Online payment processing: how the sausage is made

Editor’s note: Many of our college and university web sites accept credit cards for many reasons. It could be online gifts, tickets or event registrations, even tuition deposits or payments. We all buy things online with our credit cards. Once you hit that purchase button, what actually happens and what are the steps and players that work to put the actual money into your account. This post looks into that.

If you’re an online business, odds are your business wouldn’t be possible without credit card transactions. Most of the convenience and speed we associate with online purchases are thanks to the infrastructure behind credit card processing. This makes it possible for payments to be received almost immediately, and is a big part of the reason why online spending is increasing all the time. Your customers send their credit card information, their payments are approved, you get your money, and you send the products. All of this happens in a matter of moments, regardless of how far apart you and your customers are. Even though the process can seem like magic, there’s an extremely complicated process involving numerous parties, and it’s important for businesses operating online to understand that process and the role they play in it. Knowing how the process works not only makes you better informed when your customers have questions, but it also can help you control certain processing fees. All businesses are subject to credit card processing fees, but understanding the processes behind them may allow you to negotiate them or avoid them altogether.

In addition to you and your customers, credit card processing involves a number of financial institutions and service providers. These include the banks that issue the credit cards; the processors that serve as intermediaries between the banks and the credit card associations (Visa, MasterCard, etc.) that establish the rules; the merchant account providers that manage the actual processing; and the payment gateways that provide the “virtual terminals” that capture the credit card data during the online checkout process.

The process is broken down like this:

  1. The customer enters his or her credit card information into the secure online checkout form.
  2. Through the payment gateway, the merchant captures the credit card information.
  3. The merchant sends that information to the credit card processor that then sends that information to the appropriate credit card brand association.
  4. The credit card association then confirms the transaction with the customer’s card-issuing bank.
  5. The card-issuing bank either confirms or declines the purchase, and notifications are sent to all parties. This all happens within moments of the customer submitting his or her card information.

In addition to the fact that you and the customer never meet face to face during an online transaction, processing credit cards through an online purchase differs from an in-person, point-of-sale transaction for two key reasons: The first is the involvement of the payment gateway, which takes the place of the point-of-sale credit card terminal equipment during the transaction. For brick-and-mortar merchants, the terminal is either rented from merchant account providers or purchased by the merchants.

The other key difference for online merchants is the presence of the address verification fee, which is assessed for online transactions because of the extra level of verification required when the physical credit card is not involved in the transaction. This is just one of many fees merchants can incur on every credit card transaction. Some of them are regular fees that occur monthly, others occur on a per-transaction basis, and others are incurred only under certain circumstances.

No matter how often your business conducts transactions with customers through e-commerce, understanding the fees you may be subject to — as well as your options for paying them — is essential in helping you avoid racking up more fees than you should be paying. The guide below explains many of the most common of these fees, as well as the payment structures available to online merchants. Review it and you’ll come away with a better understanding of how complicated all of those simple e-commerce transactions really are.

How Does Payment Processing Work?

Author bio: As Vice President of Sales at Performance Card Service, Matt Wollersheim’s focus is on general marketing, client relations and development of new processing channels. Performance Card Service provides high-risk payment gateway solutions.