Payment Processing Process: What It Is and How It Works 

Every second, thousands of online payments take place worldwide, forming the foundation of the global economy. But what makes these transactions so fast and reliable? 

 Today, payment processing is not just a technical process, but the basis of modern business, which ensures the constant movement of finances and their satisfaction with payment services on the merchant’s website. Each successful transaction is a step towards strengthening trust between the business and its buyer because reliable payment processing creates a sense of security and professionalism. In a world where every business strives to stay one step ahead of the competition, online payments have become an integral part of the digital economy, allowing businesses to not only stay competitive but also deliver the perfect customer experience. 

Did you know that the online payments sector is one of the largest and fastest-growing markets in the financial industry? The average consumer now uses a digital payment method for 75% of their transactions each year. As a result, online payments have become essential for successful business operations in today’s digital environment.  

Furthermore, seamless payment processes can convert a buyer into a loyal customer — and the opposite can happen as well. In fact, 50% of customers abandon a purchase if the payment process takes longer than 10 seconds. Clearly, time is a crucial factor! 

But how does this system work, allowing you to transfer funds from one end of the world to the other quickly and securely? And how to choose the perfect payment solution that will meet the needs of your business? 

In this article, we’ll reveal what’s going on behind the scenes of payment processing, what its key elements are, and how to ensure the perfect customer experience.

Learn more about integrating payment processing for your business.

What is payment processing?  

Payment processing is a technological system that facilitates the secure and efficient execution of financial transactions between customers and merchants. This process encompasses a series of actions that ensure that payments made through credit cards, e-wallets, and other digital systems are verified, accepted, or declined. At its core, payment processing relies on specialized infrastructure, including payment gateway servers, to handle data encryption and ensure transaction integrity.  

This process consists of several key stages and involves not only financial institutions but also payment systems that are continually evolving to meet new needs and technologies. Consequently, businesses operating in an international environment must constantly enhance their payment solutions to remain competitive in the market. 

How does the payment processing process work? 

Payment processing involves the rapid verification and approval (or rejection) of transactions through payment gateways.  If the payment is successfully approved, the funds are transferred to the merchant’s account. In most cases, this happens quickly, although sometimes transactions are subject to additional verification, which takes time.  

 In other words, there is a complete payment processing system — a set of technologies and processes that ensure the execution of transactions. It covers the entire path: from the customer’s payment data entry to the funds being credited to their merchant account. Depending on the method of payment — in person, online, or through other channels — the system can adapt by using different verification and encryption methods.  

 Some of the different types of payments that are processed include:  

• Debit and credit cards — physical cards issued by banks.  Debit cards allow you to use your own funds, while credit cards allow you to borrow money from a bank to pay for goods or services.  
•  Digital wallets — software applications, usually on mobile devices, such as Apple Pay or Google Pay, that allow you to make electronic financial transactions.  
•  Wire transfers — electronic transfers of funds, usually made between companies. They are often used for large amounts and are processed through SWIFT or SEPA systems.  
•  Electronic checks — digital counterparts of paper checks that are processed through an automated clearing house (ACH), allowing financial transactions to be made without physical documents. 

In addition to standard payment solutions, there are alternative payment methods that unlock new opportunities for businesses.

Learn more about their setup and benefits!

What are the stages of payment processing? 

Let’s consider the main stages of the payment processing process: 

• Initiating a payment 

When a customer makes a purchase, the payment process is automatically activated, transmitting essential data such as card number, expiration date, transaction amount, to the payment processing system. 

• Authorization for security 

The processing system requests permission to conduct the transaction by verifying the customer’s basic payment data, such as the card number, CVV code, and expiration date. The issuing bank authorizes the transaction after verifying the card number, expiration date, security code, billing address, and total payment amount, using encrypted protocols to ensure security. This step ensures that the customer’s card is valid, not blocked, and all data is correct. 

• Authentication 

 After verifying the card details, the issuing bank certifies the purchase, allowing the payment to be transferred to the acquiring bank. Otherwise, the customer will see an error message, such as “Insufficient funds” or “Card invalid”, which explains the reason for the refusal. 

• Transfer of data to the bank 

After confirming the transaction, the system automatically sends a request for debiting funds to the buyer’s bank. This process ensures the payment is completed swiftly and without unnecessary delays, although the exact time depends on the payment system or banking protocol. 

