Since the number of online shoppers and digital consumers increases daily, companies are investing time and effort in approaching this new demographic to generate more leads and capture more sales. The best way to accomplish these goals is to provide customers with a smooth purchasing experience.
That is why online payment processing services with multiple payment options have become a necessity today. Modern-day businesses must accept payments online in an optimized way not only to keep up with the latest digital business trends but to increase payment authorization and conversion rates, improve customer UX and bank relations.
Incorporating streamlined online payment processing is one of the trends that allows businesses to provide customers with the option to make online payments using their preferred payment methods.
In this article, we will cover the following things:
- Essential payment processing terms;
- How payment processing works;
- Different payment method categories.
Read on to find out more about payment processing. Let us first explore some essential payment processing terms, such as payment processor and payment gateway.
Payment Processing Glossary
A payment processor is an intermediary between the financial institution and the merchant. It receives the cardholder’s information through a payment gateway and submits it to the acquirer, the merchant’s bank. A payment service provider (PSP) manages the critical steps of the online payment process, such as:
- Mediating between the merchant bank and the financial institution;
- Authorizing credit card transactions;
- Facilitation of the funds’ transfer.
A payment processor ensures the merchant receives the funds in their bank account on time by authorizing credit card payments. A payment processor also refers to a payment service provider or payment gateway. The best payment processing services include responsive customer support, PCI compliance assistance, cybersecurity solutions, card acquiring tools, and more.
Also known as a merchant bank or acquiring bank, the acquirer refers to the financial entity that allows a merchant to accept credit card payments and debit card transactions. The financial institution processes credit card transactions on the merchant’s end and settles revenue into the merchant’s account.
The issuers, also known as the issuing banks or the customer’s banks, are financial institutions in charge of the credit card transaction process on the cardholder’s end. It ensures the acquiring bank receives the funds by collecting payments from cardholders, authorizing credit card payments, and approving online transactions.
How Does Payment Processing Work?
1) The consumer enters card details and makes a payment
A customer buys an item or a service with a credit or debit card. After checking out, customers provide their card details through a payment page, form, or link online, at a store terminal, or via another method. The information goes to the merchant through the payment gateway – a secure portal for authorizing card payments usually included in payment processing services.
2) The merchant requests authorization from the merchant acquirer
Upon submitting the information, the payment gateway forwards it to a payment processor. The payment processor receives the encrypted card data from the payment gateway and requests authorization approval from the acquiring bank to check if the payment is legit.
3) The merchant acquirer submits an authorization request to the card scheme
The acquiring bank forwards the authorization request to the card scheme; mostly, it’s either Visa or Mastercard.
4) The card scheme submits the request to the issuer
5) The issuer approves the transaction and sends a confirmation to the card scheme
The customer’s issuing bank checks the information to ascertain whether the customer has sufficient funds for the transaction and either approves or declines the transaction.
6) The card scheme sends the confirmation to the merchant acquirer
7) The merchant acquirer sends the confirmation to the merchant
8) Goods or services are released
Once the transaction is complete, the consumers can receive the required services or items.
Payment Method Categories Involved in Payment Processing
Giving your target audience multiple payment options, including modern and traditional, is the best way to grow your business and beat competitors. Since there’s no way around it, you should offer as many payment methods to your customers as possible. Here are the top seven payment method families to consider.
Debit and credit cards offer a quick and convenient way to make financial transactions. Debit cards use a bank account to withdraw money, while credit cards provide users with a credit limit they can spend on online and offline purchases.
The best way to accept credit cards is to incorporate a credit card payment system into your payment processing model. For accepting debit card payments, set up online payments for both web and mobile payments to accept transactions from debit cards.
Digital Wallets & Mobile Payments
In the case of card-present transactions, digital wallets use near-field communication (NFC) technology to make electronic payments and are linked to a card or bank account. A merchant must then have a credit card terminal or a Point of Sale system (POS) to process digital wallet payments. For online payments, NFC and POS are not required, the payment information is sent securely through tokenization.
Wallets also typically require additional customer verification (e.g., biometrics, SMS, passcode) to complete payment. Aside from debit and credit cards, digital wallets support digital currency, such as cryptocurrency. Mobile payments allow customers to make purchases using a device like a smartwatch or a smartphone. Mobile payment information is processed the same way as a digital wallet method and can require an app or a QR code.
Buy Now, Pay Later
Buy now pay later is a payment method that allows customers to buy items now and pay for them later. BNPL companies process these payments by charging 25% or more of the overall purchase sum upfront, allowing customers to pay off the rest through interest-free installments. Most companies require a soft credit check for approval, although some may ask for a hard credit pull.
When it comes to banking, merchants can use an open banking provider (OBP), utilize bank debits, bank redirects, or bank transfers. OBP replaces the function of the acquirer and the card network in a traditional card flow. Bank debits pull funds directly from your customer’s bank account. Bank redirects add a layer of verification to complete a bank debit payment. And bank transfers allow customers to push funds from their bank account to the merchant’s.
Vouchers, Prepayments, and Gift Cards
Gift cards, prepaid options, and vouchers are popular ways to reward consumer loyalty. Retailers commonly offer rewards to the highest-paying customers to encourage them to keep purchasing. Customers receive a voucher with a transaction reference number that they can scan and bring to an ATM, bank, convenience store, or supermarket to complete the payment in cash.
Most consumers abandon in-person transactions due to the convenience that online shopping offers them. That change in their behavior forces millions of merchants to look for the best ways to provide customers with a frictionless purchasing experience without endangering their operations.
In a modern-day digital business landscape, processing online payments while complying with the latest privacy standards is more of a challenge than business owners would expect them to be. They also have to think about the safety of customers’ financial information. That’s why retailers need payment processing solutions like Solidgate to secure revenues generated from each card transaction and transfer funds from the consumers’ credit accounts to the merchant’s bank with ease.
Solidgate is an online payment processing platform. We ensure the buyers get a seamless purchasing experience while online businesses get paid online. Our fintech solutions optimize payment routes, improve conversion, beat fraud and chargebacks. In the long run, we’re a merchant’s ultimate money-making machine, helping you enter new markets and scale aggressively wherever you are.
Frictionless Payment Processing
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