How Does Payment Processing Software Work?It would be easy to simply describe payment processing as the “middle man” that connects your business to the financial institutions that manage credit cards and bank accounts, but it’s helpful to understand how that process actually works in practice. This will help you to select the payment processor that’s right for your business. All payment processing software consists of three key elements:
- Your Merchant Account: All customer payments are deposited into your business’s merchant account. While it may not be the primary account where you manage your day-to-day expenses, any transactions carried out through your payment processing platform go through here.
- Your Payment Processor: The payment processing company manages the back end of the processing software and helps to connect your business to credit card and banking networks to facilitate transactions. They are typically responsible for ensuring the security of transactions and dealing with fraudulent activity or chargebacks.
- Your Payment Gateway: As the name suggests, the payment gateway connects your physical and online point of sale (POS) systems and your merchant account to credit card networks and issuing banks. Without a payment gateway, there would be no way to transfer data between accounts.
- The POS submits the transaction details to the merchant payment gateway, which then shares that information securely with the processor.
- The processor delivers the information to the customer’s bank or credit card network (depending upon the payment type).
- The issuing bank reviews the transaction and then approves or denies it.
- If the transaction is approved, funds are released and transferred to the merchant account.
- The approval/denial notification is sent back to the processor, which is then relayed to the POS through the merchant gateway.