Have you ever wondered what happens behind the scenes when you tap your card, swipe at a terminal, or click “pay now” at an online checkout? Merchant payment processing is the unsung hero of modern commerce, ensuring that electronic payments flow seamlessly from customer to business. Occasionally, it may happen the other way round too.
This process, from capturing payment information to securely settling funds into a merchant account, keeps businesses thriving and customers smiling.
This article explores the essentials of merchant payment processing, the critical steps involved, and the key players who make it happen.
What does processing merchant payments mean?
The phrase, processing merchant payments, refers to the many steps in capturing and transferring payment information from the customer to the merchant’s bank account.
Payment processing ensures that transactions are conducted securely, ensuring that customer’s sensitive payment data is adequately safeguarded.
There are three key steps involved in processing merchant payments:
- Payment Information Capture: Collecting customer card details via a point-of-sale (POS) terminal or online payment gateway for online transactions.
- Authorization: The issuing bank verifies that the customer has sufficient funds available and approves the transaction.
- Settlement: Once approved, the issuing bank securely transfers the funds to the merchant accounts.
Payment gateways are pivotal, as intermediaries encrypt data and connect merchants with payment processors.
What is the merchant payment process?
The merchant payment process has multiple stages to ensure smooth and secure transactions.
- Stage 1: The customer initiates the transaction using a credit and debit card, mobile wallet, or other alternative payment method.
- Stage 2: Payment information is captured via a point-of-sale terminal or online checkout system.
- Stage 3: Authorization is requested by sending data relating to payment transactions to the chosen payment gateway or merchant service provider.
- Stage 4: The issuing bank verifies the transaction if sufficient funds are available.
- Stage 5: Once approved, the settlement process occurs, and the funds are transferred directly into the merchant’s accounts.
This flow ensures funds are deposited into their merchant accounts while customers enjoy a seamless, hassle-free experience.
What is a payment processor?
A payment processor acts as a bridge between businesses and their customers, ensuring merchants can accept payments securely using the customers' chosen electronic payment method.
They have three core functions:
- Authorization: Ensuring the customer has sufficient funds to complete the transaction.
- Processing: Securely moving transaction data and customer's payment information through the necessary financial networks.
- Settlement: Once the transaction is complete, the payment processor deposits the transaction funds into the merchant account or business bank account.
Payment processors work in harmony alongside payment gateways, which transmit payment data securely to complete transactions and ensure a smooth, error-free experience for all parties. They facilitate a seamless payment experience, allowing businesses to accept credit card or other electronic payment method.
What are merchant payment processing esrvices?
Merchant payment processing services enable businesses to conduct and accept credit cards, debit card payments, digital wallets, or other electronic methods.
Merchant service providers are responsible for capturing and safeguarding customer payment data, sending authorization requests, and settling funds into the merchant’s account.
With a payment processor like Nuvei, businesses can access comprehensive online payment processing services that are scalable and bespoke to their needs – ensuring quick, secure, and reliable transactions.
How does merchant payment processing work?
Merchant payment processing involves coordinated actions – connecting merchants, customers, banks, and financial networks.
The merchant's payment processor is responsible for the following key actions:
- Payment Initiation: Customers provide their debit or credit card payment details.
- Data Transmission: The customer's account details are securely sent to the payment gateway.
- Authorization: Authorization is the next step in the transaction process. The issuing bank approves credit or debit card payments contingent on the amount of funds available.
- Clearing & Settlement: The funds are deducted from the customer's account and deposited into the merchant account.
All organizations - from the acquiring and issuing banks to the merchant service provider - play an instrumental role in ensuring payment transactions are conducted smoothly and securely.
Types of fees for merchant services
An in-depth understanding of the transaction fees associated with merchant services is essential to effectively manage costs.
Setup fees
The fees cover merchant account setup and the necessary renting or purchasing of hardware - such as credit card terminals or POS systems - to process payments.
Interchange fees
These are the fees charged by the customer's issuing bank. The amount is typically a percentage of the transaction value and sometimes includes a fixed cost.
Interchange fees payable to accept electronic payments can vary based on the different payment methods used, the transaction's risk level, and whether it occurs online or in-person.
Assessment fees
Assessment fees are charged by credit card networks (such as Visa, American Express, or Mastercard). Typically, they are a fixed percentage of the transaction value.
The assessment fees are deducted from the business bank account to pay the applicable card network.
Payment processor fees
These fees are charged by the payment processor handling the transaction on behalf of the merchant.
Processing fees can be structured in several ways - including a percentage of each transaction, a flat fee per transaction, monthly fees, or a combination of all three.
Monthly statement fees
It is not uncommon for a payment processor to charge a monthly fee for providing monthly transaction records. It is important to know if such extras will be levied by your chosen merchant service provider before signing an agreement.
Payment gateway fees
Businesses with an eCommerce store will likely work with a payment gateway, which will come with their own fees for conducting digital transactions.
Gateway fees can be per transaction, monthly, or both depending on the service provider.
