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What is Payment Processing?



Fervent growth of financial technology has greatly improved the payment processing methods. Process of financial transaction i.e. transfer of funds from one account to another can be facilitated in several ways. Before discussing about the payment processing industry, the software and the associated technology, it is imperative to understand the fundamental concept of payment processing.

What is Payment Processing?

Any financial transaction involves a total of three parties or players.

1. Customer, the one who pays
2. Payment processor that provides the technology
3. Merchant,  the one who receives the payment

Payment processing is the management of fund transfer between two players. Companies that provide this facility or the technology are called as payment processors. An important function of these companies is making the transactions secure to curb frauds. Now-a-days there are multiple ways of completing a payment, via credit/debit card, eCheck payment over an ACH network, digital payments, NFC (near field communication) among others. A payment facilitator usually comes in between the two players who are exchanging funds.

Popular Payment Processing Methods:

1. Credit/Debit Card Payments: One of the most common methods of payments, these payments need a merchant account to facilitate the transfer of funds. A processing fee is levied upon the merchant by the credit/debit card processing companies. Sensitive information is sent over an encrypted network and payments are verified by the service provider before being approved.

2. eCheck Payments via ACH Network: eChecks are a great mode of payments, they are the digital version of conventional checks. Processing of eCheck takes place via an ACH (Automated Clearing House) system that authenticates the eCheck and completes the payment process.

3. Digital Wallet/Online Payments: Digital wallets are becoming popular as a payment method. These payments need regular debit card processors as the wallets are ultimately linked to a debit/credit card.

What is a Merchant Account & Payment Gateway?

A merchant account is a mandatory requirement for accepting card payments. Once set-up, these accounts can be used to facilitate card present and card-not-present transactions. The details of card are input on a secure webpage/portal which is referred to as a ‘payment gateway.’ However, there are certain PSPs (payment service providers) that help small businesses to process card payments without setting up merchant accounts. These PSPs usually aggregate several businesses together and charge a flat rate fee.

Businesses are evolving rapidly and as new technologies develop, payment processing is set to become simpler, faster and more secure. Tailor made solutions are next in line and fin-tech like blockchain and cryptocurrency are brewing up a digital revolution.

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