BLOGs
Credit Card
Published December 07th, 2016 by

The Basics of Payment Processing Software: How it Works

The Basics of Payment Processing Software: How it Works

Payment processing is more than just the client swiping their credit or debit cards onto the machine. There is a lot that goes on behind the scenes. There are many players involved like the merchant, the issuing banks, and the merchant account providers. The payment processing software makes it possible for these key players to work in a fluid and continuous way.

What exactly happens after the card has been swiped? How will your business get paid? The process is kind of long and complicated, but if you are interested in knowing the inner workings of payment processing, here are the steps that happen.

Step 1: Authorization

Actually, the real first step is when the client swipes the card. But the payment process starts on the authorization part. This step includes verifying if the card has sufficient balance or credit to make the purchase. This part will also tell you if the card is good to go and valid. If this part is skipped, there is a possibility that what was purchased from you will not be paid.

Authorization is a quick process; it will only take a few seconds. But during those few seconds, there are already a lot that happen; here they are.

  1. The customer gives the credit card information. Payment processing can be done in person, through the phone, or through websites that offer For personal purchases, the card can just be swiped. But for instances that the card is not physically present, the information has to be entered.
  2. The information is sent to the payment processing solution.
  3. The software will then send the request to the payment brand. This is whatever the client used, for example, a Visa debit card or a MasterCard credit card.
  4. The payment brand will then send the request to the issuer of the card. The issuer of the card is a bank or establishment that issued the card.
  5. The issuing bank will then accept or decline the transaction. Whatever the issuing bank decides will be sent back to the payment brand.
  6. The payment brand will again send the response to the payment processing tool.
  7. Your processing software or tool will then tell you what the verdict is, whether the card is declined or accepted. It would be either from your credit card terminal, your point of sale hardware, through the website, or through the phone. Once the request is accepted, you can now complete the transaction.
  8. When the card is approved, you will receive an authorization number. For declinations, you won’t really know the reasons behind. You can ask the issuing bank why, but answers are not guaranteed. There are also instances of referrals where the issuing bank may require more information either from you, from the merchant, or from the client. The referral is sometimes in place to avoid scams and frauds.

Step 2: Settlement

You’ve finally sold something. But because the client used a credit or debit card, the money is not in your hands yet. In this step of the process, you will get to settle your transaction and get the money. This part deals with clearing the payment transaction so it can be funded to your account. You won’t get the whole amount because there will be deductions which you can find in this article, Credit Card Processing Fees Explained. You can also read payment processing software reviews to know which processors offer the lowest fees.

For you to be cleared, you have to present your approved transactions to your payment processor. The payment processor will then submit those approved deals to the payment brand to be exchanged with the money owed to you. Here are more detailed actions during the settlement step.

  1. The payment processor will receive the approved transactions from you. It may come directly from the credit card terminal or from your point of sale device, or you can submit all your approvals at once as a batch.
  2. This information will be then sent to the payment brand to confirm that the cards are really confirmed by the issuing bank.
  3. Once the payment brand receives your settlement request, they can do two things. First is to issue a credit to your payment processor so the amount that needs to be settled will be reimbursed. And the issuing bank will just then pay the payment processor. Or second, the payment brand will issue debit to the issuing bank so the amount will be charged to them and the transaction is settled.
  4. The issuing bank will then indicate this transaction in the client’s statement of accounts which will be sent to the client at the end of the month.
  5. Once the client receives the statement, he or she will pay the bill, and the issuing bank will be paid the money that it paid to the merchant.

As you can see in the process, it is not the client that will pay for the transaction directly. This is one misconception that people believe, and there are many misconceptions surrounding credit card processing. Credit cards are made so that the client do not have to pay for his or purchases immediately. When looking for a credit card processing company, you might want to know about merchants and processing companies among other things.

The time for the settlement process depends on a lot of things, so there really is no definite time frame for this. It could depend on how fast you are to submit your approved transactions; it could also depend on your payment processor on how fast they are in submitting the approved transactions to the payment brand. And it could also depend on how fast the issuing bank is at crediting or debiting the money.

Step 3: Funding

This is the part where you will finally see some money in your account. After the transaction has been settled, it will be then funded to your account. To be funded immediately, you have to be sure to meet deadlines. There are also holidays that might delay funding, so be sure to submit all approved transactions before the holidays hit.

Although you can meet deadlines and avoid holidays, the time frame for the funding step will still depend on the issuing bank and the payment processor. Here, you can read some questions you can ask your payment processor to ensure that you are getting the best. Having the best payment processor on your side will help tremendously with the payment process. If they know how to fast track the funding process, then even better.

The payment processing is done, but here is some additional information that you might need.

Credit Card Fees

When you use a payment processor, there are fees that you have to pay. Of course, these are needed because the banks and the processing companies also need to make money.

  1. Annual fee. This varies from company to company so there is no definite amount for this. It can range from free up to $250 a year. Try to read payment processing software reviews to know which companies offer free annual fees.
  2. Cash advance fee. This is the fee a client has to pay if they decide to withdraw money from their credit cards through machines or over the counter. This might range from 5% to 8% of the amount withdrawn.
  3. Late payment fee. This is what you pay when you don’t pay the minimum amount you have to pay on your due date. To avoid paying this fee, you have to pay your bills on time. Timely payments will also reflect positively on your credit score.
  4. Overseas transaction fee. You have to pay a fee if you plan to use your credit or debit card outside of the country you got it from. This is usually 1% of the amount spent.
  5. Outstanding balance interest. Whenever you have an outstanding balance left on your account, it is being charged an interest rate. It usually ranges from 20% to 24% depending on the issuing bank.
  6. Transaction fee. This is what it is charged to the merchants whenever someone pays them through credit or debit card.

If you want to lessen the fees that you have to pay, you can try these things:

  1. Pay more than your minimum monthly requirement. This is to avoid the very high interest rates placed on the remaining balance on your account.
  2. Always pay on time. You can avoid the late payment fee if you always pay your bills on time.
  3. Fees are actually negotiable to some issuing banks, so you can take it up with them if you want some of your fees lowered.

Accepting credit cards is a sure way to get more clients. Nowadays, people carry cards rather than cash. So you should really look into getting a payment process software that can process both credit cards and other forms of payment. You can read reviews of payment processing software so you know which ones offer good features and won’t rip you off.

Looking for the best payment processing software? Check out CrowdReviews.com for opinions and ratings of other users.

Our rankings are completely independent, transparent, and community driven; they are based on user reviews and client sentiment. These credit card companies had to earn their way up and didn't just pay their way up.

View Rankings of Best Credit Card Companies