Payment processing basics

To complete an online transaction, merchants have to connect with a network of banks (both issuing and acquiring), credit card processors, and other financial institutions so the purchase information provided by the buyer can be billed in a secure environment.

The solution is a payment gateway that connects your online store to these institutions and processors.

The Payment Processing Network

Acquiring Bank : In the field of accepting payments online, the Acquiring Bank is what provides the Internet Merchant Account. An owner has to apply for and open a Merchant Account with an Acquiring Bank for credit cards to be authorized online. Most major banks double as an acquiring bank.

Credit Card Authorization : The process that ensures the person charging an amount to their credit card has the available credit to cover the cost of the purchase. An authorization also verifies the billing information.

Credit Card Association : An economic establishment that provides credit card services that are recognized and circulated by Customer Issuing Banks- Discover and American Express are examples.

Customer Issuing Bank : A financial establishment that provides a customer with a credit card or other means of payment, such as a debit card. Citibank is one such example. During a transaction, the Customer Issuing Bank ensures the payment information given to the merchant is accurate and the available credit covers the cost of the intended purchase.

Internet Merchant Account : An agreement with an Acquiring Bank that enables merchants to accept credit cards online. The merchant typically pays a processing fee for each transaction processed, which is also known as the discount rate. A merchant applies for a Merchant Account much the same way they apply for a commercial loan. The fees charged by the Acquiring Bank will differ from merchant account to merchant account.

Merchant : An individual or business that sells products or services.

Payment Gateway : A service that provides a network among merchants, customers, and financial networks to process authorizations and payments. A third-party supplier like GeoTrust usually oversees the service.

Processor : A huge data center that processes credit card transactions and settles funds to merchants. The processor is connected with a merchant's site on behalf of an Acquiring Bank through a Payment Gateway.

Settlement : Think of this as the final step. It is the method by which transactions with authorization codes are sent to the processor for the merchant to receive their payment. Settlement is like an electronic bookkeeping procedure that causes all the money from completed transactions to be directed to the merchant's acquiring bank for deposit.

How Payment Processing Works

Payment processing in the online world is pretty much like payment processing in the offline world, with one big difference. On the Internet, the credit card "isn't present" for the transaction.

That means that the merchant must work a little harder to ensure the real person whose name is on the actual purchaser. It's not as easy as checking a driver's license identification purposes.