How Payment Processing Works
A comprehensive guide to understanding the payment processing flow
Overview
Payment processing involves multiple parties working together to securely transfer funds from a customer's account to a merchant's account. The entire process happens in seconds, but involves several steps and multiple entities.
As someone who worked in payment processing at Shift4 and as Marketing Lead Developer at Revel Systems, I've seen this process from the inside. Let me break down exactly how it works.
The Payment Processing Flow
When a customer makes a payment, here's what happens behind the scenes:
Step 1: Authorization
When a customer swipes, dips, taps, or enters their card information, the payment processor sends an authorization request to the card network (Visa, Mastercard, etc.). The card network forwards the request to the customer's bank (issuing bank) to verify:
- • The card is valid and not expired
- • The account has sufficient funds
- • The card is not reported stolen or lost
Step 2: Approval or Decline
The issuing bank responds with either an approval or decline. If approved, the funds are "held" or "authorized" but not yet transferred. The authorization typically lasts for a few days.
Step 3: Settlement
At the end of the business day (or in batches), the merchant's payment processor batches all authorized transactions and sends them for settlement. The card network facilitates the transfer of funds from the issuing bank to the merchant's bank (acquiring bank).
Step 4: Funding
The merchant's bank receives the funds (minus processing fees) and deposits them into the merchant's account. This typically happens 1-3 business days after settlement.
The Players Involved
Merchant
The business accepting payments. You need a merchant account to accept card payments.
Payment Processor
Companies like Stripe, Square, or PayPal that handle the technical aspects of payment processing. They connect merchants to the card networks.
Card Networks
Visa, Mastercard, American Express, and Discover. They set the rules and facilitate communication between banks.
Issuing Bank
The customer's bank that issued their credit or debit card. They approve or decline transactions.
Acquiring Bank
The merchant's bank that holds their merchant account. They receive the funds from the issuing bank.
Key Takeaways
- ✓ Payment processing involves multiple parties: merchant, processor, card network, and banks
- ✓ Authorization happens immediately, but settlement and funding take 1-3 business days
- ✓ Processing fees are deducted before funds reach your account
- ✓ The entire process is secured with encryption and fraud prevention measures