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How Merchant Services Payment Processing Works

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The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedSep 20222 min read

Merchant services payment processing helps your business accept credit and debit card payments. To choose the best provider, it’s helpful to first look at how these types of services work. Here’s the lowdown on merchant payment processing services, as well as what to look for when comparing your options.

What are merchant payment processing services?

Merchant services are designed to provide an all-in-one solution for payment processing. This includes credit and debit card payments as well as additional forms of non-cash payment, like digital wallets, mobile payments, and ACH transfers. The best merchant payment processing services will include a merchant account to help you accept payment, alongside standard features like chargeback support and PCI compliance.

How does payment processing work?

Online payment processing involves numerous players and steps for completion. It’s the job of a merchant payment processing service to manage these various roles on your business’s behalf.

This starts with the authorization process:

Step 1: The buyer submits their card details to the merchant as payment for goods or services. This might take place on an ecommerce checkout page, via a mobile app, or in person using a point-of-sale system.
Step 2: The merchant submits a request for payment authorization to the payment processor.
Step 3: The payment processor handles authorization by submitting the transaction details to the card association and issuing bank.
Step 4: The issuing bank must use security details like CVV and AVS to approve or decline the authorization request. It will be declined if there are insufficient funds or if the cardholder’s account is unavailable for any reasons.
Step 5: The issuing bank submits its decision back via the payment processor to the card association and on to the merchant.

Provided that the transaction is approved, the second stage involved in merchant services payment processing is the settlement and funding process:

Step 1: The merchant submits batches of authorized card transactions to the payment processor, who passes these to the card associations.
Step 2: The card association communicates with issuing banks to charge the cardholder’s account and transfer these funds to the merchant bank account. Any applicable fees are taken at this time.
Step 3: The merchant bank deposits the funds into the business’s merchant account for settlement.

Understanding merchant services vs. payment processing vs. payment gateway

If you’re new to exploring the world of online payment processing, it’s all too easy to find the terminology overwhelming. To start with, here’s a quick rundown of the differences between merchant services vs. payment processing and payment gateways.

Payment processors act as a middleman between the bank and the merchant account. They may or may not include POS equipment and other features.
Payment gateways act as a middleman between the third-party payment processor and the credit card company, handling the technical side of transmitting cardholder data.
Merchant accounts are required to accept credit and debit card payments. Without one, your business will be unable to accept this type of payment.

The payment gateway handles the cardholder data transfer, the payment processor secures and authenticates it, and the merchant account provides a place for the bank to settle funds before they’re eventually paid into your usual business account.

How to compare merchant payment processing services

Although there are numerous steps involved with the authorization, settlement, and transferring of funds to your bank account, a good payment processor makes short work of all this. Third-party merchant services help tackle fraud, ensure PCI compliance, and are compatible with your existing ecommerce platform.

They let you get started with accepting payments without opening your own separate merchant account – a lengthy process for new businesses. They guide you through the paperwork. Examples of merchant services include providers like Braintree, Stripe, and Authorize.net. Just be sure to compare security features and fees carefully to find the right fit.

We can help

GoCardless can also help with processing online payments with a user-friendly dashboard and easy integration with accounting software. Set up and schedule both one-off and recurring payments, using secure payment links and your website checkout page. Get paid on time, every time, with automatic payment collection. The merchant retains total control, eliminating awkward conversations about late payments and reducing failed payment rates.

GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.