Dec 8, 2022 7 min
Payment Processing Explained: How to Choose the Right Company and Payment Method
Payment Processing Explained: How to Choose the Right Company and Payment Method
Payment processing is a vital component of both brick-and-mortar retail and e-commerce. Modern technology allows a customer to make a purchase, present a payment method, and almost instantaneously have that purchase approved. This technology is provided and managed by payment processing companies. To select a payment processor, merchants must thoroughly understand how transactions move through the system and what to look for in a processing vendor.
What Are Payment Processing Companies?
Payment processing companies provide hardware, software, and transaction management between merchants, customers, and banks. To ensure each transaction’s security, they must follow security protocols called the Payment Card Industry Data Security Standard (PCI-DSS). These procedures include maintaining a secure network, protecting cardholder data, protecting against hackers, restricting sensitive information, monitoring networks, and maintaining a formal information security policy.
How Does Payment Processing Work?
Payment processing comprises many steps to assure accuracy, regulatory compliance, seamless transactions, and customer satisfaction. So how does it work? It all begins at the point of sale (POS):
1. The customer presents the payment – for example, inserts a credit card into the payment device (a card-present transaction) or provides a credit card number on a website (a card-not-present marketing).
2. The payment processor manages the device and submits the transaction details to the issuing bank.
3. The issuing bank accepts or rejects the transaction and sends that status to the merchant’s bank, then back to the merchant. All of this happens in a matter of seconds.
After the sale is authorized and completed, the merchant doesn’t yet have the sale’s proceeds. To complete the transaction:
1. The issuing bank charges the customer’s credit card the transaction amount.
2. The issuing bank transfers that amount to the merchant’s bank minus its fee.
3. The merchant bank then transfers the final proceeds to the merchant.
What Parties Are Involved in Processing a Payment?
As indicated above, multiple parties are involved when processing a payment. Let’s review them in more detail.
• Customer: the person purchasing an item in a store or via a website or app which pays with a payment card or an online payment service.
• Merchant: the company or business selling the product and accepting the payment.
• Payment Gateway: the secure connection and payment system between the merchant and the payment processor, such as a card terminal or an Application Programming Interface (API) on a website or app.
• Payment Processor/Payment Service Provider (PSP): the company that provides the payment gateway or interface between customer and merchant. The PSP works with the issuing bank to authenticate that the customer has enough funds, then approves or rejects the transaction. Sometimes the merchant bank is also the PSP.
• Issuing Bank: the bank holding the customer’s funds.
• Acquiring or Merchant Bank: the bank managing the merchant’s funds.
What Are the Main Components of the Payment Processing Platform?
In addition to the key parties involved in the payment process, the platform has many components, some of which have already been mentioned.
• A website, app, or retail store where a merchant sells products.
• A high-speed internet connection by which transactions are conducted.
• Payment methods include debit cards, credit cards, e-wallets, online payment apps, or bank transfers.
• A payment gateway that uses an internet connection and a card terminal or an API to encrypt transaction details and send them to the issuing (customer’s) bank. Encryption protects the customer’s financial and personal information.
• A payment processor or service provider communicates with the issuing bank to confirm that the transaction is legitimate and accurate. These PSPs also serve as mediators between merchants, customers, payment providers, issuing banks, and merchant banks to ensure seamless transactions and good customer experiences.
What is the Cost of Processing Payments?
Payment processors and credit card networks charge merchants a percentage of each transaction and other fees associated with the services they provide. Payment processors charge a flat monthly service fee plus a terminal lease fee to cover the credit card transaction equipment cost.
Other fees include:
• Chargeback Fee: This fee is assessed each time a customer returns an item or disputes a charge.
• Address Verification System (AVS) Fee: This per-transaction fee is charged for matching a customer’s billing data with a keyed-in transaction.
• Hosting Fee and Wireless Access Fee: These are fees for using server-based and cloud-based POS systems.
