The business world and their functioning has evolved drastically. What seemed impossible several decades back, is now just a matter of now. A business is considered incomplete if it doesn’t offer the facility of online transactions. Having a proper online payment setup isn’t just a feature. It has become a necessity to make your products and services available to maximum number of potential consumers. The increased customer reach encourages high volume of sales and thereby high profits.
If you are a business, you probably know the basics of the online transaction system, but you might not know a lot about what’s going on behind the scene. This post is meant to enlighten you on the steps and procedure entailed by every online payment transaction, regardless of the type of economy, area or business type you operate in.
Before starting to explain the online payment procedure. Let’s introduce you to some technical jargons commonly used in the financial industry.
the gateway which is your doorway to make sales online.This allows the users to charge their credit/debit card details of the purchase he/she makes online.
the processor is a system authorizing online credit card processing services, which connects to both the merchant account and the gateway -Quickly passing information back and forth, ensuring safety of consumer’s personal and financial data.
A provider also known as payment service provider is a software that controls both the gateway or processor services.
This refers to various types of gateways that provide a holistic integration with the transaction system. A classic example of this is Paypal. While PayPal itself is a a payment service provider, PayPal Payflow Pro and PayPal Express Checkout are payment systems that offers complete transaction services.
A merchant account is an extremely important aspect of the online transaction system.A merchant account is used to process transactions from customers’ debit and credit cards. You will need to create a merchant account with your payment provider in order to receive money from your customers online. The funds are later deposited from the merchant account to the organization’s bank account on a regular or monthly basis.
The two most important entities in the online system of transaction are as follows.
In order to process online, your organization need to have a merchant account (sometimes referred to as acquirer) The merchant account accepts payment on your business behalf and after going through a number of processes, transfers them in the merchant account they provide.
This is the person who visits your online store and buys products and services offered by your organization.
The process begins when the visitor hits the “checkout” button on your website page in order to pay for membership fees or register themselves for an upcoming event, or simply to buy a product or service online.The users are then redirected to a form on your websites where users input their credit/debit card information and request for transaction.
The credit card / debit card is then encrypted by the gateway and passes it to the processor. The encrypted data ensures customer’s personal and financial details are safe and not revealed to anyone including the merchant.
The issuing bank (i.e. the customer’ bank) then goes through the customer’s details, validates and verifies if the customer has sufficient funds to make the purchase. Lower funds lead to transaction being rejected. Once approved, the issuing bank notifies back to the acquiring bank who notifies the payment gateway provider. This complex process hardly takes 3 seconds!
After the gateway receives approval, the customer gets a confirmation regarding whether or not their transaction was accepted on the checkout page. Simultaneously, you are notified via an instant payment notification so you can begin preparing visitor’s order.
After the transaction is approved and you are done preparing the order, you will deliver the order to your consumer. The final step in the procedure is the settlement phase where the issuing bank i.e. customer’s bank will transfer funds to acquiring bank where the merchant’s account is made. The acquiring bank will then provide the deposit to the merchant account. This process depends on the payout cycle.
In nut shell, when the customer makes a purchase from your checkout page and enters their credit/debit card information, that information is send to the gateway who securely gathers the data and forward to providers for validation and verification where the transaction is either accepted or rejected. That decision then shoots back to your customer and all that flurry of activity takes place in about 2 seconds.
Basically, when the customer places an order on the merchant’s website, the payment gateway securely gathers and stores the transaction data, which is processed and forwarded to the financial institution and to the credit card networks, which, in turn, transfer the encrypted information to the customer’s card issuing bank for approval. The final step is when the gateway sends the transaction details to the processors and the money is transferred from the customer’s bank into your account.
Being an entrepreneur, it is your responsibility to not only have knowledge regarding the procedures and factors affecting an online system but provide your customers a safe and easy to pay online. You must know the ins and outs of how an online payment system works so you can avoid pitfalls and make the most effective choice to protect and grow your business.