How Online Payments Really Work - Part 2: Payments
In part 1 of “How Online Payments Really Work”, we focused on the three players – the merchant, the customer and the technology. In part 2, we’ll emphasize payments.
As a business owner, it’s helpful to understand exactly how money moves from your customer to you. There are two stages to payment processing: the authorization (approving the sale) and the settlement (getting your money into your account).
The transaction goes roughly like this:
- Your customer buys an item on your site with a credit or debit card.
- That information goes through the payment gateway, which encrypts the data to keep it private, and sends it to the payment processor.
- The payment processor sends a request to the customer’s issuing bank asking for the money to pay for your stuff.
- The issuer responds with a yes (an approval) or a no (a denial).
- The payment processor sends the answer back to you that the sale was approved and also tells your merchant bank to credit your account.
All of the above takes place within 1-2 seconds.
The second piece of the process (where you get paid!) is the settlement:
- The card issuer sends the funds to your merchant bank, who deposits the money into your account.
- The funds are available. Sometimes, your bank lets you access your money before it’s even sent to them. They also might keep a portion in your account that you can’t touch, just in case there are things returned from customers later (called a reserve in payments speak).
This half of the process can take a few days.
To learn more, visit PayPal Stories next week for part III where we’ll focus on pricing.
Dan Leberman, VP and GM, North American Online Small & Medium Business, PayPal