here is what happens when a customer pays using a credit or a debit card.
- A customer chooses to pay by debit or credit card after they complete the checkout process. They submit their card information.
- The merchant transfers the information to the payment gateway.
- After the payment gateway has received the transaction details, it transfers the information to the payment processor that the merchant uses.
- The payment processor then transfers the transaction information to the network of the card.
- The card network then transfers the transaction information to the customer’s bank. The bank checks if there are enough funds in the account to complete the transaction.
- The card network receives a response whether the transaction is declined or approved.
- The card network relays a response to the payment processor, which forwards it to the payment gateway. It informs the customer and the merchant of the response.
- The customer’s bank deposits funds into the merchant account. The funds will remain there for an agreed time. Then they will pay them into the business account.
When choosing a payment processor, avoid the following mistakes.
- Not getting enough protection from fraud
- Do not overlook the need for support and assistance
- Choosing a payment processor that does not offer multiple payment options
- Taking on PCI compliance on your own
- Having to deal with taking care of data security on your own
- Picking a processor that does not give you access to your funds easily
As you have seen, payment processors are not a challenging concept to understand. It is important to note that payment processors have different prices depending on the model that you choose. Before choosing one for your business, do some research and then settle on one you think will work perfectly for your business.