Basic Step-by-Step Guide to Merchant Payment Processing

Many of us must have used a payment processor at one point or another. It could be a bank, an accredited merchant service provider, or a specialized tech company like Paypal or Payoneer. In any case, we must learn the basics if we are to fully maximize such innovation in our respective businesses.
Merchant services processing

merchant services processing

The entire process can be divided into 3 parts:

  • Authorization
  • Settlement
  • Financing

Authorization Procedure

This is the first step of the payment processing system. If our customer fails in this process for some reason, he cannot possibly move on to the next level.  And this, of course, means lost revenues.

There are three ways to get approval for such process: through phone, credit card or through an e-commerce website.  And the sub-steps are as follows:

  1. The client submits his credit card details through any of the channels above.
  2. The merchant then transmits the info to the payment processor through a swipe machine or via a website.
  3. The merchant service provider requests from the Card Company such as American Express, MasterCard or Visa.
  4. The Card company then requests from the bank of issue.
  5. The Bank of issue will then approve or deny the request and hence, inform the Card company
  6. The Card company send the response to the payment processor
  7. The payment processor then forwards the details of the transaction thus far to the merchant.
  8. The merchant gives the final word to the client whether it is approved, declined or referred.

Incidentally, referral means a merchant, card company but usually a bank requests for another piece of information for authorization and verification purposes such as when the purchase was made outside the country, or there were large amounts of transactions over a certain period of time. Also, it is good to note that all of the processes outlined here happen in real time and in a few seconds almost simultaneously.

Settlement Procedure

At this point, it is now between you or your business and the payment processor. As far as the customer is concerned, his transaction is already consummated.  The following processes then take place:
  1. The merchant submits information to the processor via a certain settlement request or trigger.
  2. The payment processor then forwards that request to the Card Company
  3. The Card company confirms to the issuing bank once again.
  4. The Card company issues credit to the payment processor while charging the bank of issue for the transaction
  5. The Bank of issuance then issues a debit memo or collection request from the client who made the purchase.

Financing Procedure

Depending on the parties and terms agreed, this final procedure involves the payment processor making a deposit to the merchant’s account. What merchants have to consider here are deadlines, cut-off periods and holidays which may affect the length of time before the settlement/reimbursement amount show up in the merchant’s bank account.

In summary, this is just a prologue to the actual complicated process flow that occurs in merchant payment processing. But feel free to let us know through this site if you have further inquiries.