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The 2024 Guide to Payment Processing Solutions

Everything you need to know about payment processing.

Introduction to Payment Processing

How people pay is transforming. The days of cash and check are long gone, but even debit and credit cards are starting to fade.

Financial technology (fintech) is evolving to create new, digital forms of payment. At the same time, businesses must get on top of these trends by accepting payments in multiple forms that are secure and convenient to satisfy consumer expectations.

No matter your business type, you need at least a foundational understanding of payment processing. Not only will it help you find the best solution for your business, it will ensure your customers’ payment needs are met.

What’s covered in this post:  

• What is payment processing? 
• What is a payment processor? 
• How does payment processing work?
• Common payment processing terminology
• What to look for in your payment processor

What is payment processing?

Payment processing refers to the process of transferring electronic funds from a payer to a payee. This usually involves a few key players, including a merchant, a customer, a payment gateway, a payment processor, and the banks involved (we’ll discuss all these terms later on).

Essentially, payment processing is everything that happens (both openly and behind the scenes) to move money—and it’s more complicated than you might think.

There are a wide variety of payment types that are processed in everyday transactions. These include:

• Credit and debit card transactions
• Automate clearing house (ACH) transfers
• Mobile payments
• Electronic funds transfers (ETFs)
• Cryptocurrencies

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What is a payment processor?

Payment processors are companies that do just as their name suggests—provide payment processing services. They act as the intermediary between merchants, customers, and financial institutions.

Merchants partner with payment processors to securely handle electronic payments, ensuring funds are safely transferred from customer to business. Types of processorsPayment processors can be categorized based on various criteria, such as the type of transactions they handle, the services they offer, and their integration capabilities. Here are some common types of payment processors:

*Note: A single payment processor can handle multiple merchant services simultaneously.

1. Front-end processors

These processors have connections to various card networks and are responsible for handling the initial parts of the payment process, including authorization and capture of funds. They ensure that ACH/debit/credit card processing transactions are approved by the cardholder's bank and provide an immediate response to the merchant.

2. Back-end processors

After front-end processors capture the transaction, back-end processors take over to settle the funds. They are responsible for the movement of funds from the cardholder's bank to the merchant's bank. They handle the clearing, settlement, and any necessary batching of transactions that occur after the initial authorization.

3. Integrated payment processors

These processors offer seamless integration with other business systems like eCommerce platforms, point of sale systems, accounting software, and customer relationship management (CRM) systems. They provide APIs (Application Programming Interfaces) allowing businesses to customize the payment experience and automate various operations.

4. ACH processors

An ACH (Automated Clearing House) processor specifically handles transactions that go through the ACH network, which is a network used for electronic money transfers and payment services in the United States. ACH transactions are becoming standard in a number of use cases, like recurring payments, iGaming, cannabis, payroll, and peer-to-peer (P2P) payments. ACH is the fastest, most secure way to move money. 

5. Mobile payment processors

These processors are designed to handle transactions initiated from mobile devices. Examples include mobile-specific payment solutions like Square, PayPal Here, Apple Pay, and Stripe, which provide businesses with apps and dongles to accept payments directly on smartphones and tablets.

6. Cryptocurrency processors

With the rise of digital currencies, some processors specialize in handling transactions using cryptocurrencies like Bitcoin, Ethereum, and others. They convert cryptocurrencies into traditional currency in real time, allowing merchants to accept digital currencies without needing to manage them directly.

7. High-risk payment processors

These processors specialize in working with businesses that are considered high-risk due to their industry type, higher chances of chargebacks, or regulatory issues. Examples of these industries include cannabis, gaming, and gambling. 

High-risk processors are equipped to handle the additional scrutiny and risk management required to service such accounts.

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Common payment processing terminology

To stay ahead in the payment processing conversation, it’s important to understand the lingo. Here are some common payments terms, many of which will be used in this article:

Merchant account: A type of bank account that allows businesses to accept payments by debit or credit cards. A merchant account acts as an intermediary between the business's bank account and the payment processor.

Payment gateway: A service that authorizes and processes payments for e-commerce sites and traditional brick and mortar stores. It facilitates the transfer of information between a payment portal and the front-end processor or acquiring bank.

