Thanks to technological advances and the ability to accept digital payments, merchants can offer multiple payment options to customers all over the world. However, the global payment processing landscape has become more complicated, involving multiple steps and numerous service providers. No doubt, as a merchant, you’ve come across unfamiliar terminology and there may be some parts of the payment process you don’t understand completely. It’s time to learn more about it.

Let’s start by delving into the processes that occur when a transaction is made.

The online payment approvals process

When credit card details are submitted online, the first step is ‘authorization’, which involves a number of steps, itself:

1. Details of the transaction are sent to the acquiring bank/processor by the payment service provider (PSP).
2. The details are forwarded to the credit card network (such as MasterCard or Visa).
3. The network sends these details to the issuing bank that issued the customer’s card.
4. The issuing bank approves or declines the transaction.
5. This decision is passed back to the credit card network, then to the acquiring bank processor, then to the PSP who will share the payment approval or decline decision with the merchant and customer.

This entire process happens in under 3 seconds.

The settlement process

After ‘authorization’, the customer’s funds are paid to the merchant through a process known as ‘settlement’. These are the steps involved in ‘settlement’:

1. The funds are sent to the credit card network from the customer’s account by the issuing bank.
2. The credit card network transfers the funds to be deposited in the merchant account at the acquiring bank. This account may belong to the merchant or the PSP.
3. If the merchant account belongs to the PSP, the PSP will then offer the merchant a choice as to how they can receive the payment. This may include ewallets or prepaid cards. The settlement period is usually more flexible, sometimes as little as 24 hours.
4. If the merchant account belongs to the merchant, funds will be received in the merchant’s company bank account each month in arrears.

The world of payment terminology

There are also many important terms used in the world of online payments. Here are some of the most commonly used payment processing terms you should know:

Consumer

This is the person purchasing a product or service using a credit or debit card.

Merchant

This is the business selling the product or service and accepting the card payment.

Payment gateway

This is the endpoint of the payment process. For a traditional payment, it will be a physical point-of-sale, such as a cash register. For a digital payment, it will be computer software. The gateway accepts card details and passes them onto the processor, and offers solutions for reviewing transactions and processing refunds, etc.

Payments processor

This is the acquiring bank (or acquirer) that connects the issuing bank, credit card association, and the merchant’s business.

Card network/association

This is a network of issuing banks and acquiring banks specific to payment cards of a specific brand. For example, MasterCard is a payment network brand.

Issuing bank

This is a bank that offers card network payment card to a customer. The issuing bank gives the consumer the credit/debit card.

Merchant account

This is a bank account that allows businesses to process card payments, it allows for a temporary hold on funds before settlement.

Payments aggregator

When opening a merchant account, the merchant can either enter an agreement with an acquiring bank directly, or through an aggregator. An aggregator allows small businesses to benefit from services that otherwise have requirements such as a minimum transaction volume. Gateways often provide aggregated account services.

PCI DSS

This stands for “Payment Card Industry Data Security Standard”. It is a security standard worldwide that ensures card information is kept safe. PCI DSS certification is mandatory for any business dealing with credit card information. This certification can be achieved by using the hosted payment page of a PSP that is already PCI DSS certified.

Alternative payments provider

This is a provider that offers other payment methods in addition to credit card payments. These methods may include ewallets, QR codes, or digital currencies like Bitcoin.

Settlement

This is the process through which money is transferred from the merchant’s merchant bank account to the merchant’s business bank account.

Recurring payments

This is a payment that is repeated as a set frequency. It requires customer credit card information to be saved safely and the charges to be made at the right time.

Chargeback

This occurs when a customer asks the issuing bank to reverse a transaction. It is meant to protect the customer in the event that a card is stolen, or if the customer feels the merchant failed to meet their part of the agreement. Every chargeback incurs fees for the merchant, and high chargeback rates can lead to merchant account termination. Merchants who communicate well with their customers and have clear refund policies often have lower chargeback rates.

Merchant category code (MCC)

An MCC is a 4-digit code which represents the merchant’s industry. Every industry has different characteristics and risks involved, with higher risk businesses having much higher chargeback rates and higher payment processing fees.

Considerations when selecting a PSP

When you want to choose a PSP, you should consider these factors:

Merchant accounts  

What process is required to open a merchant account? Does the PSP open merchant accounts for your industry and risk level?

DBA (doing business as)

Also known as a descriptor, this is a name that will appear on the cardholder’s transaction report instead of your company name. Most PSPs will allow you to choose your own DBA, which can reduce chargebacks as customers are more likely to recognize the transaction.

Familiarity with the target market

A local PSP will understand the local market, and a PSP familiar with your industry will understand the global target market, too. This understanding will ensure the PSP can correctly recognize legitimate payments.

Fees  

Check the PSP’s fees and ensure they are favorable for your business. There may be setup fees, minimum fees, fees for refunds and chargebacks. Ask for a full list of fees when signing with a provider.

Receiving payments

Find out how long it will take for settlement to occur and funds to be transferred to your account. Ask if there are any restrictions or minimum amount requirements.

Security

Ensure the PSP has PCI DSS level 1 certification.

API

Using a PSP’s API opens up an array of different functionalities. Firstly, the API allows you to customize payment pages to match your website. Secondly, you can use the API to accept multiple payment methods in one single integration, so that customers can use their preferred payment type in a few clicks. Ensure the PSP you are working with gives access to their API for your use.

Data portability

Find out how easy it would be to transfer from one PSP to another in the future. Don’t become a victim of ‘vendor lock-in’, where you are reliant on the PSP to store your data  and are unable to transfer it to a new provider. Make sure you read a copy of the terms involved. Here are some  questions you should ask your PSP to find out about data portability:

• What do I need to provide in order to access the sensitive data you are storing on my behalf?
• How long does it take to retrieve data and what is the process involved?
• What fees are involved in retrieving the data?
• What data can be retrieved? Is there a time limit as to when I can retrieve the data.

Customer service

A PSP that provides 24/7 support in multiple languages is highly desirable and can help you solve issues as they occur.

Escalation and dispute

What happens when a chargeback occurs? What information do you need to request from your customers in case of issues? Find out what your PSP will need from you in the case of a dispute.

From the payments process itself through to payments terminology and choosing a PSP, now you should have a clearer understanding of the world of online payments. With renewed confidence, you can benefit from the convenience and security offered by digital payments.