Payment Processing 101 for Business Owners

The payments industry has a history of complexity, often confusing merchants and others who come in close contact with this world. Most people’s understanding of payments involves only swiping cards, even for business owners. Yet knowing the ins and outs of payment processing is helpful for all merchants. A sturdy knowledge of the industry can help inform the choices that fuel your ability to continue doing business.

That being said, let’s break down the topic of payment processing to the basics so you can better understand what happens each time a transaction is initiated.

What is payment processing?

Each time a credit card is swiped, dipped, or keyed in online, a cycle of rapid computer operations begins. In a matter of just seconds, transactions are transmitted, authorized, and accepted/declined. The process is automatic and invisible, so most people don’t even know how it works. Customers simply swipe their cards and go about their day. But as a merchant, being familiar with the process can come in handy, especially when it comes to employing the services of a payment processor.

A third-party payment processor facilitates the transaction cycle and transfer of funds. At least, that’s their most basic function. These days, many payment processors offer additional services like integration, online shopping carts, transaction management dashboards, automatic account updating, and more. These services can prove beneficial for simplifying payment management and improving the customer experience.

How does payment processing work behind the scenes?

Money travels across vast networks to get from customers to merchants, and the majority of the process happens in the blink of eye. Here’s everything that happens within that brief moment.

  • A customer uses a credit or debit card to make a purchase with your business, either in-person or online.
  • If the purchase was made online, the payment data travels through a payment gateway. This is software that encrypts data and transmits it from an online shopping cart to your payment processor.
  • With in-person purchases, the payment data is transmitted directly to your payment processor without the need for a payment gateway.
  • Your payment processor transmits the payment data to the customer’s issuing bank to ensure they have the appropriate credit or account balance available to complete the purchase. This is called an authorization request.
  • The issuing bank approves or declines the authorization request, and transmits the answer to you so you can complete the transaction.
  • Once complete, the card issuer then sends the funds to your merchant bank, where the money is deposited into your account.
  • Your funds should become available in one or two business days.

While it’s good to be aware of this process, merchants fortunately don’t need to be directly involved with many of these steps. That frees you up to focus on what you need to run your business efficiently, including software and equipment designed to make the payments process simpler.

What do you need to process payments?

Processing payments requires an intricate web of communication between various banks and companies. Much of this communication is handled by your payment processor, which is the first thing you’ll need. The right payment processor will offer all the services you’ve identified a need for, all for a price that’s within your budget. There are hundreds of options and it’s easy to select one that may not necessarily meet all of your needs, so be sure to do your research first.

Once partnered with a payment processor, they will likely open a merchant account on your behalf. A merchant account is what allows you to process card payments. It’s a sort of middleground between your business and credit card issuers.

Next, you’ll need the point-of-sale terminal of your choosing. Some of these devices are meant to simply plug in and go, offering a quick card reading solution. Other terminals are more complex, tying into your computer system for enhanced functionality like reporting, tracking inventory, and accepting more modern payment methods like NFC contactless payments.

As discussed above, you’ll need a payment gateway if you plan to conduct business online. This works alongside your website’s shopping cart to promote a secure, efficient eCommerce business.

(Tip: If you plan to sell online, you might want to select a payment processor that offers merchant account, payment gateway, and shopping cart services to create an all-in-one solution.)

Your chosen payment processor can work with you to create an customized payment plan, detailing everything you’ll need to get setup for payment acceptance. The best solutions run smoothly with minimal involvement on your part, with your processor handling the complexities so you can focus on your business.

How can you secure all payments?

Data security is a crucial aspect of payment acceptance, especially in the US where nearly half of worldwide credit card fraud occurs. The Payment Card Industry Security Standards Council (PCI SSC) developed a set of standards that businesses are required to adhere to for fraud prevention.

Utilizing technologies like encryption, tokenization, and EMV chip cards helps protect sensitive data as it travels across the internet. Fortunately, leading payment processors are required to maintain PCI compliance, which is passed down to the merchants that use their services. This helps your business stay compliant without the need to expend further resources.

What does this boil down to?

Working with a payment processor closes the gap between your business, credit card issuers, and various banks. It also secures the process from swipe to settlement. We live in a time of increasing competition, and something as seemingly small as how convenient it is to complete a transaction holds more weight with consumers than it once did.

Efficient payment processing provides the necessary tools you need to provide consumers with the experience they seek, which can help boost word-of-mouth business and customer retention.

Want to learn more about payment processing? Visit our website or call us at 866-290-5400 to speak with a payments professional today.

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