Payment processing explained: A guide for small businesses

You must be able to accept payments online through online payment gateway if you want to sell products or services on the internet. For business owners who have never accepted payments in this manner before, this can be a very intimidating area. The good news is that the entire procedure is quite simple. We'll explain how small business payment processing works in this brief guide.

What is small business payment processing?

When a customer purchases a product or service from your website, they will be required to pay online. After they enter their credit card information, a payment processor will handle the transaction for you before depositing the funds into your business account.

The payment processor's role is to act as a liaison between the seller (you), the buyer, the card networks, and the bank. They transmit data from your customer's card to your bank and the customer's bank. The transaction can be completed once it is confirmed that there are sufficient funds in the customer's account.

Small business payment processing is fraught with rules and risks. That's why it's critical to find a small business payment processor who can make the buying and selling process go as smoothly as possible for all parties involved.

What types of online payment should you process as a small business?

Customers will likely go elsewhere if you do not provide them with a convenient payment option. As a result, you should accept all of the most popular payment methods.

1. Debit card payment processing

Every online business should accept this payment method. Debit card processing is low-risk and straightforward. Unlike a credit card payment, no credit is issued to the customer to cover the cost. The transaction can take place as long as your customer has sufficient funds in their account. This is why debit card payments are frequently less expensive to process than credit card transactions.

2. Credit card payment processing

Accepting credit card payments may cost a little more in terms of processing fees, but it is necessary for most businesses. The credit card company must approve the payment and agree to cover the purchase cost on the customer's behalf. The payment can then be deposited into your company's account.

3. Digital wallet payment processing

Digital wallets and apps are becoming increasingly popular payment methods, particularly among younger consumers. Digital wallets are most commonly used to pay for products purchased with customers' mobile phones. The ability to process this type of payment can provide a significant competitive advantage.

Some businesses use different payment processors for each type of payment. However, for the majority of small businesses, it makes sense to use a single payment processing provider who can handle all of them.

Who is involved in payment processing?

You don't have to be an expert in small business payment processing, but understanding the basics and knowing who's involved helps.

Customer

This is the person who is purchasing your goods or services. They'll proceed to the checkout and select a payment method or best payment gateway. They will then submit the necessary payment information.

Merchant

You are the merchant as an online seller. You accept the customer's payment and exchange it for your goods or services.

Merchant account

This is the bank account in which funds from your online sales are held before being transferred to your business account. A merchant account is required for any business that accepts online payments. Your payment processor may provide this account automatically at times.

Payment processor

This is a third-party company that handles your company's online transactions on your behalf. It will securely route the payment details, check for available funds, and accept (or deny) the transaction.

Payment gateway

When making an online purchase, the customer's payment information must pass through the gateway of the payment processor. This helps to safeguard your customer's financial information until the funds are deposited into your merchant account.

How does payment processing work?

What happens behind the scenes before a customer payment reaches your bank account?

In the simplest terms, this is how small business debit and credit card payment processing works:

1. The customer finds an item or service they want to purchase, selects how they want to pay, and enters their debit or credit card information.

2. After that, the merchant sends the payment information to the payment gateway.

3. Once the payment gateway has received the transaction details, it forwards them to a third-party payment processor acting on the business's behalf.

4. The payment processor sends the transaction details to the card network.

5. The card network (MasterCard or Visa) will send the information to the customer's bank, which will verify that sufficient funds are available to complete the transaction.

6. The customer's bank either approves or declines the transaction, and the response is sent to the card network.

7. The card network sends the response to the payment processor, who then sends it to the payment gateway. It notifies the customer and the merchant of the outcome, such as 'The transaction has been approved.'

8. Finally, funds are transferred from the customer's bank to the merchant account. They will be held there for a short period of time before being transferred to your company's bank account.

All of the steps involved in small business payment processing are completed in a matter of seconds. However, it usually takes 2–5 days for the funds to reach your company's bank account.

Why is payment processing important for small businesses?

The ability to accept and process payments online is critical to the survival of many businesses. Because online shopping is all about convenience, you must make the payment process simple, quick, and adaptable.

Online debit card, credit card, and mobile payment processing improves business cash flow. It provides you with a consistent and reliable stream of income that is quickly deposited into your merchant bank account. This provides you with quick access to funds that you can use to pay employees, suppliers, and other bills.

Credit card payment processing also contributes to the legitimacy of your company. Accepting payments from major financial institutions such as MasterCard and Visa demonstrates your commitment to your business and helps to build customer trust and confidence.

Online payment processing also helps to position your small business for the future. Accepting credit cards paves the way for accepting digital wallets. They are especially popular among younger users and can assist you in reaching that lucrative demographic.