Processing payments is not as simple as it seems to the customer making the purchase. It is crucial for merchants to be informed about all parties in the payment process and how they work together. This post will go through an overview of the payment process, then a deeper dive into two parties: payment gateways and merchant accounts.
The Payment Process
The payment process from the side of the cardholder happens in just a few seconds as the chip reader processes their card or as they wait for the payment confirmation page to load. What is actually happening to make that payment happen involves multiple parties, communication of data, and checks for validity. We will take a look at some of the entities that make the payment process happen:
Step One: Ecommerce Store
The customer has gone through the merchant's online store, added the products they want to the cart, and presses "buy."
Step Two: The Customer Pays
The information about the sale is encrypted and passed to the payment gateway. The payment gateway authenticates the store and gives the cardholder their options for purchase at checkout. Once the customer enters their payment details, that information is passed to the acquiring bank by the gateway. Who then gives the information to the issuing bank where the authorization of the sale happens.
Step Three: Authorization By Issuing Bank
The issuing banks go over the cardholder information given to the merchant. Depending on if the information looks correct or that the transaction may be off, the issuing bank responds with an authorization code. This code is passed through the acquiring bank, to the payment gateway, who communicates it to the merchant.
Step Four: Funds and Merchandise are Sent
If everything looks good with the transaction, the issuing bank sends the funds to the merchant. The funds will first enter into a merchant account, then are transferred to a merchant bank account. In turn, the merchant gives their product to the customer.
Now that we went over the full process let's take a closer look at payment gateways and what they do.
What is a Payment Gateway?
A payment gateway allows card-not-present transactions to take place. It is like an online credit card reader that let's ecommerce merchants accept payment. Payment gateways are the connection between the merchant's bank and the cardholder bank. When the customer information first enters the payment gateway gives the first "okay" on the validity of the purchase. It encrypts and protects the cardholder data. The payment gateway also makes sure that all parties are communicating and receiving what they need from the transaction. Finally, the gateway tells fulfillment to start processing the order. Overall, payment gateways are a vital part of the payment process and connect to all the necessary parties, helps prevent risk, and ensure quality from the transaction.
What is a Merchant Account?
A merchant account also allows merchants to accept credit card transactions. This account can be set up through a merchant’s payment gateway. A merchant account holds the money from a transaction once the payment gateway approves the purchase. The funds remain in the merchant account until a scheduled transfer happens which puts the funds into the merchant's bank account. This schedule can range from once a day to once a week.
Since not every transaction is successful, the merchant account allows for money to be pulled from when necessary. When a return or a dispute happens, the money is drawn from the merchant account instead of the merchant's bank account.