What Is Payment Processing? The Basics

Payment processing is a workflow that allows businesses to accept credit cards, debit cards, and related forms of payment.

That makes payment processing a foundational need for most modern businesses, large and small. To tap into customer preferences and capture as many sales as possible, payment processing is simply vital.

There’s much more involved in payment processing than only this basic definition, however. From the payment processing journey to related costs and fees, there’s a lot for business owners to consider. Keep reading to learn more.

Do you know that your business needs to make a change when it comes to managing card payments? Swipesum’s payment experts will take the lead in research, evaluation, and negotiation.

We’re not tied to a specific processor or platform. Our only goals are to help you find the best payment technology and reduce the fees that come with card payments. Book your free consultation today.

Why is Payment Processing Important?

Payment processing gives businesses and customers convenient options to make and receive payments. 

Outside of small things like counting out exact change, physical cash is very simple when it comes to actual transactions. However, it’s also very limiting to customers and businesses. Customers need cash on hand to buy something, and making physical deposits of cash takes valuable time.

Credit and debit card payments are much easier to use overall. Whether in a brick-and-mortar store or online, customers can make a purchase and move on quickly. Similarly, businesses with an efficient payment processing workflow can simply accept a card swipe or tap. Then, they’ll quickly see the funds flow into their merchant account.

What are the Steps of Payment Processing?

How does payment processing work? It all depends on how you look at it. The customer perspective is very straightforward and quick. From the view of payment processors and other parties, it’s a multi-step process.

The processing of payments normally appears seamless to customers (and often to you or your staff as well). They swipe or tap their payment method and, just a few seconds later, can tell if their purchase is approved. 

Behind the scenes, there’s a complex workflow. It’s still very efficient. However, it’s anything but simple.

We offer an in-depth review of the players in payment processing as well as the workflow itself. Here’s a condensed version:

The People and Companies Involved in Payment Processing

• The customer. They use their card to start a transaction.
• Your business. It accepts the card as payment from the customer and works with other organizations to process payments.
• Your payment gateway. This business helps keep payment data safe while sending it to your payment processor.
• The issuing bank. This is the bank that provided the customer with the card used in the transaction.
• The acquiring bank. Your bank, where you maintain your merchant account. This account enables you to accept card payments.
• The card network or card association. This organization connects issuing and acquiring banks to help complete transactions.  
• The payment processor. The processor interacts with many of these parties. It transmits authorization requests and results that lead to approval or denial of the transaction. In successful transactions, the processor also notifies the issuing bank to send the amount charged to your bank account. Specifically, the merchant account at the acquiring bank.

A Simplified Payment Processing Workflow

Know that we know the players, let’s look at the process. Payment processing involves several discrete steps. However, these can be organized into a few larger categories that represent related actions:

Payment Processing: Authorization

In simple terms, authorization starts with a customer using a card at the merchant’s business. It ends with the merchant receiving a notification explaining that the card either has or doesn’t have sufficient funds.

In between, information passes from the merchant to the payment gateway, payment processor, issuing bank, and merchant bank. 

If the authorization is denied, the transaction ends there. If it’s approved, the end of authorization means the transaction needs to be processed. That marks the beginning of the clearing and settlement phases.

Payment Processing: Clearing and Settlement

In general, but not always, merchants group approved transactions into batches. These batches pass through the payment processor and to the card network or association. 

The information is relayed by the card network or association to the issuing bank. Then, the issuing bank actually moves the funds to the merchant account at the acquiring bank.

What is Payment Processing? Questions and Answers

What is an Example of a Payment Processor?

Payment processors help to facilitate transactions between merchants and financial institutions. They send messages between parties involved in each transaction. Examples of payment processors include Stripe and Square.

What Do Payment Processing Companies Do?

Payment processing companies can be seen as a bridge between issuing and acquiring banks. 

These companies request and receive approval or denial for each transaction. Additionally, they pass along transaction data to the customer’s bank. Payment processing companies also ensure the money owed to you makes it into your account.

What is a Payment Processing Account?

A payment processing account is your merchant account. Merchant accounts allow your business to accept debit and credit card payments, as well as other types of non-cash payments.

Merchant accounts allow you to collect funds from customer transactions. You can then move that money into another account, like your business checking account.

A payment processing account isn’t an additional requirement for your business or a new concept we’re just now introducing. It’s simply another name for your merchant account.

Securing the Best Payment Processing Solution for Your Business

Swipesum helps businesses just like yours optimize their payment processing systems. Our experts can help you find the best possible balance of high-quality service from providers, low fees, and effective tools.

We’ll research, source, negotiate, and manage your payment processing, so you can focus on the most important parts of your business. And it comes at no additional cost to you.

Ready to learn how Swipesum can help? Book your free consultation.