What is Payment Processing?

Payment processing includes all the different actions, primarily automated and electronic. A customer must go through to pay a seller securely.

Some of these actions include checking if all payment information is correct (verification), approving a payment (authorization), and sending money from the customer's bank account into the seller's bank account (settlement).

Many intermediaries and financial institutions participate in payment processing; all of these are essential to making it safe to send money from the customer to the seller.

To summarize, payment processing is an umbrella term for all the different sub-processes that must occur to transfer funds from customers to merchants.

Components of Payment Processing

The main entities engaged in payment processing include the following-

Payer / Customer - The individual or organization that is transferring the money and making the acquisition.

Payee / Merchant - The individual or company that is accepting the money and completing the transaction.

Issuing Bank - The financial entity that supplies the client with their payment option (e.g., debit card) and is accountable for approving their transactions.

Acquiring Bank - The financial organization that handles card transactions for the merchant. It enables the transfer of money from the issuing bank to the merchant's account (often, the payment service provider acts as the acquiring bank and the merchant account provider).

Merchant Account - An account offered by the acquiring bank (or an independent third party) where money from card transactions is held temporarily before being moved to the merchant's business bank account.

Payment Gateway - The entity that securely transmits customer payment information to the payment processor.

Payment Processor - A system that manages the technical tasks related to transmitting payment data among the payment gateway, acquiring bank, and issuing bank.