What is a payment processing system? How does it work?

With modern technology and innovative software, your business has almost no limits. Even a small souvenir shop in the countryside can go global thanks to a website, Ecommerce platform, or payment processing software solutions. A payment processing system is some sort of transaction for financial calculations, technically an invertible currency exchange (often a third party) appointed by a merchant to handle transactions from various channels such as credit cards for merchant acquiring to handle transactions from various channels such as credit cards and debit cards for merchant acquiring banks.

Running your own business always works much better when your customers actually pay you for the products and services you provide to them. Paying for purchases has become a lot more complicated in the modern world than it used to be. It wasn’t all that long ago that cash and paper checks were the preferred payment methods.

Today, however, these methods have faded in popularity as consumers increasingly prefer to use credit or debit cards. Online payments, while commonplace today, have only been available for a little over twenty years.

How does Payment Processing System Work?

So basically there are three components of payment processing system – Merchant Account, Payment Processor, Payment Gateway. Merchant account is the account that allows your business to accept online payment. A payment processing company or financial institution handles the transactions between your customers’ banks and your bank. They deal with such questions as credit card validity, available funds, card limits, and so on. One more essential function of the payment processor is security.

A payment gateway is a mediator between all transactions on your website and the payment processor. It connects your merchant account with credit and debit card issuers like MasterCard and Visa.