• Minimum Monthly Processing Fee: Credit card processors can impose a fee if a minimum monthly transaction quota still needs to be met.
• Payment Gateway Fee: This fee covers the software and data security costs of processing online payments.
• Batch Fee: This fee is imposed when closing or settling daily deposits.
In addition, the four major credit card companies (Visa, Mastercard, American Express, and Discover) each charge fees to use their products and services. These include assessment fees, ranging from 0.13% to 0.15% per transaction, and interchange fees, which also vary by network and change every April and October. Those range from 1.5% to 3.3%.
Finally, merchants must pay an Acquirer Processing Fee on each Visa transaction, a Network Access and Brand Usage Fee on each Mastercard transaction, and a Fixed Acquirer Network Fee for all cards.
Why Are Payment Processing Companies Important?
Payment processing companies are essential to the retail industry, whether online or in person. Following PCI standards ensures transactions are authentic, accurate, and secure. They allow merchants to have one system for all payment types, eliminating confusion and redundancy. Their designs often integrate with the merchant’s accounting and customer relationship management programs, saving time and effort when filing taxes or conducting marketing. All of these advantages result in satisfied merchants and customers.
How Does the Payment Processing Sector Operate?
The payment processing sector is an ecosystem comprising many credit card networks, acquiring banks, issuing banks, payment gateways, payment processors, independent sales organizations (ISOs), and payment facilitators (PayFacs). The ISOs sell processing services and act as intermediaries between merchants, acquiring banks, and payment processors. PayFacs use more advanced technology to offer faster onboarding and a streamlined fee structure.
What Are the Top Payment Processing Companies?
In addition to banks serving as payment processors, technology has enabled companies like Amazon, Google, PayPal, Square, Stripe, and Shopify, for example, to offer processing options.
What to Consider When Choosing a Payment Processor
Merchants must remember many essential elements when selecting a payment processor. This is a partnership that will have a direct impact on the profitability of the business and its ability to provide products to customers for years to come. Aspects to consider include:
• Fees: As previously discussed, payment processors charge merchants a fee for the right to use their services and equipment. This is in addition to fees charged by credit card companies. Therefore, merchants should carefully research when and how fees are assessed before choosing a payment processor.
• Payment Types: To best serve customers, merchants should select a payment processor that offers various payment types, platforms, and currencies.
• Add-Ons: In addition to payment services, processors offer merchants additional products such as the payment gateway, credit card terminal, and point of sale terminal, which are needed to transmit payment details between the merchant and the bank. Merchants should consider the type, cost, and availability of these add-ons.
• Customer Service: Ideally, a payment processor will offer customer support 24 hours a day, seven days a week, to assist merchants wherever and whenever they do business. The processor should be an expert in the payment industry and provide risk management advice, tools for business growth, transaction flexibility, and practical business solutions.
The Future of Payment Processing
As technology continues to evolve, the payment processing industry will grow as new fintech players enter the arena, contactless payment and digital wallet adoption will continue to increase, and more people will use cryptocurrency to pay for purchases. Add to that the growth of peer-to-peer and real-time payments, automated sales systems such as kiosks and vending machines, mobile points of sale, and ubiquitous intelligent devices and voice assistants, and the future of payment processing is bright indeed.
Discover Why CARDZ3N is the Right Payment Gateway For You
CARDZ3N is the right payment gateway because we provide a unified approach. With our flexible plans, merchants can accept credit cards in person or online from anywhere in the world, generate robust financial reports and optimize performance and productivity. We consult with our clients to provide a broad range of solutions for achieving their long-term vision.
Whether selling online or in a traditional retail store, selecting a suitable payment processor is one of the most critical decisions a merchant can make. At CARDZ3N, we understand that payment processing is complex and different for every merchant. We work with our clients to provide a custom solution with no setup fees. To learn more about how your business can benefit from our services, email us at email@example.com or call 702-623-3528.