How Does Online Payment Processing Work?: In Detailed

Although it might seem like a simple process, a lot goes into an online payment process. Whether you’re a business owner or a customer, knowing what happens behind the scenes is a good idea. This guide breaks it down for you.

Your Guide to Online Payment Processing

What is Online Payment Processing?

In basic terms, it’s the process behind making online payments through the internet. While most traditional transactions involve cheques and direct deposits, online payments are strictly digital.

The Key Players in the Processing

There are four key players that are involved in the online payment process:

1. The Merchant (aka. The business owner). As the business owner, you will need to work with a payment process provider. They will be responsible for managing, transferring and handling the money during the payment transaction.
2. The Customer. You need someone to pay for your products, don’t you? The customer is on the opposite end of the scale and pays for products with either a debit or credit card.
3. The System (aka. The processing itself). In the middle of the interaction is the online payment processing system that handles the transfer. The system collects the money from the customer, works with the bank to move the money, and deposits it into the business account. There are two main components of the processing system:
   1. The payment processor, which is the system that manages the card transaction by transferring the card information between the banks and handles the movement of the finances. Think of the payment processor as a middleman between the bank, the customer and the merchant.
   2. The payment gateway is the system that connects your website with the payment processor. These systems handle the technical side of the transactions and ensure payments are received.
4. The Banks. There are two banks involved in the processing of online payments. The issuing bank, which is the bank of the customer and provides and confirms the funds of the transaction. The second is the bank of the merchant, which takes and places the money in the business’ account.

Separately, these three key players can’t contribute anything. They bring the online payment process together.

How Online Payment Processing Works:

While the key players are pivotal to the success of an online payment process, it’s helpful to understand exactly how money moves from customers to a business. This detailed breakdown sums it up for you:

1. The customer finds the product or service they want on your website. They complete the checkout process and purchase the product/service by entering the credit or debit card details.
2. The card information, such as the card number, name, address, and billing details, moves through the payment gateway and is sent to the payment processor.
3. The payment processor verifies the customer’s credit card details, confirming its authenticity.
4. Once verification is complete, the payment processor sends a request to the customer’s issuing bank to determine if there are enough funds to pay for the products/services. The issuing bank will respond with a yes or no.
   1. If it’s a no, then the transaction will be declined. You might have to upload more funds into your account or speak directly to your bank for more information.
5. If it’s a yes, the payment processor requests the funds from the issuing bank and transfers them over to the merchant’s account. While the payment is confirmed on the day, it might take several days for the money to appear in the business account.

That, in a nutshell, is how an online payment process works. As you can see, it’s more complex and involves a lot of players than expected. We hope that this guide helps you understand how online payment processing works!