How Does Payment Processing Work?

The process involves several steps and multiple parties. Here’s an explanation of how payment processing works:

1. Transaction initiation

The customer initiates the payment by providing their payment information (e.g., a credit card, debit card, or another payment method) at the point of sale in a physical store, or through an online platform like an e-commerce website or mobile app.

2. Payment gateway

Once the customer submits their payment information, it’s securely transmitted to the payment gateway, which acts as a bridge between the customer, the business, and the payment processor. The payment gateway is responsible for encrypting the transaction data and ensuring the data is transmitted securely to the payment processor or the acquiring bank.

3. Transaction authorization

The payment processor receives the transaction data from the payment gateway and validates the information. It then forwards the transaction details to the acquiring bank, which sends the information to the card network for validation and authorization.

4. Issuing-bank verification

The card network forwards the transaction details to the issuing bank. The issuing bank verifies the customer’s account status, checks the available balance or credit limit, and assesses any potential risks. Based on these factors, the issuing bank either approves or declines the transaction.

5. Authorization response

The issuing bank sends back the authorization response—approval or decline—through the card network to the acquiring bank, which then forwards the response to the payment processor. The payment processor then sends the response to the payment gateway, which communicates the result to the business’s POS system or online platform.

6. Transaction completion

If the transaction is approved, the business completes the sale by providing the customer with the goods or services. If the transaction is declined, the business may request an alternative payment method from the customer.

7. Transaction settlement

At the end of each day, the business sends a batch of approved transactions to the payment processor or the acquiring bank for settlement. The acquiring bank requests the funds from the issuing bank through the card network. The issuing bank transfers the funds to the acquiring bank, which then deposits the money into the business’s account, usually within a few business days.

8. Reconciliation and reporting

The business reconciles the settled transactions with its sales records and any transaction fees charged by the payment processor, acquiring bank, or other parties involved. Both the business and the customer receive transaction records, such as invoices, receipts, or account statements.

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