Wednesday, March 13, 2013

How Payment Processing Works

Here's a diagram that illustrates how real-time, electronic credit card processing works:


Purchaser places order.


Merchant securely transfers order information to Payment Gateway over the Internet.  Payment Gateway receives order information and performs requested services.


 Payment Gateway formats the transaction detail appropriately and securely routes the transaction authorization request through its payment gateway to the processor.


The transaction is then routed to the issuing bank (purchaser's bank) to request transaction authorization.


The transaction is authorized or declined by the issuing bank or card (Discover, American Express).


 Payment Gateway returns the message to the merchant.


Issuing bank approves transfer of money to acquiring bank.


The acquiring bank credits the merchant's account.


What is an Issuing Bank? 
An issuing bank is a bank that offers card association branded payment cards directly to consumers. The name is derived from the fact that it issues payment to the acquiring bank on behalf of its customer (the purchaser in the transaction).

What is an Acquiring Bank? 
Sometimes referred to as the Processing Bank or the Acquirer, the bank that has the relationship with Visa/MasterCard and other credit card acquirers and at which the merchant account is setup to initially receive funds resulting from credit card transactions of the merchant. Funds are transferred from the Acquiring Bank into the merchant's bank account weekly. If using a Third Party Merchant Account, it is usually the case that a Processor will be transferring the funds to the merchant's bank account.

Who is the Processor? 
The entity that has an established relationship with the Acquiring Bank. Transactions are processed via the Processor, sent to the Acquiring Bank for authorization, and then settled out to the merchant. The Processor underwrites the merchant account in the case of Third Party Accounts, and forwards documents for due diligence to the Acquiring Bank for underwriting in the case of Direct Merchant Accounts? In either case, the Processor supplies the Payment Gateway and customer service to the merchant.

With Third Party Accounts, the Processor absorbs much of the risk because the merchant is using the Processor's Merchant Account and the Processor is paying settlements to the merchant, in many cases, prior to receiving settlements from the Acquiring Bank. For this reason, it is common for Processors to impose high Reserves to cover their potential losses. However, in the case of offshore accounts, it is common for banks to do this even with Direct Accounts since it is often times the case they are dealing with higher risk businesses that warrant backupReserves.

What is a Payment Gateway?
A real-time transaction processing system that operates as a payment service using a secure transaction server on the Internet. Most of the systems our processor's provide are used to submit, authorize, capture, and settle credit card transactions without the need for a separate transaction terminal or processing software. However, often times, merchants will already have processing software and/or shopping cart software established for their website. The software is integrated with the processor's Payment Gateway. Data entered by the customer online is transmitted to the credit card acquirer. The transaction amount is then authorized by the bank in real-time, and the transaction is settled.

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