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The Quick Guide: Online Payment Processing

In the modern consumer landscape, individuals make card transactions to pay for almost anything with minimal fuss. According to Statista, the total value of digital payments in the UK is estimated to top £290bn in 2022, with e-commerce contributing around £204bn of this segment.

What goes on behind the scenes, though, is a complex network of digital actors executing the payment processing work, aeons faster than the pre-internet era.

Unsurprisingly, many businesses remain unfamiliar with these finer technical points, leaving them scratching their heads when it comes to understanding additional fees, choosing the right provider, and why they have to wait longer than expected for settled funds to reach their bank account.

Sellers want to ensure that the payments they receive are secure and the process cost-effective, but at the same time this should be of no extra burden to their customers. The transaction process should be as seamless and hassle-free as possible, so that sellers remain competitive in a digital marketplace that prioritises ease-of-use.

In this article we take a look behind the curtain of what happens at each juncture of the journey between the customer checking out and their funds reaching the seller’s account. Read on to learn how online payment processing works, this differs for international transactions, the key players involved, and the current state of the digital payment ecosystem.

Payment processors

A payment processing company or simply ‘payment processor’ manages and facilitates transactions between buyers and vendors.

These are typically third parties, and are used across both large and small enterprises.

Processors organise the transaction to guarantee that vendors receive their money from consumers through the network of credit cards issuers and acquirers.

Some are associated with acquirers like Santander, but others are independent. They can belong to an integrated payment service provider (PSP), along with a merchant acquirer, or they are separate. Processors collect the card-based payment any business accepts, manage and aggregate (process) the transaction information and transfer this data to issuers that represent business accounts, otherwise known as acquiring banks or merchant acquirers.

The core elements of the payment process

Processors may also offer a range of additional specialised support, including extra fraud and security protections or assistance with regulatory compliance.

As with other parts of the payment ecosystem, they incur charges for their services, which we will explain in more detail later.

Payment processors are a single but indispensable piece of the total transaction puzzle – if a business is unable to securely secure processed funds from customers, it cannot function. Let’s explore the other vital parts of the transaction process.

Payment processors

The payment processor manages card transactions by transferring payment information (i.e. if the cardholder has sufficient funds in their account), validating the card number and approving the transaction if all conditions are met. They are in essence the middlemen between the customer’s payment and the business’s account, transmitting information between the business, the merchant acquirer and the issuing bank.

Payment gateways

Payment gateways are in turn the middlemen between the payment processor and the credit card company. These are software applications that allow merchants to accept any debit or credit payment, encrypting payment data and transmitting this information between card issuer, processor and merchant acquirer.

The key function is to provide security that protects sensitive cardholder information during the online payment process.

Merchant acquirer

The merchant acquirer maintains the business recipient’s account to accept payments, and directly interacts with payment processors rather than the vendor themselves. Funds from the merchant account are automatically transferred to the business bank account within one to two business days.

The acquirer relays approval or decline of payment to the business’s bank or through the payment gateway. It performs the role of confirming the customer account validity, and whether they have available balance sufficient to complete the transaction.

Card network

Consumer or merchant banks issue credit or debit cards to consumers via a card network – the most notable being Visa or Mastercard. These networks facilitate the entire payment processing activity, ensuring settlement and sales clearing as well as regulating them in accordance with network compliance policies.

This works differently for distinct card types: a credit card company transfers payment to the merchant acquirer on behalf of the consumer, making them liable if the consumer cannot repay these funds. When a debit card is used, the liability belongs to the bank, as the transaction can only take place if there are sufficient funds available at present. Networks charge the issuing and acquiring companies for each transaction.

Issuing bank

Banks or fintech companies are home to actual customer funds. They issue credit or debit cards to their customers through card networks, and payment to the merchant’s bank (the acquiring bank) on behalf of the consumer, meaning they assume liability for the money if the consumer cannot pay the money back.

How online payment processing works

The process itself requires several steps. The transaction flow involves the payment meeting the individual requirements of each gateway, from the start of the transaction to the settlement of funds in the business owner’s bank account. As previously mentioned, the individual entities involved in the process (card network, gateway, processor, merchant acquirer and issuing bank) perform distinct roles in the total process:

1. Authorisation

The first stage in the payment process is authorisation, and this takes only a few seconds. The cardholder initiates the transaction, which then passes through the merchant acquirer, payment gateway, issuer, card network and processor.

2. Batching

Transaction data is communicated in real-time, yet for many vendors the total amount of sales are accumulated throughout the day and sent in a batch. These are received by the merchant acquirer to receive payment. Another benefit of batching is that it allows for more time in order to assess each order for fraudulence, unlike in real-time where they are less likely to be identified.

3. Clearing

In the clearing stage, the acquirer accepts the transactions from the payment processor, and transfers them to the card networks for distribution to the issuing bank. The issuer then carries the cost of the transaction from the cardholder’s bank account, and transfers them back to the merchant acquirer through the card network.

4. Settlement

Once the release of funds have been authorised, businesses usually have to wait one to two days before they receive the funds, which can lead to confusion and impatience. From the perspective of the vendor, although they may have successfully sold their product and the payment process has been executed smoothly, it can still take time to deduct the money from the customer’s bank. The length of time this takes depends on both the method of payment and time of day, along with the individual of the banks and perceived risk levels.

