Understanding Payment Processors: What They Are and How They Work
4 min read
The rise of e-commerce platforms in India has transformed how businesses operate and how consumers shop. While this transformation has introduced a wealth of online payment options, it often comes with issues like payment errors, security risks, and technical glitches. Businesses also face several challenges with accepting online payments, such as the possibility of fraud, technical problems, and errors.
This has made it more important than ever for businesses to select the right payment processor. A reliable processor can help you navigate these challenges, streamline online transactions, and minimise risks, providing a seamless shopping experience for customers.
In this article, we’ll explore everything you need to know about payment processors to help you make the right choice for your business.
What are Payment Processors?
Payment processors are companies or services that manage online payments, allowing you to receive digital payments from customers. They support several payment options, including digital wallets, debit cards, credit cards, and UPI.
Payment processors serve as intermediaries and securely transfer funds between the client’s and the business’s account. They ensure all business transactions are completed safely and without compromising the security of users’ money. Payment processors are equipped with advanced security features like fraud detection and chargeback to enhance transaction security.
What Do Payment Processors Do?
Payment processors are essential for ensuring secure online transactions. They offer several services like:
Security, Fraud Detection, and Encryption
Payment processors safeguard consumer information by using advanced encryption technology. They also monitor transactions for unusual trends to prevent fraudulent activity, helping businesses stay compliant with security standards like PCI-DSS.
Facilitate Online Transactions
When a customer makes a purchase, the processor encrypts the transaction information and sends it to the card issuer for verification. They oversee the communication between the acquiring bank and the customer’s bank, ensuring a seamless and efficient payment process.
Management of Chargebacks
When a consumer disputes a purchase with their bank, payment processors support businesses that manage chargebacks. They provide tools and assistance to resolve these disputes and minimise financial penalties.
Support for Multiple Currencies
Payment processors allow businesses to accept payments in various currencies, simplifying international operations. By accepting payments in local currencies, businesses can increase their customer base and enhance consumer convenience.
Support for Multiple Payment Methods
Payment processors accept credit and debit cards and other payment methods, including digital wallets and mobile payments. This flexibility enables businesses to accommodate a wide range of client preferences, ensuring a user-friendly payment experience.
The process begins when a customer makes a purchase using a debit/credit card, digital wallet, UPI, or another payment method. This can be at point-of-sale (POS) terminals, mobile apps, or online platforms.
Merchant to Processor
Once the customer selects their preferred payment option, the retailer encrypts the transaction data. This ensures the customer’s sensitive information is securely delivered to the payment processor, safeguarding it from potential breaches.
Payment Processor to Bank
The payment processor sends the encrypted transaction information to the customer’s bank, also called the issuing bank. The bank verifies if the customer has sufficient funds or available credit to complete the transaction.
Confirmation from the Bank
The customer’s issuing bank receives the encrypted transaction details from the payment processor via the card network (e.g., Visa, MasterCard, or RuPay). If the customer has enough funds in their account, the bank approves the transaction.
Transaction Completion
After receiving the approval, the payment processor shares the authorisation number with the business owner. After verifying the order, the business owner fulfils the customer’s order.
Wrapping Up
Selecting the most suitable payment processor and payment gatewayis a significant decision that should align with your business needs and preferences. Make sure to consider factors such as your desired payment methods, fee structures, expected sales volumes, and the nature of your business. Carefully understanding these aspects will help you make a well-informed decision to enhance your payment processing experience.
