How online payment processing works

Online payment processing consists of two principal steps: authorization and settlement. The authorization process verifies that the customer’s credit card is active, and that there is sufficient credit to pay for the transaction. During the settlement process, the customer’s card account is charged and money from the customer’s account is transferred to the merchant’s account.

1. Payment processing authorization

During authorization, a bank verifies that holders of a payment instrument, such as a credit card, have sufficient credit or funds to make a purchase.

1. Customer decides to purchase online and inputs credit card information.
2. Merchant’s website receives customer information and sends it to payment processing service.
3. Processing service routes information to processor.
4. Processor routes information to bank that issued customer’s credit card.
5. Issuing bank sends authorization (or declination) to processor.
6. Processor routes transaction results to payment processing service.
7. Processing service sends results to merchant.
8. Merchant decides to accept or reject purchase. (Here, the merchant should take additional precautions to ensure the 8. credit card is not stolen and that the customer actually owns this card.)

2. Payment processing settlement

Once the merchant ships the product or authorizes the download of merchandise, the merchant may request that the payment processing service settle the transaction. During settlement, funds are transferred from the customer’s account to the merchant’s bank account.

1. The merchant informs the payment processing service to settle transactions.
2. The payment processing service sends transactions to processor.
3. The processor checks the information, and forwards settled transaction information to the card association and card-issuing bank.
4. Issuing bank transfers funds to the processor.
5. Processor routes funds to the acquiring bank.
6. Acquiring bank credits merchant’s bank account.
7. Issuing bank includes merchant’s charge on customer’s credit card account.