Online shopping has taken the shopping experience to the next level. From personalized recommendations to the comfort of buying whatever you want from your home, it has brought much-needed convenience for people. Easy purchasing ability and secure payments have made eCommerce a thriving industry. However, the process that facilitates this is much more complex.
Payment processing is the process that enables the secure transfer of money from the customer’s account to the merchant’s account. A merchant must carefully research the various aspects of payment processing before choosing one since the processor will be responsible for facilitating smooth and secure payments.
What is payment processing?
Payment processing allows customers to make payments through their credit and debit cards and allows merchants to accept the same. It interacts with the customer, the card service, issuing bank, and the merchant to enable the smooth transfer of money. While the process may be complex, it takes only a few seconds to finish.
Payment processing allows merchants to provide a meaningful customer experience and increases their revenue and sales. The entire process is automated and convenient for the merchant and the customers.
What is a payment processor?
A payment processor is a company that provides payment processing services. It handles transactions securely and quickly and keeps the data exchanged confidentially. They are typically third-party vendors merchants hire to enable online payment processing services.
It is easy to confuse the payment processor and payment gateway since both are a part of the payment. However, the payment processor shares the data while the payment gateway authorizes and verifies it. The payment processor is responsible for enabling the transaction, while the payment gateway is responsible for interacting with the customers and communicating the approval/rejection of the transaction.
Key parties in payment processing
There are primarily three parties involved in payment processing. Let us discuss each of them.
- Merchants: A merchant is a company that sells goods/services and enables the services of a payment processor to facilitate smooth payment processing.
- Customers: Customers buy the merchant’s goods/services through credit/debit cards.
- Technology: The technology used by payment processors allows money to be transferred from customers to merchants.
How does it work?
Payment processing is a complex process. However, it takes a short time.
Let’s understand it in steps:
- The customer selects the products they want and clicks on the pay now option to buy them.
- They share their credit/debit card details to initiate payment.
- The data is encrypted by the payment gateway and sent for verification.
- The payment processor verifies the data and transaction details.
- The payment processor shares the information with the card service and issuing bank for approval/decline payment.
- Upon approval, the payment processor gives the information to the payment gateway and requests a funds transfer from the customer’s account.
- The funds are transferred, and the customer receives information through the payment gateway.
The time of fund transfer depends on several factors, such as the banks involved, the terms of gateway payment processing, etc.
Cost of payment processing
The payment processing fee depends on the payment processor and the services you are getting. The payment model is different for all payment processors, but the common fees each processor charges are as follows.
- Interchange fee: The interchange fee is charged by the issuing bank as a percentage of each transaction.
- Assessment fee: This is charged by the card association as a percentage of each transaction.
- Merchant bank fee: This fee is charged by the merchant’s bank as a percentage of the total transaction amount.
- Authorization fee: The payment processor charges an authorization fee for all transactions.
Except for the authorization fee, all three other fees are added to find the fees for one transaction. The authorization fee is separately added to it.
The pricing structure typically followed by payment processors is as follows:
- Flat rate: A flat rate per transaction is charged in this model.
- Interchange plus: The interchange fee remains fixed under this model, and an additional fee is charged.
- Tiered: Tiered payment model includes qualified, mid-qualified, and non-qualified. The fee is determined as per the risk involved in the transaction. Most e-commerce companies are charged the highest rates under a non-qualified pricing structure.
Growth of payment processing
With the booming e-commerce industry, the payment processing industry is also on the path of significant growth. More and more people prefer to shop online, making payment processing essential. People prefer to use non-cash methods to make payments, even in physical stores. Payment processing is necessary for ensuring a superior customer experience. Only a positive customer experience can bring customers back to the brands.
Payment processing is an inseparable part of eCommerce. Payment processors allow payments through credit/debit cards, digital wallets, bank transfers, and other local payment methods. Choosing a payment processor is a crucial decision, and merchants should carefully examine their requirements and the processor’s capabilities before integrating it into their business.