How Payment Processing Works

Payment processing in the online world is similar to payment processing in the offline or “Brick and Mortar” world, with one significant exception. In the online world, the card is “not present” at the transaction. This means that the merchant must take additional steps to verify that the card information is being submitted by the actual owner of the card. Payment processing can be divided into two major phases or steps: authorization and settlement

INFO: Payment Processing—Authorization and Settlement

Authorization verifies that the card is active and that the customer has sufficient credit available to make the transaction. Settlement involves transferring money from the customer’s account to the merchant’s account.

Authorization: Online

1. A customer decides to make a purchase on a merchant’s Web site, proceeds to checkout, and inputs credit card information.

2. The merchant’s Web site receives customer information and sends transaction information to the payment gateway.

3. The payment gateway routes information to the processor.

4. The processor sends information to the issuing bank of the customer’s credit card.

5. The issuing bank sends the transaction result (authorization or decline) to the processor.

6. The processor routes the transaction result to the payment gateway.

7. The payment gateway passes result information to the merchant.

8. The merchant accepts or rejects the transaction and ships goods if necessary. Because this is a “card not present” transaction, the merchant should take additional precautions to ensure that the card has not been stolen and that the customer is the actual owner of the card.

Authorization: “Brick and Mortar”

1. A customer selects item(s) to purchase, brings them to a cashier, and hands the credit card to the merchant.

2. The merchant swipes the card and transfers transaction information to a point-of-sale terminal.

3. The point-of-sale terminal routes information to the processor via a dial-up connection.

4. The processor sends information to the issuing bank of the customer’s credit card.

5. The issuing bank sends the transaction result (authorization or decline) to the processor.

6. The processor routes the transaction result to the point-of-sale terminal.

7. The point-of-sale terminal shows the merchant whether the transaction was approved or declined.

8. The merchant tells the customer the outcome of the transaction. If approved, the merchant has the customer sign the credit card receipt and gives the item(s) to the customer.

Payment Processing—Settlement

The settlement process transfers authorized funds for a transaction from the customer’s bank account to the merchant’s bank account. The process is basically the same whether the transaction is conducted online or offline