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As the world continues to shift away from cash in favour of cards and digital payment methods, it’s more important than ever for businesses to understand the value of secure, efficient payment processing.
Not only does a robust payment processing system help businesses streamline transactions, reconcile accounts, manage cash flow, and prevent fraud, but it also plays a major role in securing customer loyalty.
Today’s consumers want to pay quickly and efficiently, with the peace of mind that their personal financial data is protected. Businesses relying on outdated, fragmented payment systems risk losing out to competitors that offer a more secure and integrated checkout experience.
To optimise payment processing for your business and your customers, it’s crucial to understand what happens behind the scenes when a transaction is made and the ever-evolving best practices.
What is payment processing?
Payment processing is the series of actions, mostly automated and electronic, required to send funds from a payer to a payee securely.
Among the many steps involved are checking that all the payment details are correct (verification), approving the payment (authorisation), and transferring the money into the payee's bank account (settlement).
In addition to the merchant and customer, there are multiple intermediary parties and financial institutions involved in payment processing, each playing a key role in facilitating the secure movement of funds.
Components of payment processing
The key parties involved in payment processing are as follows:
Payer / Customer - The person or business that is sending the funds / making the purchase.
Payee / Merchant - The person or business that is receiving the funds / making the sale.
Issuing bank - The financial institution that provides the customer with their payment method (e.g. debit card) and is responsible for authorising their transactions.
Acquiring bank - The financial institution that processes card payments on behalf of the merchant. It facilitates the movement of funds from the issuing bank to the merchant account (in many cases, the payment service provider serves as both the acquiring bank and the merchant account provider).
Merchant account - An account provided by the acquiring bank (or a separate third party) where funds from card transactions are temporarily held before being transferred to the merchant’s business bank account.
Payment gateway - The intermediary responsible for securely transferring customer payment data to the payment processor.
Payment processor - Software that handles the technical processes involved in sending payment information between the payment gateway, acquiring bank, and issuing bank.
How does payment processing work?
Payment processing is a multi-step workflow, most of which occurs electronically and lasts only a matter of seconds. The steps involved are as follows:
Step 1: Customer initiates payment
Payment processing begins when a customer initiates the payment, for example, by tapping their card on the card terminal or clicking “submit” on a checkout page. This initial action sets in motion a series of verification and authorisation processes required to successfully move funds from their bank account to the merchant’s bank account.
Step 2: Payment gateway securely sends data to payment processor
After the customer initiates the payment, an intermediary technology known as a payment gateway encrypts the sensitive payment data (e.g. card number, CVV code, expiration date) and transmits it to another intermediary known as a payment processor. Increasingly, the payment gateway and payment processor are provided by the same company or integrated into a single, end-to-end payment system.
What is a payment processor?
Step 3: Payment processor sends transaction data to acquiring bank
Next, the payment processor securely forwards the transaction details to the acquiring bank for further processing.
Step 4: Acquiring bank sends transaction data to card network
Once the acquiring bank receives the transaction details, it submits an authorisation request to the card network (e.g. Visa, MasterCard, or American Express).
Step 5: Card network validates data and routes authorisation request to issuing bank
The card network assesses the transaction details and performs its own set of checks to ensure that the card details are valid, the data has been properly encrypted, the merchant is authorised to accept that type of card, and there are no indicators of potential fraud (e.g. unusually large transaction amount, suspicious location, etc.) If everything is in order, then the card network forwards the authorisation request to the issuing bank.
Step 6: Issuing bank approves or declines the transaction
Next, the issuing bank checks that the customer’s account is active and that they have the funds or available credit needed to cover the transaction amount. Based on this analysis, it either approves or declines the payment and sends this decision back to the card network. If the payment is approved, the customer leaves with their purchased good or service. If the payment is declined, the merchant may ask for an alternative method of payment.
Step 7: Acquiring bank settles funds
Although the transaction is completed, the payment process isn’t over. The next phase is settlement. Settlement is the actual movement of funds from the customer’s issuing bank to the merchant’s acquiring bank. While some transactions may appear as pending or available instantly in online bank statements, final settlement doesn’t typically occur until the end of each business day.
Step 8: Acquiring bank deposits funds into the merchant’s business bank account
After processing the transaction and settling the funds, the acquiring bank credits the merchant’s merchant account. Then, based on the settlement terms (daily, weekly, etc.), the acquiring bank transfers the funds from the merchant account to the merchant’s business bank account.
The steps above outline what’s involved in processing card payments. The process remains largely the same if a customer uses digital payment methods, such as a digital wallet or Buy Now Pay Later apps (BNPL).
However, digital wallets often include enhanced security measures, such as tokenisation, to protect sensitive data.
Also, BNPL apps rely on third parties to communicate with acquiring banks to facilitate and manage payment plans. Despite these differences, the core functions of verification, authorisation, and settlement remain the same.
Payment processing best practices
Make security a priority
When setting up a payment system, security should be factored into every component and every stage of the sales process. Without robust security protocols, even the most modern and sleek payment system is falling at the first hurdle.
First and foremost, you must protect your customers’ sensitive data from the dangers of theft and fraud. It’s only from this secure foundation that a high-quality payment system can be built.
