Payment Processing: The Definitive Guide
- What is payment processing?
- The rise of digital payments
- What is a payment processing center?
- Payment gateways
- How do payment processors make money?
- How long does payment processing take?
- Examples of payment processors
- What is the best payment processing service?
- What to look for in a payment processing service
In a world that is more and more reliant on digital transformation, many businesses are experiencing operational changes, such as accelerated e-commerce growth and the need for expedited fulfillment—and it’s triggered an enhanced focus on modernization of their payments infrastructure. With an eagerness to get back to business, more than 37% of surveyed merchants have signaled their intent to prioritize business payment processing as a top area of investment for commerce technology.
We’re shedding light on all of the answers to your essential questions about processing payments. You’ll learn the ins and outs of how payment processing works, what payment processing centers are—and get more insight into the different types of payment processing services. After reading our definitive guide to payment processing, you’ll be equipped with all the essentials to get started with more flexible and expanding payment processing options.
Ready to set your business on better footing with increased agility and adaptability to thrive and grow in this new business environment? Without further ado, let’s start off with a definition.
What is payment processing?
As Business-to-Business (B2B) purchasing picks up, an increasing number of businesses are gravitating toward online purchases using credit cards—and this means more merchants will be in search of payment processors to help them facilitate digital transactions. But exactly what is payment processing?
When businesses pay for their purchases, in-person or online, the transactions are referred to as payment processing. In-person Point-of-Sale (POS) or online e-commerce purchases involve essential back-office processes such as payment authorization, settlement, and funding. These general steps involve customers (purchasers), merchants (businesses), payment processors, sending and receiving banks, and credit card companies. Let’s take a closer look at the end-to-end processes.
- A customer makes a purchase and pays using a credit card or debit card.
- The merchant puts through the card transaction.
- The secure transaction is sent through a payment gateway to the payment processor for verification and approval.
- The funds are sent from the customer’s bank through the payment processor to the merchant’s bank.
- The payment gateway receives an approved or denied status from the processor.
- If approved, the merchant receives a confirmation, and payment is sent to their bank.
The rise of digital payments and digital wallets
With more customers opting for cashless and contactless transactions, studies show 25% of B2B customers are choosing to pay using digital payment options such as credit cards, debit cards, and digital wallets. Further, findings from a recent B2B ecommerce report also shows 65% of B2B companies are fully transacting online in 2022—and are more likely to offer ecommerce over in-person sales. With this in mind, digital payment methods are becoming a top priority for business owners and financial decision-makers for the following reasons:
- 95% say digitizing payments benefits their customers and vendors
- 64% want to automate their current manual processes
- 37% seek to accelerate their transaction processing
- 75% of CFOs want more transparent transactions to boost their customers’ lifetime value
With the increased adoption of digital payments and digital wallets, credit card use will continue to climb, prompting the need for payment processors to successfully complete digital transactions. Payment processing centers are at the heart of digital payment transactions. Let’s look at how the magic happens behind the scenes and what it means for your business.
What is a payment processing center?
Payment processing centers are the indispensable companies that enable consumers and businesses to transact and make international payments to (almost) any other consumer or business around the globe. They establish the connection point between merchants, banks, and card networks to take care of the end-to-end credit and debit card transaction processes.
Whether a payment is made in-store or online, business payment processing centers are required to manage the back-end processes involved in accepting credit or debit card payments. When a customer uses a debit or credit card to make a purchase, the communication and hand-off between all of the connection points confirm that the buyer’s funds are sufficient and that the transactions are secure and complete. All of this safeguards the customer and the merchant against fraud while creating an invisible, seamless, and hassle-free experience.
The role of payment gateways
A payment gateway is a technology that takes care of the approving or declining of transactions by collecting, encrypting, and forwarding payment card information to the payment processor. Some payment processors may already have payment gateways built into their platforms to simplify and expedite transactions. With the use of payment gateways, payment processors take care of the entire transaction process oversight. But, what does this mean for payment processors, and how they make money?
How do payment processors make money?
