Payment Processing Explained

No longer are customers relegated to paying via cash or check as they were years ago. How people pay has evolved in a short period. There are tons of payment options now — from credit cards and debit cards to the likes of Paypal and Venmo. Those people who prefer to pay in cash or check only (and those merchants who will accept cash or check only) are fewer and far between. Enter, payment processing systems. Payment processing represents how transactions get verified and then ultimately processed. So, when talking about online payments or eChecks for example, a payment processor would be required to finalize any such transaction. In this article, we look closer at what payment processing is all about given the plethora of ways that people can now pay for goods and services.

What Is A Payment Processor?

A payment processor is that which processes transactions outside of those involving cash. It will authenticate the information provided by the purchaser and then disburse funds to the merchant from the customer’s account. The payment processor also makes sure that the banks issuing the debit card for example or the credit card company get their percentage of that transaction as well.

A payment processing company will have a processing network established — this is what takes care of moving information from one account to another during the transaction. Primarily, a payment processing network will rely on online technology to process any transaction.

Forms of Payment Processing

As a small business owner and/or merchant you are going to have to coordinate with a payment processor to accept certain forms of payment (so anything other than cash or check) from customers. The companies that generally provide payment processing services are referred to as merchant services providers. Merchant service providers fall into two categories: payment service providers and merchant account providers. A merchant account provider will provide merchants with their unique account numbers. And so, when there is a transaction, the merchant by this account number is identified as such. This is a very secure way of handling payment processing, however, it can cost more than some other means of gaining access to payment processing.

On the flip side, there are payment service providers. In this particular model, merchants will share the same merchant account. So you will not be given a unique account number — some may argue that this proves a less secure way of transacting business. And yet, at the same time, the costs associated with payment service providers can be significantly less. So as a startup, this might make the most sense for your business. PayPal and Square are examples of payment service providers.

Credit Card Processing

Credit card usage is at an all-time high. Merchants do have to pay a fee when a customer makes a purchase using a credit card. However, the cost of not using a credit card and the potential business that might be lost is usually too great a risk for most merchants to take. Plus, the additional sales that come in by accepting credit cards generally will make up for the fees associated.

Usually, banks will issue credit cards. These cards are in turn sponsored by the likes of Visa, American Express, and Mastercard. When a payment is processed certain fees are charged. First off, there is what is called an interchange. This is what the processor charges (along with markup) in exchange for utilizing their payment processing service. The rates associated can vary from one service to the next. So it is important to pay attention to the fine print before signing on with a specific processor.

Debit Card Processing

This is another extremely popular way of paying. A bit simpler than processing credit cards, with debit card payment processing, the issuing bank just has to ensure there is enough in the customer’s account to cover the cost of the transaction. The risk connected with debit cards is a lot less than that associated with credit cards, as the bank does not have to concern itself with whether or not the consumer is credit-worthy. They are strictly concerned with what is available in the debit card holder’s checking account. As with credit card processing, as a merchant, you want to do your homework before selecting a debit card processor as some that offer tiered pricing plans may charge the same for debit cards as they do for credit card transactions.

ACH Payments

Beyond just credit and debit cards, there are of course other ways that people pay for goods and services. And some of these are becoming increasingly popular especially as we move to a more digital mindset. Accepting ACH payments for example is becoming more and more common especially within the eCommerce sector. This is an all-digital payment that comes directly from the customer’s checking account. eChecks, along these same lines, are also a convenient way for consumers to pay for their purchases.

Both of the above require a separate payment processing method than that which is commonly used for credit cards. Most merchant service providers will offer eCheck services to their account holders, as many merchants do require to tend to this service. Keep in mind, there is a monthly fee connected to eCheck processing — generally anywhere from $20 to $30 per month. Still, this is less than what you would pay for credit/debit card payment processing services.

Digital Wallets

What exactly is meant by the term “digital wallet”? This is a form of payment that is based on near-field communication. So for example, smartphones utilize short-range radio technology to transact a payment. Examples of this include Google Pay and Apple Pay. While these types of payments are not as popular as others on this list, they are starting to take off. Keep in mind, that digital wallet transactions are tied to some form of credit or debit card and so from a payment processing standpoint, they are processed very much in the same way. As contactless payment methods continue to be in demand in the wake of the pandemic, these types of payment methods are projected to experience increased popularity.