Payment processor: A company appointed by a merchant to handle transactions from various channels like credit cards and debit cards for merchant-acquiring banks.

Customer: The individual who makes a payment to the merchant.

Payment method: The means by which a customer can make a payment—ACH bank transfer, credit card, debit card, digital wallet, etc.

Acquiring bank (Acquirer): A bank or financial institution that processes credit or debit card payments on behalf of a merchant. The acquirer allows merchants to accept credit card payments from the card-issuing banks within an association.

Issuing bank (Issuer): The bank, credit union, or other financial institution that issued the credit or debit card to the consumer. The issuer is responsible for paying the acquirer for the purchases that their cardholders make.

Point of sale (POS) system: Hardware (like card readers) and software that manage the selling and checkout process via a transactional interface (usually used in retail stores, restaurants, etc.).

Payment Card Industry Data Security Standard (PCI DSS): A set of security standards designed to ensure that all companies that accept, process, store, or transmit credit card information maintain a secure environment.

Authorization: The process of verifying that a credit or debit card has sufficient funds to cover the transaction. This is a key step in the payment process.

Card network: Organizations (like Visa, MasterCard, American Express, and Discover) that facilitate and govern the processing of card-based transactions. They set the rules and standards for issuing card companies, processing payments, card data, card details, and settling transactions between merchants, card issuers, and acquiring banks. 

Settlement and reconciliation: The process where the acquiring bank pays the merchant for transactions minus the interchange fees.

Interchange fees: Fees paid between banks for the acceptance of card-based transactions. Typically, these processing fees are passed from the merchant's bank (acquirer) to the cardholder's bank (issuer).

Chargeback: A demand by a card provider for a retailer to make good the loss on a fraudulent or disputed transaction.

Transaction fee: A fee charged for each transaction processed, usually consisting of a percentage of the transaction amount plus a fixed fee.

Batch processing: The process of processing transactions in a group or batch at the end of the business day.

Tokenization: The process of replacing sensitive data with unique identification symbols that retain all the essential information about the data without compromising its security.

Bank-level encryption: The capability for a customer to log directly into their bank when completing a bank transfer, guaranteeing the level of security that banks or financial institutions use to encrypt and protect financial data and personal information.

Fraud detection: Systems designed to detect and prevent suspicious transaction activity.

SDK: A Software Development Kit helps streamline the process of application development by providing building blocks that developers can use, reducing the amount of code they need to write from scratch.

API: An Application Programming Interface, is a set of rules and protocols for building and interacting with software applications.

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How does payment processing work?

Here’s an example of what the process can look like. Although, it depends on the processor and type of transaction.

1. Transaction initiation

When a customer decides to make a payment using a credit or debit card, either in-person, in an online store, or through a mobile device, the transaction begins. The customer's payment information (like credit card number and expiration date) is collected via a point of sale (POS) system, an online payment gateway, or another payment interface.

2. Data transmission

The payment processor receives the transaction data from the merchant. This information is encrypted to ensure security and is then sent to the payment processor. The processor's primary task here is to ensure that the data moves securely from the merchant to the relevant parties, such as the card network (Visa, MasterCard, etc.).

3. Authorization request

The payment processor forwards the transaction details to the card association (Visa, MasterCard, etc.), which then routes it to the issuing bank (the customer’s bank that issued the card) for authorization. The issuing bank checks several things, including:

  • Whether the card number is valid.
  • Whether the card has sufficient funds or credit available.
  • Whether the card is not reported lost or stolen.

4. Authorization response

The issuing bank then approves or declines the transaction based on the verifications and sends this response back through the card network to the payment processor. The processor, in turn, sends this authentication response back to the merchant.

5. Completing the transaction

If the transaction is authorized, the merchant completes the sale. For an online transaction, this might mean sending an order confirmation to the customer. In a physical store, it often results in printing a receipt.

6. Settlement

After the transaction is authorized and completed, the actual movement of funds is processed during settlement. At the end of the business day, the merchant sends all the authorized transactions in a batch to their payment processor. The processor then forwards these batches to the card networks, which settle the transactions with the issuing banks.

