As a business owner, you need to be able to accept payments from your customers. But how does payment processing work, and what are your options?
In this article, we’ll explain everything you need to know about payment processing, including how it works and the different types of payment processors.
What is Payment Processing?
Payment processing is the process of accepting and approving payments for goods or services. This can be done through a variety of means, such as credit cards, debit cards, checks, or ACH transfers.
Payment processors are the companies that facilitate payment processing. They work with businesses to set up the necessary infrastructure to accept payments and then process those payments through the appropriate channels.
There are a few different types of payment processors, which we’ll discuss in more detail below.
How Does Payment Processing Work?
Payment processors use a variety of methods to process payments. The most common method is through the use of credit cards.
When a customer makes a purchase with a credit card, the payment processor will send a request to the credit card issuer for approval. Once the issuer approves the transaction, the payment processor will then settle the funds with the merchant.
This process usually takes a few days, during which time the merchant will not have access to the funds.
Other methods of payment processing include debit cards, ACH transfers, and checks. Each of these has a different process, but the overall goal is the same: to get the funds from the customer to the merchant as quickly and efficiently as possible.
What are the Different Types of Payment Processors?
There are a few different types of payment processors, which include:
- Credit Card Issuers: These are the companies that issue credit cards, such as Visa or Mastercard. They are also responsible for approving or declined transactions.
- Payment Networks: These are the networks that connect merchants and banks, such as VisaNet or Mastercard Paypass.
- Acquiring Banks: These are the banks that work with merchants to set up credit card processing. They are also responsible for holding onto the funds until they are settled.
- Processing Companies: These are the companies that actually process the payments, such as First Data or WorldPay.
What are the Benefits of Payment Processing?
There are a few key benefits of payment processing, which include:
The ability to accept credit cards: This is the most common form of payment, and customers are more likely to make a purchase if they can use a credit card.
The ability to process payments quickly and efficiently: Payment processors have the infrastructure in place to process payments quickly and efficiently. This means that businesses can get their hands on the funds from a sale much faster.
The ability to accept multiple forms of payment: Customers like to have options, so being able to accept multiple forms of payment is always a good thing.
What are the Drawbacks of Payment Processing?
There are a few key drawbacks of payment processing, which include:
- The fees: Payment processors charge fees for their services. These fees can be a percentage of the sale, a flat rate, or a combination of both.
- The risk of fraud: When you accept payments, there is always the risk of fraud. This is why it’s important to have a good fraud prevention strategy in place.
The need for specialized equipment: In order to accept credit cards, you’ll need to have the proper equipment, such as a card reader and a point-of-sale system. This can be an added cost for businesses.