When you’re buying or selling online, the most logical payment option is a bank card. However, you can’t swipe your card online, so you need to use a payment processor. This is a third party financial service provider that processes cards on behalf of the buyer and the seller. Payment processors can also transact offline, by providing electronic keypads, mobile payment apps, and check processing. Checks can be accepted on phone, email, or in person.
Participants in payment processing
There are six parties involved in online card processing:
- The customer or buyer (cardholder)
- The seller or vendor (merchant)
- The buyer’s bank (issuing bank)
- The seller’s bank (acquiring bank)
- The card provider (Visa, MasterCard, etc.)
- The payment processor (Charge.com, for example)
Paying with a card
There are two types of cards – debit cards and credit cards. Either cards can be used to pay for purchases, and either can be used to withdraw cash at the ATM. Debit cards draw cash directly from your bank account, while using a credit card is technically taking out a loan.
Credit cards give cardholders access to a specified amount of cash, determined by the issuing bank and based, in part, upon the cardholder’s credit score. the cardholder can use that ‘credit’ to buy goods and pay for services, even when they don’t have money. The cardholder then pays it back later with interest. The approval of each purchase depends on how much cash is accessible to the cardholder.
Setting up payment systems
The issuing and acquiring banks don’t deal directly with each other, even though there are charges on both sides. Typically, when a merchant starts an online store, they open a merchant account with a reliable payment processor.
This merchant bank processor can either link directly to the merchant’s website or they can redirect buyers to a checkout page hosted on the processor’s website. It generally depends on the preferences of the seller. When the cardholder wants to make a purchase, they enter their card details on the checkout page at the merchant’s or the processor’s website, as the case may be.
The payment processor then encrypts the buyer’s data and sends it to the buyer’s bank. First, the buyer’s bank (issuing bank) will confirm whether the card actually belongs to the buyer. This is called verification, and a good payment processor will verify instantly.
The issuing bank will confirm whether the buyer has enough cash or credit to make the purchase, and will send back an encrypted approval or notification of a decline. This is called authorization.
Settling the transaction
Upon approval, the payment processor will then transfer the cash from the issuing bank to the seller’s bank (acquiring bank). After a day or two, the cash will reflect in the seller’s account. This is called settlement. The payment deducts a small service fee for facilitating each transaction.
In case the issuing bank rejects the transaction, there might a cancellation fee involved. Similarly, if the buyer later rejects the merchandise, there is a levy for refunding the cash from the merchant’s account.
For more information on how payment processors work, or to sign up for a merchant account, please call (888) 924-2743 or go to Charge.com.