Small BusinessPaymentsPayment Processing
PayPal Editorial Staff
PayPal Editorial Staff
July 17, 2023
July 17, 2023
Online payment processing is an important part of running a small business. Payment processing refers to how money is transferred from your customer’s account to your business account. A smooth online payment process can help you securely earn money.
Still, online payment processing can be tough to understand since it includes many players, platforms, and types of technology.
To help, we’ll break down online payment processing for small businesses, including how it works and which entities are involved.
Who is who in online payments?
There are many parties involved in processing online payments. But before diving into the main players, let's look at the roles of these entities:
- Payment gateway.Thepayment gatewayvalidates the customer’s payment information and securely sends it to the payment processor to complete the transaction.
- Payment processor.Thepayment processorauthorizes the transaction and transfers the funds from the customer’s account to the business’ account.
- Issuing bank.The issuing bank — or customer’s bank — provides the funds from a credit or debit card on behalf of the customer.
- Acquiring bank.The acquiring bank — or merchant acquirer — receives the payment authorization and collects the customer’s funds on behalf of the business.
It can be easy to confuse the merchant acquirer vs. payment processor. Basically, the merchant acquirer is the bank that accepts the payment from the customer. But the payment processor does the heavy lifting of actually authorizing and completing the transaction.
Some platforms, like PayPal, can act as both processor and acquirer, completing your business transactions and securely storing your money in one place.
Online payment processing players
Now we’ll unpack the main online payment processing players. It’s important to understand each player’s role so you can optimize your payment process and increase revenue.
1Customers
Somewhere in the world, a customer thinks, “I need some awesome high-top sneakers.” You happen to sell these high-top sneakers.
That customer finds your store online, adds the shoes to her cart, and checks out. Thanks to the secure payment gateway, her credit card information can be validated and transferred to the payment processor in seconds. Now, she can just sit back and wait for her new shoes to arrive!
2Technology
The customer uses the payment gateway to safely submit her information and make her purchase. From there, the payment processor authorizes and completes her transaction.
The customer’s bank then authorizes the payment, and your merchant bank credits your account. Money is debited from the customer’s bank account and, a few days later, deposited into your bank account. The sale goes through, and everyone is happy!
To get a bit more technical, here’s a closer look at the different elements of online credit card payment processing:
- Authentication and authorization.The customer’s payment information — like their credit card number and billing address — must be authenticated before completing their purchase.
- Validation and settlement.The funds themselves need to be securely validated and transferred between bank accounts.
- Processing fees.The business may need to pay credit card processing fees to the payment processor, merchant bank, or credit card issuer. For example, the payment processor might charge a percentage of each transaction amount.
Learn more about how PayPal credit card processing works.
3Merchants
The merchant (that’s you) gets paid. As your payment processor, gateway, and online merchant account, PayPal authorizes transactions and helps protect electronic payments that come through your website. So you can easily accept online payments and earn money for your business.
Other online payment processing players you should know
So, we’ve covered the big players. But there are still a few more online payment processing tools and participants you might want to know about:
- Card networks. Credit card networks, like MasterCard and Visa, set their own fees and regulations for processing customer transactions.
- Point of sale (POS) systems.Your POS system is the network of hardware and software you use to accept payments online or in-store. You might connect your POS system to a tablet device, for example, which you can use to process payments at your store register.
- Address verification services (AVS). You might use AVS to verify customers’ credit card information and avoid accepting fraudulent transactions.
Looking for more ways to optimize your payments and earn money? Check out our handy list of payment processing terms for small businesses.
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