Minimum monthly fees
Some processors charge a minimum monthly fee to provide payment processing services, which is the lowest processing fee a business can pay.
However, if transaction fees incurred do not add up to this minimum amount, the business must pay the difference as a surcharge.
Early termination fees
Many merchant service agreements have stringent contract terms, resulting in substantial fees if the contract is terminated early.
Flat fee
Flat fees are a payment structure where a fixed percentage or fixed amount is charged for every transaction.
Payment processors often use this pricing model. They are often charged as a flat rate percentage or fee.
Chargeback fees
When a customer disputes a transaction, the business may be required to return the funds to the customer - this is referred to as a chargeback.
When a chargeback occurs, businesses usually incur a fee. This fee covers any administrative costs associated with handling the transaction dispute.
Incidental fees
These fees cover the cost of any other additional services such as batch processing fees, or fees for non-compliance with regulations and security standards.
Understanding payment types
Integrating various payment methods ensures businesses cater to customers' diverse preferences when accepting electronic payments.
Prepaid cards
Prepaid cards are those with a predetermined amount of funds loaded onto them.
They are a secure way to conduct electronic transactions and make payments, as they are not directly linked to a bank account. That means prepaid cards are ideal for controlled spending and budgeting purposes.
On the other hand, this can be inconvenient in some circumstances as the cards must be reloaded once the funds are diminished.
From a merchant's perspective, accepting prepaid cards is straightforward. Businesses need to onboard a payment processor to facilitate the transactions. Customers may incur additional fees when they use prepaid cards.
Buy Now, Pay Later (BNPL)
Buy Now, Pay Later (BNPL) enables customers to purchase immediately and repay the balance in small convenient instalments.
This payment type offers customers greater flexibility but can lead to overspending and debt. If re-payment is not made in line with agreed terms, customers may be subject to interest rates.
Accepting BNPL as a business requires partnering with BNPL providers, integrating their service offerings, and complying with their terms.
Mobile payments
Mobile payments involve conducting a transaction using a smartphone or a mobile app.
These digital payments are convenient and secure but depend on a compatible device and a reliable network connection.
For merchants, accepting mobile payments involves setting up a compatible point-of-sale system. It is also imperative to adequately train staff to ensure a seamless transaction process.
Point of Sale (POS) terminals
POS systems are commonly used for in-person transactions such as those often used in the hospitality and retail sectors.
They allow customers to make payments quickly and efficiently via credit or debit cards but require hardware and a stable internet connection. Contactless functionality is useful in these circumstances as merchants can accept payments by asking customers to simply tap their cards on a terminal.
Businesses must invest and integrate POS terminals and payment processing services to accept card payments at their physical locations and comply with local regulations.
Digital wallets
Digital wallets allow customers to store their card or other type of account information securely and make payments online quickly usually via a smart phone.
They offer convenience and security to customers but require compatible apps and internet access.
To accept digital payments, merchants must integrate digital payment options into their websites or point-of-sale systems.
Cryptocurrencies
Currently, more than 560 million people worldwide own some form of cryptocurrency such as Bitcoin and Ethereum. These cryptocurrencies have become increasingly popular as digital payment methods.
Virtual currencies, which use cryptography to provide customers with enhanced security and anonymity, are subject to price volatility and often stringent government regulations.
Businesses looking to accept cryptocurrency as a form of payment must set up a wallet, provide customers with the wallet's address, integrate cryptocurrency payment gateways, and manage exchange rates and security.
Businesses must also stay vigilant of ever-changing government crypto regulations.
Debit & credit cards
Now let's talk about what remain the most widely used payment method - the credit and debit card, accounting for 53% of all payments made globally.
Debit cards
Debit cards allow customers to make payments directly from their bank accounts.
They allow customers the convenience of not having to carry cash while giving them a way to track expenses and transaction details.
Merchants accept debit payments via POS systems or online platforms, with the transactions processed through payment gateways and card networks.
They must also ensure compliance with PCI DSS Standards to maintain a secure environment for processing and handling debit card transactions.
Credit cards
Credit cards provide customers with a line of credit for purchases, making them a vital tool for modern commerce.
This card type provides customers with benefits such as credit building. However, it can lead to high interest rates and potential debt accumulation if not effectively managed.
Businesses must partner with a payment processor to facilitate credit card payments and set up a merchant account with a service provider.
PCI DSS compliance is also necessary with this card type which is important in maintaining trust and security in the payment process for the customer and business.
Conclusion
Understanding the details of merchant payment processing can transform how businesses operate, enhancing efficiency and customer satisfaction.
By leveraging the right tools and partners, merchants can offer diverse, secure, and seamless payment options that cater to every customer preference - from traditional credit and debit cards to cutting-edge alternative payment methods.
Why settle for anything less than the best? With Nuvei, businesses can access innovative, scalable payment solutions tailored to their unique needs.
Are you looking for streamlined POS systems, robust online payment gateways, or the ability to accept emerging payment methods? Nuvei has got you covered.
.svg)
