Online Payment Processors

by Simon. Average Reading Time: about 3 minutes.

Accepting electronic payments is essential to modern business. The UK is currently Europe’s largest ecommerce economy with two-thirds of consumers having shopped online. The power of the Internet continues to grow with 27.7 million UK adults having used the Internet in the last year. Current predictions believe that the rate of growth of Internet sales will see this channel occupy 15% of retail sales by 2010.

Payment Service Providers (PSP) offer merchants online services for accepting electronic payments by credit card or other payment methods such as payments based on online banking.

Typically, a PSP can connect to multiple acquiring banks and card networks, thereby making the merchant less dependent of financial institutions, especially when operating internationally. Furthermore, a PSP can offer reconciliation services, risk management and multi-currency functionality.

For many small businesses, selling online provides some major benefits. Customers increasingly expect this type of facility and it can improve cash flow significantly.

It’s easy to accept cheques or invoices for your online sales and to process payments in the traditional way. However, because buyers often use the Internet for a speedy service, most sales are paid for with credit and debit cards.

To accept cards online, you will have to make special banking arrangements, but this doesn’t mean you have to have a merchant service.

Payment Service Providers

Common PSPs include:

Online Payment Processors

Payment Gateway

A payment gateway is an e-commerce application service provider service that authorises payments for e-businesses, online retailers, bricks and clicks, or traditional brick and mortar. It is the equivalent of a physical Point-of-Sale (POS) terminal located in most retail outlets. Payment gateways encrypt sensitive information, such as credit card numbers, to ensure that information passes securely between the customer and the merchant.

How Payment Gateways Work

A payment gateway facilitates the transfer of information between a payment portal, such as a website or Interactive Voice Response (IVR) service, and the Front End Processor or acquiring bank, quickly and securely.

When a customer orders a product from a payment gateway enabled merchant, the payment gateway performs a variety of tasks to process the transaction, completely invisible to the customer.

For example:

  • A customer places order on website by pressing the Submit Order or equivalent button, or perhaps they enter their card details using an automatic phone answering service.
  • If the order is via a website, the customer’s web browser encrypts the information to be sent between their browser and the merchant’s web server. This is usually done via Secure Socket Layer (SSL) encryption.
  • The merchant then forwards the transaction details through to their payment gateway, which holds the detail of their merchant account transaction. This is often another SSL encrypted connection to the payment server hosted by the payment gateway.
  • The payment gateway, which receives the transaction information from the merchant, forwards it to the merchant’s acquiring bank.
  • The acquiring bank then forwards the transaction information to the issuing bank (the bank that issued the credit card to the customer) for authorisation.
  • The card-issuing bank receives the authorisation request and sends a response back to the payment gateway (via the acquiring bank) with a response code. In addition to determining the fate of the payment, (i.e. approved or declined) the response code is used to define the reason why the transaction failed (such as insufficient funds, or bank link not available).
  • The payment gateway receives the response, and forwards it on to the website (or whatever interface was used to process the payment) where it is interpreted and a relevant response then relayed back to the customer.
  • The entire process typically takes 3-4 seconds.
  • At the end of the bank-day (or settlement period) the acquiring bank deposits the total of the approved funds in to the merchant’s nominated account. This could be an account with the acquiring bank if the merchant does their banking with the same bank, or a suspense account with another bank.

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