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The basics of online payment processing

Although it might seem like a relatively simple process, accepting payments online is a complex undertaking that requires many different parts to work in harmony together. As a small business owner, you may not be aware of what’s actually going on when you accept a payment via your online store. However, the mechanisms behind online payment processing is something that you should be aware of, if only because it may help you to deal with potential issues as they arise. Find out more about how online payment processing works with our simple guide.

What is online payment processing?

If you’re going to accept payments online, you’ll need three key pieces of software. These three components work together, and if even one of them is missing, the entire system will stop working. Here’s a little more information about the key components of online payment processing:

  • Payment processor – The payment processor manages the card transaction process by transmitting information from your customer’s credit/debit card to your bank and the customer’s bank. Payment processors deal with issues like card limits, credit card validity, security, and so on. If they have sufficient funds in their account, the transaction will be approved, and the payment will go through. In a sense, you can think of the payment processor as being like a middleman between the bank and the merchant.

  • Payment gateway – The payment gateway is essentially an online version of a point-of-sale device, helping to connect your website and the payment processor. Furthermore, payment gateways can help connect your merchant account with credit/debit card issuers. In short, the payment gateway handles the technical side of the transaction and ensures that you’ll be able to receive your customers’ payments.

  • Merchant account – The merchant account is a specific type of bank account that enables your business to accept online payments. Without a merchant account, there’s nowhere for the money that your customers have transferred to you to go. While you won’t have direct access to the account itself, funds from your merchant account will be automatically transferred to your business bank account within one or two working days.

Some online payment processing software packages offer an all-in-one solution that ties together the payment processor, payment gateway, and merchant account in one bundle. In other cases, the payment gateway and merchant account will be combined with a third-party payment processor. If you want to make the process as simple as possible, it’s best to go with an online payment processing company offering an all-in-one solution, like Worldpay or PayPal.  

How online payment processing works

Now that you know how online payment processing for small business works, let’s explore the actual mechanism behind it in more depth. There are eight different entities involved in online payment processing: the customer, the business (you), the credit card network, the payment processor, the payment gateway, the merchant account, the customer’s bank, and your bank. Here’s how online payment processing works:

  1. Firstly, the customer chooses an item to purchase and completes the checkout process. They’ll choose to pay via credit/debit card and enter their card details on your payment page.

  2. Next, the card information is transferred to the payment gateway. At this point, the payment gateway will transfer the information to the payment processor.

  3. Then, the payment processor transfers the transaction information to the credit card network, verifying the customer’s credit card details.

  4. Once the verification is complete, the card network requests authorisation to release the funds with the customer’s issuing bank. After they confirm that there are sufficient funds in the account and run verification checks to ensure that the transaction isn’t fraudulent, the issuing bank will submit a response to the credit card network that indicates whether or not the transaction has been approved.

  5. This information is then relayed to the payment processor, which requests a transfer of funds from the issuing bank. These funds are then transferred to the merchant account, where they’ll sit for a couple of days before they’re transferred to the business’s bank account by the payment processor.

And that, in a nutshell, is how online payment processing for small business works. When you’re choosing a payment processor for your business, it’s important to ensure that it’s a good fit. Every industry has a slightly different way of managing online payments – software companies are likely to have slightly different needs than manufacturing firms, for example – so be sure to think about your business’s specific requirements before you settle on an online payment processing company to work with.

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GoCardless (company registration number 07495895) is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017, registration number 597190, for the provision of payment services.