With the exception of non-profits, payment processing businesses typically exist to help their customers either sell a product or service or solve a problem. Of course, they also want to get paid. Payment processors help merchants by taking care of all back-end processing and protecting merchants from accidental transaction errors or fraudulent transactions.
To complete and safeguard merchant transactions throughout the purchase and return process, merchants pay a fee to the business payment processing company for the transfer of funds to and from the customer’s account. The fees charged to the merchant are called a “Discount Rate” and typically range between 2% and 3% of the total transaction value. The fee is for aspects of the service such as interchange fees, processor fees, and assessment fees. Card networks determine these fees to cover the costs of building, maintaining, and operating the entire payment ecosystem.
How long does payment processing take?
Payment processing times vary depending on where things are in the process. End-to-end payment processing involves three key stages—authorization to settlement and funding—and for merchants or customers, it’s similar. Here’s how long it typically takes for the merchant throughout each stage.
Think of authorization as the green light that indicates that the purchase can go ahead. When the customer makes an online or in-person purchase or a return, it takes anywhere from seconds to minutes for the customer’s bank to authorize it so that a merchant can put through the transaction.
Settlement and funding
The settlement and receipt of funds into a merchant’s account involves several steps and can vary depending on the type of merchant account. Although payment processing has typically taken between 24 hours to three days to complete, a lot has changed. In many cases, merchants now see funds deposited to their banks as soon as overnight.
What are examples of payment processors?
With payments processing services expected to become more embedded in digital ecosystems, it can confuse merchants. To help clear things up, we’ve listed various roles that each type plays in facilitating and processing transactions and where each fits within the digital payment ecosystem.
These are the companies or banks that issue their credit and debit cards to consumers and businesses. For instance, if Bank of America or Chase issues a credit card to a customer, those banks would be considered the card issuer.
These are companies that provide electronic networks that enable each party to communicate with each other and process transactions. Companies like MasterCard, Visa, and American Express, which facilitate transactions between consumers, merchants, banks, and processors, are considered card networks. Some of these also act as card issuers (for example, American Express).
Merchant acquirers can be independent sales organizations or payment processors that coordinate transactions with other financial companies to accept payments.
These are technology platforms that coordinate purchases and returns through card networks and banks to ensure merchants can transact with their customers and get paid accurately and on time. In essence, this ensures debit and credit card payments can be sent and received successfully.
Why do merchants need a payment processing service? It’s because of the many benefits that simplify and secure the processing of transactions—but that’s not all.
Benefits of payment processing services
Using business payment processing services not only help merchants complete and expedite card transactions using gateways, but it also provides other benefits:
- A ready-made comprehensive solution with merchant-friendly procedures
- The ability to increase business flexibility through expanded payment options
- The ability to meet payment regulations like PCI DDS (Payment Card Industry Data Security Standard ) compliance
- Fraud prevention steps to safeguard every transaction
With all of these benefits, there’s no doubt it’s time to discuss how to find the best payment processing service for your business. Let’s get further into how to go about finding the best payment processing service to meet your business needs.
What is the best payment processing service?
Finding the best service isn’t a one-size-fits-all answer. There are many payment processors; the key to identifying the best one for your business rests first on clearly identifying your business challenges and goals—then venturing out to search for those best equipped to sustainably meet both.
What to look for in a payment processing service
First, look for companies that have a solid reputation and testimonials from existing clients—especially if they’re experienced in your industry. Take your time and talk with the product teams about your challenges and ask how they’ve addressed these in the past. Experienced payment processing companies will offer innovative solutions that demonstrate:
- They understand your business and industry
- Their services and solutions have the capabilities to meet all your challenges and goals
- They are innovative and interested in helping to find solutions where solutions may not previously exist
- The company has a solid reputation and customer testimonials to back it up
- They’re transparent about how they work and about their rates
- Their customer service is exceptional (implementation is just the start of the partnership)
Companies like Plastiq have partnered with numerous satisfied merchants to provide them with flexible expanded business payment processing options that keep them and their customers happy—our customer testimonials are proof of our solid reputation and dedication to exceptional service.
Ready to get started on your journey to exceptional and secure payment processing capabilities for your business? Reach out to one of our team members and learn how we can help your business accept credit cards with zero merchant fees.