How Do Payment Processing Systems Work?

There are multiple steps and parties involved in a payment process. The acquirer is the institution which is authorized by Visa or MasterCard to accept their cards. The issuer is responsible for offering either the buyer or seller a line of credit that can be used for purchases. The issuer may come in the form of a bank, government or even a credit union. Organizations such as MasterCard or Visa offer the technology which is used for transactions.

How Payments Work

Everything begins at the POS (Point of Sale), where the consumer attempts to buy goods from the seller. This may be done via a physical store or a website. If it is done in a store, the customer will need to swipe their card at the terminal and or key in their number. If they are shopping on a website, their credit card number and three digit CCV number must be entered manually. Next, the payment will need to be authenticated. What this means is that the POS system, either the online form or credit card terminal, will capture the customer’s account data, after which it will be securely transmitted to the acquirer.

The transaction will now be submitted. The acquirer will ask the credit card company (such as Visa or MasterCard) to obtain an authorization which must be sent from the issuing bank of the consumer. The credit card company will then make a request for the authorization, by sending the issuer a transaction which they can then authorize. Next, the issuing bank must allow authorization for the transaction, after which the response will be returned to the seller.The issuing bank will now need to transmit the payment to the acquirer of the merchant, who will then place the funds within the account of the merchant. Credit card transactions occur in real time.

Online Payment Processing

Online payment processing is quite similar to the process that occurs in physical stores. The difference is that customers don’t have to use a physical card terminal in order to swipe their card. Instead, they will use an online form on a secure webpage. After a customer makes an order using an online form, the merchant will transmit the information for the order over the Internet, and encryption will be used to the secure the data. The difference is that the details for the transaction will be formatted and the transaction authorization will be routed through a payment gateway. After this it will be transferred to a payment processor.

Transactions must always be routed to the issuer so that they can be authorized. Once a transaction is authorized or declined, a message will be returned to the seller. For transactions which have been approved, the issuing bank will allow the transfer of funds to the acquiring bank. Then, the bank will issue the funds to the account of the merchant. It can take up to 48 hours for the funds to leave a merchant account so they can be placed in the checking account of the business.