|July 30th, 2020|
The payment processing engine is driving the online business network. Every second, millions of users across the world make use of online payments by simply clicking a button. However, things are not that simple at the merchant’s end. A whole lot of technology goes into making a digital payment happen in real time. All this is to make the experience of online shopping much more convenient and efficient.
Merchants (business owners) do a lot of research and market evaluation before deciding on a payment processor. This is done in order to find the most suitable, economical and safest option. It is right for them to do so since payment processing is a vital component of any business. There are several aspects of payment processing that a business must be familiar with before choosing a payment processor. This post discusses all that information for the benefit of the readers.
What is a payment processor?
A payment processor is a service provider that handles monetary transactions for a merchant or a business owner. These transactions could come from a variety of different payment methods. Payment processors charge merchants for this service. They are responsible for secure, seamless and fraud free transaction processing. They analyze and transfer the payment data to relevant networks that further authenticate the information. Payment processors integrate with payment gateways to make this happen.
What is payment processing?
Payment processing denotes the technology or the software processing that customers and merchants use to make transactions. The process uses payment gateways, payment networks and a bundle of software that ensures smooth and error free transactions. Payment processing for credit/debit card transactions and other payment modes like eCheck etc. is offered to the merchants by payment processing companies at a minimal cost.
Stakeholders in the payment processing cycle: The payment processing cycle begins from a consumer and ends at the business owner, the technology for processing the payment comes in between these two stakeholders.
1. The customer: The customer is the key contributor in the payment process. They purchase items online and make payments which keeps the cycle going. All a customer needs is a bank approved credit or debit card and an intent to purchase a product/service.
2. The technology: Payment processing uses a bunch of technology and modern software to process payments which may look simplistic from the outside but are very complicated in reality. The technology works as a connector between the customer and the merchant.
3. The merchant: The merchant is the other end of the customer. They receive the money paid by the customers for their purchase of products/services. Merchants hire payment processors who take care of these payments and offer them the relevant technology and support.
How does payment processing work?
Payments pass through several gateways before finally reaching the merchant’s bank account. A lot happens in those few seconds which consumers refer to as a ‘transaction.’ In this part of the post we look at what goes on behind the scenes from the moment a customer hits the final ‘submit’ button until the amount is deposited in the merchant’s bank account.
Step 1: Purchase
Customer makes a purchase on the merchant’s website or mobile application and enters credit/debit card details and presses the ‘buy’ button.
Step 2: Encryption
The information input by the user is passed on to a payment gateway that encrypts customer data for security purposes.
Step 3: Verification
Customer’s data is verified and authenticated and passes them onwards if it is correct. In case of error the transaction gets declined.
Step 4: Authorization
Payment processor authorizes the transaction with the customer’s bank to approve or decline the transfer of funds.
Step 5: Fund Transfer
If the customer’s bank approves, funds are transferred to the merchant’s bank account via the payment processing channel.
Given above is the whole payment processing cycle in a nutshell. There may be several reasons which can cause rejection or result in transaction failure, let’s check them out too:
1. Frozen/deactivated accounts
2. Insufficient funds
3. Invalid personal info or data
4. Card reported lost or stolen
5. Network failure issues
6. Others: wrong expiry date, CVC etc.
Cost of payment processing: Payment processing companies charge merchants for handling monetary transactions for their business. There are several other service providers in the loop like credit card issuing organizations, payment gateways, networks, software companies etc., these players also share a pie of the fees that merchants pay for payment processing services. Let’s see a breakdown of the fees that a merchant has to pay to a payment processor.
1. Interchange fee: A percentage amount of the transaction value charged by the card issuing bank.
2. Assessment Fee: A percent of the fees goes to the credit card issuing company like VISA, Mastercard etc.
3. Merchant bank fee: Charged by the merchant’s bank to maintain and deposit funds for the business owners.
4. Authorization fee: Payment processor’s service, customer support and rentals. Monthly or yearly fees also charged.
Credit card processing fees: When it comes to credit card processing a flat rate fee and an interchange fee is charged along with a tiered fee structure.
Flat-rate fee: This is processing fee and transaction fee (charged per transaction).
Interchange plus fee: A fixed markup over the interchange fee is charged to merchants.
Tiered Fee Structure: Merchants are free to choose any one of the tiered structure offered by the credit card processing companies:
Qualified: Lowest risk, payments completed in person with a standard credit card.
Mid-qualified: Higher risk as physical card is not present, charged higher rates.
Non-qualified: Highest risk, mostly used by ecommerce companies.
Payment processing industry and some top players: The payment processing industry is growing at an annual rate of 14.5% and is expected to be worth $98 billion by 2027. This industry is here to grow as more and more businesses are implementing the digital model. More and more corporations and giants are entering this domain to leverage the benefits and offer payment solutions. Some of the major companies are: PayPal, Stripe, Square, Paycron, Braintree, Sage etc.
What is the future of payment processing?
This post will be incomplete without discussing the future of the payment processing industry. Apart from the definite growth and expansion, the industry is also preparing itself for major financial technology changes that are bound to revolutionize the way we make and receive payments. With digitization, speedy internet and mobile devices, the future looks bright and interesting. Here are some of the major change drivers of the future:
1. Digital wallets: E-wallets are far more secure than credit cards since they have multiple levels of authentication. Passwords, biometrics etc. create an added layer of security on the first step, i.e. accessing the wallet on the mobile phone. This trend grows as most businesses have come up with their own wallet, ex: Amazon Pay, Apple Pay etc.
2. Generation Z: This makes up for almost 40% of the consumers in the USA alone. Generation Z is the new band of consumers in 2020. They are tech-friendly and do not shy away from experimentation and new ideas.
3. Voice Commerce: The next big thing in the payment industry is voice commerce. It is already gaining popularity and is on its way to become a major trend in the near future.
The payment processing industry forms a crucial part of businesses. It is an important component of the buying cycle as well. With new tech and infrastructure, it is growing rapidly as conventional methods of payment are disappearing gradually. It is only a matter of time until everyone embraces the digital.