7. Funding

After settlement, the funds are transferred from the issuing bank to the merchant's bank, also known as the acquiring bank. The payment processor plays a role in ensuring that these funds are deposited into the merchant’s account, typically within a few days.

8. Fees assessment

During these transactions, payment processors assess fees that are typically a percentage of the transaction amount, sometimes combined with a flat fee. These fees can include interchange fees, which are paid to the card-issuing banks, and additional monthly fees that cover the processor's merchant services.

9. Security and compliance

Throughout this process, payment processors must adhere to strict security standards, such as the Payment Card Industry Data Security Standard (PCI DSS) or “PCI compliance”, to protect sensitive data and prevent fraud. They may also offer services like fraud detection, tokenization, and encryption to further secure transactions and enhance trust.

An upcoming addition to payment processing compliance is the U.S. open banking rule that was proposed in October 2023 and is set to be finalized in 2024—Dodd-Frank Section 1033. The forthcoming rule will guarantee consumers’ right to access and share their financial data. 

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What to look for in your payment processor

Getting the most out of your payment processor starts with choosing the right partner for your particular needs. These are some important frequently asked questions (FAQs) you should direct toward any prospective payment options before entering into an agreement:

What security measures and features do you offer?

Security is paramount in digital payments. Ask about encryption methods, fraud detection capabilities, and adherence to Payment Card Industry Data Security Standards (PCI DSS).

Will your solution meet the specific compliance requirements of my business? 

Some industries, like gaming and cannabis, have nuanced regulatory requirements that aren’t easily understood by every payments operator. Your business must ensure a payment processor has compliant solutions tailored to meet your compliance needs effectively.

What kind of fee structure comes with your service? 

You’ll easily spot a bad payment partner when they’re shady or unclear about their fee structure and pricing. Look for a transparent, competitive processor with no hidden fees. 

What payment methods do you support? 

The more payment methods you accept, the wider your customer base can grow. Consumers crave convenience, so be sure your service provider is keeping up with advancements in fintech, like digital ACH payments (pay by bank). 

Do you integrate with my current business software? 

Seamless integration with your existing business systems will save considerable time in day-to-day operations.

When your payment solution is seamlessly integrated into your tech stack, you’ll notice:   

- Streamlined operations
- Enhanced customer experience
- Real-time data accessImproved financial reporting and reconciliation
- Easier scalability
- And more

What kind of customer support do you offer? 

High-quality, responsive customer support can define a business owner’s success in resolving payment issues. This also includes end-user support, or help for your customers having any technical issues. 

How do you handle refunds and chargebacks? 

Some payment providers mitigate the risk of ACH returns for the business, these processors claim their A2A payments are “guaranteed”—meaning that the processor will cover the funds and make sure they’re sent to the business no matter what.

There are a couple problems with guaranteed payment systems:

1. They only protect against insufficient funds or closed accounts, not buyer’s remorse which is very popular in industries like iGaming

2. They implement additional verification steps and criteria to fulfill their “guarantee,” but this filters out legitimate transactions and deters potential customers—guaranteed ACH payments have an average acceptance rate of only 60-70%.

Your processor needs to have a built-in system in place to mitigate the risks of chargebacks, while maximizing approval rates. This starts with a transparent process for both customers and merchants. 

What’s your settlement speed?

Different payment methods have different settlement speeds. For example, ACH transactions done over the Real-Time payment (RTP) network are settled instantly—it’s the fastest way to move money. 

Additionally, every business should conduct thorough research to determine if a prospective payment processor has a positive reputation and demonstrates reliability. Check out reviews from current and past customers, visit their website, check reddit and other social media channels—do your due diligence. 

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How to Get Started with Aeropay

As a leading digital payment provider, Aeropay enables reliable pay by bank transactions for in-store and e-commerce business payments nationwide. 

Businesses using Aeropay experience: 

- 25% higher customer spend 
- 30% increase in completed online orders
- 70% increase in online customers returning at most locations

The simplicity, security, and efficiency of Aeropay make it an easy choice for your customers and your business. 

Schedule a 15-minute demo to see our full payment solution and make bank-to-bank transfers work for your business.


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