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October 19, 2021

The Ultimate Guide to Payment Processing | Small Business Tips

Merrell Sheehan

Written by:

Merrell Sheehan

The Ultimate Guide to Payment Processing | Small Business Tips

As a business owner, you are likely setting up your business to accept digital payments from customers so you can capture even more sales.

Key Takeaways You Will Get From This Article

1. The customer, merchant, technology, and card associates all play in a role in how payment processing works. 

2. Payment processing companies implement several steps that are highly secure and will ensure that payment gets done promptly.

3. When it comes to settlement and funding the issuing bank will approve the payment and the merchant will receive funds equal to the amount the customer paid for the goods or services purchased.

4. Business owners should look for a payment method that will best suit the dynamics of their business.

While many businesses now understand how crucial online payments are to business continuity, there are questions regarding how online payment processing works.

Now more than ever, businesses need to understand how credit card payment processing works and choose the right merchant or processor for their business needs.

Below, we discuss everything you need to know about online payment processing.

Main Players During Online Payment Processing


To fully understand payment processing and credit card transactions, you need to know the parties involved and their roles.

During the process, there are four main players, regardless of whether you are using phones, the payments are made in person, or are phone sales.

Read on below to understand.

How Does Payment Processing Work?

The Customer

Your customer is also involved in the payment processing. The customer pays for goods or services using a credit or debit card.

Their bank will need to approve the payment and give her the money to pay your business. The bank in the customer's case is referred to as the issuing bank.

The Merchant

The merchant is the business. To accept credit and debit card payments online, you will need to partner with several other parties, unless you choose a total payment processor like Electronic Merchant Systems.

The Technology

There are two technologies between you and the customers that help process payments.

The first technology is the payment gateway.

This technology connects the merchant's site's shopping cart to the network that is processing payment. Therefore, payment gateways allow online communications between the two banks involved.

The second technology involved is the merchant service or payment processor.

This is where the bulk of the work is as the merchant will move the credit or debit card transaction through the processing network.

After this, it will send a billing statement to you and work with the bank to ensure successful payment.

In some cases, the payment processor may be the merchant's bank, but it is important to note that this does NOT have to be the case. We'll touch on more of this later.

Essentially, the credit card processor is like a mediator between the issuing bank, merchants, merchant's bank, card networks, and the other parties needed to complete credit card payments. These processors are always in compliance with the Payment Card Industry standards.

Card Associations

Financial associations such as American Express, Visa and MasterCard, and Discover are also involved in the payment process. This party established the qualification guidelines, terms of transactions, and processing rates for the participants involved in the payment processing.

In addition, they mediate between the issuing banks when there is a dispute.

Stages in Payment Processing


Payment processing companies such as Electronic Merchant Systems implement several steps of payment processing. The steps involved are highly secure and will ensure that payment gets done promptly.

Below, we outline the stages in payment processing:

  • The cardholder will make a purchase and provide the credit number to the merchant. The payment requests will go through the payment gateway. The payment gateway ensures that the data is secure and private by encrypting it. If you are in a traditional brick-and-mortar store, you will likely use point of sale terminals to accept payment requests.
  • The merchant will then forward the payment request and get authorization from the payment processor. If the buyer pays for goods through a digital wallet, they will need to submit their transaction information to the wallet operator, who forwards it to the payment processor.
  • The payment processor will then deliver the transaction request to the card associations highlighted above before the information goes to the issuing bank.
  • The issuing bank will receive an authorization request with details of the card used in the transaction. The details received include the card verification value, address verification services, and expiration date of the card.
  • The bank is at liberty to accept or reject the payments. Some of the reasons why card payments may be declined include when payment dates have passed, if there are insufficient funds on the card and if the account is invalid or expired.
  • The bank then sends the denial or approval notification to the card association, merchant, and bank.

​Settlement and Funding

If the issuing bank approves the payment, the merchant will receive funds equal to the amount the customer paid for the goods or services purchased.

This last stage of payment processing is handled as we outline below:

  • The merchant will forward a batch of authorized payments to the payment processor.
  • The payment processor then sends the transaction data to the financial associations
  • These associations notify the issuing banks of the requested payments
  • The issuing bank puts into the accounts the requested sums for the payments
  • The issuing bank transfers the funds into the merchant's account. There are interchange fees applied at this point.
  • The bank will then credit the merchant's account with the available cash.

Interchange Fees and Other Fees

An interchange involves settling and clearing payment data. At the end of a transaction, the acquiring bank will finish the approved card payments for a merchant.

The acquiring Bank will pay fees and other costs to the issuing banks for the completed transactions. There are many other types of interchange fees that are paid as percentages of the transaction amount/

Apart from the interchange fees, a percentage of the transaction will be paid to the credit card association involved in the transaction. This is known as the assessment fee.

As a merchant, your bank will also cut a percent of the transaction amount as payment for their service. The percentage taken may vary depending on the industry, monthly processing volumes, and the sale amount.

Lastly, the payment processor will also charge an authorization fee for each time it processes a transaction on behalf of your business. Unfortunately, these fees apply whether you make a sale, return, or decline. You may also be charged fees for account cancellation, monthly usage, and setup.

Finding the Best Payment Processing Method for Your Business


As a business owner, you want to find a payment method that will suit the dynamics of your business. For example, the payment processing method may be needed to streamline your business's processes.

Still, most of all, they should be designed to give your customers many ways to make payments for themselves and improve the shopping experience.

You need to choose a payment processing company such as Electronic Merchant Systems. The company understands the dynamics of businesses in different fields and centers its services on merchants according to their business needs.

With a company such as EMS, every day is a business day. You get to enjoy affordable transaction fees, expert advice, and excellent customer support 24/7, every day of the year.

Key Takeaway

As a merchant, you need to keep updated with the fast-moving business world. If you are looking to use payment processing for online transactions, you need to ensure that it is a fast and secure process for your clients.

Above, we have captured details about how payment processing systems work, the different parties involved, and the fees charged by the various stakeholders involved in the transaction.

By understanding these different parts of payment processing, you can make better decisions about the payment processor you will work with.

Get the Best All-in-One Solution with Electronic Merchant Systems

As previously mentioned, many merchants opt for their bank for merchant services. Contrary to popular belief, this is actually NOT ideal, as all banks need to work with 3rd parties because they are not credit card processors.

This can lead to an increased credit card processing fee or rates. Thankfully, there is a better credit card processing solution.

Electronic Merchant Systems is the largest Level 1 Processor that is still privately owned. We also offer 24/7/365 customer service support and our reputation within our local communities speaks for itself once you discover our 975+ Google Customer Reviews.

From POS Terminals and Mobile Payments to Gift Cards and Loyalty Programs, EMS has you covered for any form of payment.

Contact our experts at Electronic Merchant Systems to help you get the best payment processing deals for your business.

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