• Payment processing and completion 

The final step is to complete the processing, which includes transferring the funds from the buyer’s account and completing all the necessary procedures. The issuing bank writes off funds from the customer’s account, using encryption to ensure the security of the transaction, and closes the transaction. The issuing bank releases the funds, and they are transferred to the merchant’s account with the acquiring bank. Depending on specific conditions, this process may take anywhere from a few minutes to several days, meaning the seller might experience a slight delay before receiving the funds. 

What is a payment processing account?  

A payment processing account is a specialized business account opened with a bank or payment provider that is used to conduct electronic payment transactions. This account is required for every business that accepts credit cards or electronic payments.  For example, a credit or debit card, digital wallets, or bank transfers — and a company’s bank account.  

Such an account provides secure authorization, processing, and crediting of payments, usually through a payment processor that processes transaction data or a payment gateway that connects the payment system to the bank. It is a key tool for businesses operating online, in retail, or across multiple channels.  It allows you to offer flexible and easy payment methods to customers, such as installments, one-click payment, or QR code. Payment processing accounts also support fraud prevention, chargeback processing (refunds to the customer in the event of a disputed transaction), and currency conversion, making them essential for modern commerce. 

What if your business operates outside your home country, or you are planning to enter the international market? 

For example, you can easily open a payment processing account with a Cypriot bank or payment institution, even if you are not a resident of Cyprus. This provides numerous opportunities for your business, such as facilitating international transactions, enhancing customer convenience, and reducing operational costs.  

Learn more about the benefits of such solutions in our article Cyprus Bank Account for Non-Residents. 

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What is a payment processing fee? 

Electronic transactions offer convenience and speed; however, they also incur processing fees, which are a necessary aspect of the process. What are these costs, why do they occur, and how much do they typically amount to? 

Payment processing fees are charges that companies incur when using payment systems to handle electronic transactions and ensure their security. For instance, fees for processing credit card transactions typically range from 1.5% to 3% or more of the total purchase amount, depending on the specific terms of the bank or payment system involved. The amount of these fees can vary based on several key factors: 

• Type of transaction: For example, credit card fees are often higher due to the risks and additional fees of the issuing bank. It is different from the fees for debit cards or bank transfers. 
• Payment processing system: Different payment processors may have different fee structures, which depend on their services, infrastructure, and security requirements. 
• Payment processor terms: Some payment services, like PayPal or Stripe, offer discounts on high volumes or custom rates for individual businesses. 

When planning business operations, it is worth considering these costs. Analyzing and choosing the optimal payment processor will help reduce costs and improve the financial performance of your company. Regular review of the terms of cooperation with payment systems allows you to remain competitive. 

Is your business incurring high costs due to payment providers’ fees?

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How does credit card payment processing work? 

The processing of payments through credit cards consists of several key stages, covering technical data processing and financial interaction between participants in the process. First, when the customer makes a payment and enters their card details (number, expiration date, CVV code), this information is encrypted for security and transmitted through the payment gateway to the payment processor. The processor checks the card-issuing bank for sufficient funds in the account to authorize the transaction and also validates the card for activity, expiration date, and any applicable limits. Once the payment is confirmed, the funds are reserved in the customer’s account for onward transfer, and the customer receives confirmation of the successful transaction. However, the transfer of funds to the merchant’s account itself may take several days depending on the rules of the payment system and the type of processing, as the settlement process between banks must be completed. 

How does electronic payment processing work? 

Electronic payments, such as e-wallets and bank transfers, follow similar processing steps, including data transfer and security verification, but they differ in the number of steps required for authorization. For example, e-wallets and bank-to-bank transfers typically have faster authorization processes due to automation and reduced involvement of intermediary financial institutions. In the case of bank transfers, funds are transferred directly between banks, which also allows for quicker processing. 

Regardless of the payment method, payment processing involves several stages and participants, such as payment gateways, issuing banks, and acquiring banks, each responsible for a specific part of the process. These components work together, using encryption technologies and fraud detection systems to ensure that the transaction is secure and successful. 

Why is payment processing important? 

According to Mastercard research, more than 74% of consumers consider speed and convenience to be the main benefits of digital payments. What’s more, 79% of survey respondents reported using contactless payments due to their increased security and convenience. This highlights the importance of providing fast and convenient payment systems to attract customers and increase customer loyalty, for example, businesses that have adopted digital wallets often see a 20% increase in repeat purchases. 