The steps of online payment processing

This is the typical process for online transactions:

1. The customer selects the item they wish to purchase and checks out, initiating the online transaction process.

2. Sensitive card information is transferred to the payment gateway, which encrypts the data and sends it to the payment processor along with other transactions in the ‘batch’.

3. The payment processor takes the transaction data to the connecting card network.

4. Customer credit/debit card details are confirmed and verified or denied. If the card data is verified, payment is authorised and the issuing bank debits the funds.

5. Transaction info is then relayed from the issuing bank to the card network, informing them that they have been authorised to complete the transaction.

6. The card network verifies the online transaction to the processor and payment gateway.

7. The payment gateway notifies the merchant that the transaction has been authorised.

8. The funds from a customer’s issuing bank account are transferred to the merchant acquirer.

9. The merchant acquirer deposits the funds it has been holding into the seller’s bank account.

The cost of online payment processing

Each individual player in the payment process has something to gain from their involvement. That’s why payment processing incurs a variety of fees applied to the vendor, which can be divided into four types of charge: interchange, merchant acquirer, assessment and processing.

Interchange fee

Interchange fees constitute the majority of additional transaction costs. The charge is given to the customer’s issuing bank, since its risk profile is the greatest considering that by lending credit to the card network it is liable for the payment.

The fee is intended to help the issuing bank cover the handling cost of the transactions, along with the risks that sale approval entails, and the possibility of fraudulent transactions taking place. Interchange rates may vary depending on the card network, card type and method of payment acceptance. Payment processors may charge an interchange fee along with a fixed fee or percentage per transaction.

Assessment fee

The assessment fee is a charge applied to processing the credit card, and only represents a small portion of the total costs of the transaction process. Assessment fees are paid directly to the card network, and these differ in amount depending on the card type used, the size of the transaction or the location of the transaction (cross-border payments).

Merchant acquirer fee

For a business to process credit card payments, it must interlink the credit card network to a merchant account. A merchant account lets a company accept credit card payments, and the merchant account provider deposits the payments in the merchant’s bank account at regular intervals.

The merchant account provider charges a small fee on top of the interchange fee depending on the volume of transactions and type of business. In addition to the per-transaction cost, it may also charge a monthly maintenance fee, as well as an additional fee for transactions disputed by customers.

Processing fee

As the processor facilitates the transaction from start-to-finish, this provider also charges for their services for each transaction processed. This can be for when a payment is either accepted or declined. Processing fees are not limited to the processors themselves – payment gateways also charge for processing services.

The pricing structure of payment processes

Of the various charges incurred with domestic or international payments, businesses should also be aware of the types of fees:

Flat fees

These are applied identically to all transactions, regardless of whether they take place in a brick-and-mortar or the online marketplace and the card type. These are taken as a percentage of the total transaction along with an additional fixed charge.

Tiered fees

With tiered fees, the payment processor takes the interchange fees and orders them according to the transaction’s risk level: qualified, mid-qualified and non-qualified. For instance, non-qualified charges have the highest fees as this category indicates the transaction carries the highest amount of risk. Examples include signature payments or prepaid card payments, both of which are more vulnerable to fraud via illegal acquisition of card information or forge signatures.

Online processing for cross-border payments

In the modern digital marketplace, international transactions are more and more common, and indeed often vital for business growth. The process of executing these payments can cause uncertainty for some vendors, however. When multiple currencies start to get involved, this requires additional software to process exchange rates to ease global transactions.

Payment method preferences also vary across countries, and it is important for many businesses to be able to accept a range in order to remain competitive. Businesses are often wary about cross-border payments as they are more likely to lead to declined transactions, along with the increased risk of fraud.

In turn, this incurs greater costs – notably from higher transaction fees at each stage of the process. Credit card companies may charge cardholders a transaction fee in a foreign currency for any purchases carried out in a currency other than the cardholder’s own. While this rate diverges depending on the issuer and currency types, this also leads to confusion and uncertainty about the price of cross-border transactions.

To optimise cross-border transaction processes for maximum revenue, a global payment platform will use intelligent payment processing features to reduce costs on all international payments, namely transaction fees and foreign exchange rates.

Conclusion

The right payment processor is essential for your business, both in terms of keeping additional costs to a minimum and providing the best possible transaction experience for customers. The specific needs of a business will also determine their choice of processor, and this can depend on the industry the business belongs to. It therefore pays to have a rich understanding of how payment processors work within the modern payment ecosystem. A successful digital ecosystem will, on average, possess around 40 payment partners used for each stage of the payment process.

CellPoint Digital is the leader in the ecosystem of digital payments. Through innovative front-end and back-end technology, CellPoint’s fully-integrated payment orchestration software manages multiple payment processors and service providers simultaneously in order to create the smoothest transaction process possible for customers.
The fastest and most secure transaction process is the one that delivers the best rate of consumer satisfaction in the evolving digital market, making seamless payment one of the highest priorities for e-commerce or any modern business.

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