What is payment processing?
Payment processing is the term used to define processing of digital transactions between the buyer and sellers. In simple terms, the payment processor collects info about transaction validates it, executes it, and then debit the customer account and deposits the funds into the seller’s account
If you want to accept digital payments, it is necessary for you to understand the basics of payment processing and how your payments are processed.
With the new generation technology and a cashless economy that the Government aims at for 2019, business owners and operators from all fonts must deal with the digital transaction for their businesses. And while we strive together for a cashless economy the two very common words that ring bells are “payment processor” and “payment gateway”.
But before we dive any further, let’s understand in detail, each of the party involved in the payments processing cycle and their role in the process.
Buyer- Buys goods or services in exchange of money from merchant
Merchant- is the individual that sells goods or services to buyer in exchange of money.
Merchant account- refers to the account of the merchantwhere money is deposited after every successful transaction.
Buyer’s Bank- is the bank account of the buyer who purchases the good or services. from this account money is debited
Now that we know about the key players involved in the payment processing cycle, let’s discuss the various ways one can process payments today. Below mentioned are the two most common ways to process card payments:
Payment processing for “card not present” transactions-
This situation arises when both the parties, i.e. the merchant and the buyer are not F2F and the buyer is paying for the goods or services online. In such instances, the situation must be handled differently yet securely.
This is when there arises a need for payment gateways. A Payment gateway is responsible for authenticating a customer’s digital credential before forwarding information about the transaction to the payment processor and or accepting or declining the transaction.
For e.g. every time you buy a product online from a retailer or an e-commerce store and at the checkout page you pay via net banking or debit or credit card or even UPI, you engage yourself to a“card not present” transactions. The page that you are routed to every time you click on the pay now or pay securely option that page in itself is the payment gateway page.
Payment processing for “card present” transactions-
this payment processing involves the transaction of money that takes place in a face to face scenario, where customers pay merchants by swiping their cards through the POS Terminal present at the check-out counter. Every time you pay at the grocery store or at the ice-cream retail you engage yourself in a “card present” transaction.
Payment Processor vs Payment Gateway
Now that we are well acquainted with the payment processing industry, let’s discuss the two very commonly used word in the payment processing industry “Payment Processor vs Payment Gateway”.
A lot of people confuse themselves when they hear these terms for the first time and they think it’s one and the same. No, they do not mean the same. The differences between payment processors and payment gateways are not that clear at first.
- Payment gateway – It is an intermediary between your online store and payment processor, validate and then share transaction request to the payment processor
- Payment processor – processes the payment request from the gateway and executes it – debit the money from the customer account and deposits it in your merchant account and then notifies the payment gateway about the transaction status (success or failed).
Difference between Acquirer vs Processor
Another commonly misused terms are “Acquirer” and “Processor”. While the terms “acquirer” and “payment processor” are sometimes used interchangeably, they refer to two different functions.
Where an “Acquirer” is the financial institution (most often the merchant or retailers bank) that processes credit and/or debit card transactions and is responsible for taking the approved transaction and settling the transactions, a Payment Processor acts as the mediator between you and the financial institutions involved in payment transactions.
And now that’s payment processing for you in a nutshell!