In addition, payment processing helps to optimize the internal processes of the business, for example, by automating the reconciliation of payments with orders in the CRM system. Automation of financial transactions reduces the risk of human errors, such as incorrect calculation of balances or duplicate payments, and saves a lot of time. For example, companies that use modern payment solutions, such as payment gateways with dynamic transaction routing, reduce transaction processing costs by an average of 15-25%. This is especially important for scaling a business, as it allows you to focus on strategic goals rather than routine operations. 

In a competitive environment, the variability of payment methods, such as adding cryptocurrencies or contactless payments, becomes a strong argument in favor of attracting customers. For example, adding options like digital wallets that simplify the payment process, or BNPL (“Buy Now — Pay Later”), which reduces the financial burden on the customer and can increase conversion by 30-40%. This approach not only opens up new opportunities for businesses, but also helps to retain customers, creating the most comfortable payment terms for them, for example, through the offer of regular payments or individual payment plans. 

Frequently Asked Questions (FAQs) 

How long does it take to process a payment? 

The actual payment processing time is very fast — a few seconds or minutes at most. However, the time it takes for the transaction to complete and the merchant to actually receive the funds can take up to 3-5 business days, depending on the payment method. The processing time also depends on the payment system (e.g., PayPal or bank transfer) and the chosen payment method. 

Does processed mean paid? 

Processed does not necessarily mean paid. If the bank says that the transaction has been processed, it may mean that it has been authorized and authenticated but has not yet been settled, meaning that the merchant may not yet see the funds in their account. The seller can see the funds in the account after the completion of the settlement process between banks, which usually takes 1-3 business days. 

Why are card transactions declined? 

There are several reasons why a transaction may be declined. In many cases, it is as simple as an error in the card details. In other cases, the payment processor does not accept this type of card, there are not enough funds in the account, additional verification is required, or a technical error interrupted the payment process. Also, if the transaction is rejected, but all the data is correct, the client should contact his bank to clarify the reasons and possible solutions.  

What are the components of payment processing? 

• Payment gateway 
  A payment gateway is an interface between a merchant’s website and a payment processor. It is responsible for collecting transaction information and ensuring that data is transmitted securely before processing. 
• Payment processor 
  The payment processor processes the transaction by contacting the buyer’s bank to verify the availability of funds and authorize the payment. It also notifies the seller of the outcome of the transaction. 
• Acquiring Bank 
  An acquiring bank is a financial institution that processes payments on the seller’s side. It accepts funds from the buyer’s bank and transfers them to the seller’s account. 
• The issuing bank 
  is the bank that issues the payment card to the buyer. It verifies the buyer’s information and confirms the payment based on the availability of funds. 
• Security and anti-fraud systems 
  Anti-fraud systems analyze transactions for suspicious activity and prevent fraud. This includes encryption and tokenization technologies that keep sensitive data secure. Anti-fraud systems also play an important role in building customer trust in your business, ensuring the safety of purchases. 
• Currency exchange and conversion 
  In international transactions, it is often necessary to convert the currency so that the buyer can pay in a currency convenient for him. This is automated in payment systems. 

Best practices for accepting credit card payments online? 

• PCI DSS Compliance 
  Use encryption and secure connections to comply with PCI DSS standards, ensuring that payment data is secure. PCI DSS certification will be a confirmation for customers that their data is protected. 
• Secure payment gateways 
  Collaborate with trusted payment processors (e.g., PayPal, Stripe, Square) that provide data protection through encryption and tokenization. 
• 3D Secure 
  For added security, use 3D Secure, which requires buyer authentication before completing a transaction. 
• Variety of payment methods 
  Provide multiple payment methods, including credit and debit cards, Apple Pay, and digital wallets like Google Pay or PayPal for the convenience of shoppers. Also consider accepting cryptocurrencies or regional payment systems such as iDEAL or Alipay. 
• Optimization for mobile devices 
  As more customers make purchases via mobile devices, ensure that your payment gateway is mobile-responsive and supports features like one-click payments. According to Statista, over 58% of online payments in 2023 were made through mobile devices. 
• Fraud Monitoring 
  Utilize tools to monitor suspicious transactions real time, minimizing the risk of fraud. 
• Simplify checkout 
  Minimize the number of steps in the purchase process by offering quick payment and autofill options. Companies like Amazon and Apple have successfully reduced cart abandonment by implementing features like ‘One-Click Buy’ and autofill.