Essential security features for your payment system include:
- Data encryption - Encrypting sensitive payment data as it’s transmitted and processed ensures it can’t be intercepted and used by hackers. The standard way in which data is encrypted in payment processing is through SSL/TLS protocols.
- Tokenization - Tokenization adds an extra layer of security to a payment processing system (particularly when storing payment information) by replacing sensitive data with non-sensitive data that is entirely useless if intercepted.
- Access controls - These controls, such as multi-factor authentication (MFA) and one-time passwords (OTP) help keep customer accounts secure by ensuring that only verified, authorised users have access.
- Fraud detection - Integrating real-time fraud monitoring and detection tools allows your system to flag suspicious activity and stop fraud before it occurs.
Maintain compliance with data protection standards and regulations
A secure payment system must also comply with data security rules, the most consequential of which is the Payment Card Industry Data Security Standard (PCI DSS).
PCI DSS is a set of strict guidelines detailing how sensitive card payment data (e.g. card number, expiration, CVC, etc.) must be gathered, transmitted, and stored securely. It’s enforced by the major card networks and failing to comply can result in fines and even bans on processing card payments.
Accept multiple payment methods
By providing a range of payment options—such as cards, digital wallets, local payment schemes, BNPL options, and even cryptocurrencies—you increase the likelihood that customers will be able to use their first-choice method.
Not only is offering multiple payment methods advantageous from a customer experience perspective, but it also leads to higher transaction acceptance rates. When customers pay with their preferred payment method, it’s less likely they’ll encounter declines and abandon the transaction altogether.
Accepting multiple payment methods is also an easy way for businesses to tap into new markets. For example, businesses that accept Chinese wallets WeChat Pay and AliPay automatically gain access to 2.5 billion potential customers. When setting up your payment processing system, consider the payment preferences, methods, and habits of your international customers (or potential customers), and optimise accordingly.
Integrate currency conversion tools
For international businesses, especially those in retail and hospitality, it’s now crucial to integrate currency conversion tools as standard.
These include Dynamic Currency Conversion (DCC), which allows customers to make Visa and Mastercard payments in their home currency at the point of sale, and Multi-Currency Pricing (MCP), which enables customers to view localised prices and currencies at the beginning of their shopping journey.
Taking this convenience even further, Multi-Currency Processing allows customers to pay in their preferred currency across a broad range of alternative payment methods (e.g., WeChat Pay, AliPay+, AMEX, etc.). For businesses hoping to gain a competitive edge internationally, Multi-Currency Processing is an effective strategy.
Partner with a reputable payment service provider
When choosing a payment service provider, reliability, global reach, and expertise are essential. Planet is the ideal partner to optimise your payment processing, offering a secure and efficient end-to-end solution tailored to your business needs.
With Planet, you can accept multiple payment methods, including digital wallets, BNPL, and local payment schemes, ensuring that your customers can pay the way they prefer.
Plus, Planet’s advanced security features and real-time fraud prevention ensure a safe and seamless experience, while integrated currency conversion tools like Dynamic Currency Conversion (DCC) and Multi-Currency Pricing (MCP) help you tap into global markets effortlessly.
Whether you’re expanding internationally or looking to boost your payment acceptance rates, Planet’s innovative solutions keep your transactions smooth, secure, and compliant with the latest regulations. Choose Planet and stay ahead of the competition with cutting-edge payment technology and world-class support.
Unlock the future of payment processing
Payment processing: an ever-evolving task
As is the case with most areas of business, payment processing technology and best practices are always changing. An excellent, secure payment processing system from two years ago, if left unchanged, is likely entirely deficient by today’s standards.
Although the core principles of what makes a good payment system remain the same—convenient, secure, streamlined, user-friendly, and efficient—the technology, payment methods, security protocols, and compliance requirements are constantly advancing.
Taking a proactive approach to payment processing is key to keeping up with both customer and payment industry expectations. Rather than waiting for your system to become outdated before making changes, the goal should always be to anticipate your customers’ changing needs and innovate to stay ahead of the competition.
FAQs
What’s the difference between an acquiring bank and a merchant account?
In payment processing, the acquiring bank and merchant account are so closely related that it’s easy to confuse each entity’s exact role and purpose. Simply put, the acquiring bank facilitates the payment process with the issuing bank and card networks, eventually settling funds into the merchant account. The merchant account is the place where funds are held temporarily during the settlement process. Many modern payment service providers both provide merchant accounts and serve as the acquiring bank. However, it’s also common for businesses to work with separate companies for each service.
What is end-to-end payment processing?
Also known as “full-stack payment processing,” end-to-end payment processing is an all-inclusive payment infrastructure that handles all stages of the payment process, from initiation to settlement. Rather than relying on various third-party companies, an end-to-end payment system covers each stage of the payment process and integrates it into a single interface.
What are the costs associated with payment processing?
Each payment service provider has its own costs and fee structure, which often varies depending on the services it is providing and the volume of annual transactions. Common fees associated with payment processing include:
- Transaction fees - These are typically a percentage of the transaction amount, plus a small flat fee.
- Monthly service fees - Some payment service providers charge a monthly fee on top of transaction fees.
- Chargeback fees - These charges are incurred when customers dispute charges and request a refund.
- Setup fees - Some payment service providers charge a setup fee, depending on the amount of work required to get the payment system up and running.
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