Electronic Payment Processing

What is Electronic Payment Processing?

Electronic payment processing refers to a system of accepting and processing payments digitally. These payments include but are not limited to, credit card or debit card transactions, ACH payments, and e-checks. This typically involves using payment gateways and merchant services to authorize and process the payments and ensure compliance with laws and regulations related to financial transactions.

Effectively implementing an electronic payment system for your business requires understanding the options and the overall process. It will also require some research to determine which payment processor best fits you.

Different Types of Electronic Payment Processing

There are several different types of electronic payment processing, allowing consumers and merchants more flexibility on making and accepting payments. Offering more options to your consumers is typically a great idea because you can appeal to a larger audience. Here are the most common electronic payment methods.

• Credit card processing: This type of electronic payment involves credit cards such as Visa, Mastercard, and American Express. It typically involves using a payment gateway and merchant account to authorize and process the payments. These payments are usually processed through card networks, not individual banks.
• Debit card processing: Debit cards such as Visa and Mastercard debits are another type of electronic payment processing. This method works similarly to credit card processing, with the main difference being that the funds for the purchase are withdrawn directly from the customer’s bank account instead of being charged to a line of credit. In this case, the processing goes through the cardholder’s bank or financial institution to verify funds and identity.
• ACH processing: Automated Clearing House (ACH) processing is a system for electronic financial transactions in the United States. It is used for direct deposit of payroll, Social Security, and other government benefits, as well as for payments on bills and other financial transactions.

Financial institutions act as intermediaries between the payer and payee in ACH processing. ACH transactions are processed in batches, typically once per day, rather than in real-time like credit card transactions.

• Electronic checks (e-checks): An e-check is an electronic version of a paper check that can be used to make payments online or over the phone. Customers can authorize a merchant to withdraw funds directly from their bank account. The automated clearing house is used to process e-check payments.
• Direct debit (subscription or auto-payments): Direct debit is an electronic funds transfer system that allows customers to authorize merchants to withdraw funds directly from their bank account regularly. This is most commonly used in auto-pay situations where your bills or mortgage are auto-deducted from your bank account instead of paying them manually every month.

In eCommerce, the rapid growth of the internet created opportunities for many different technologies and services within the payments industry. One of the most notable services to emerge were eWallets.

• E-wallets: E-wallets, also known as digital wallets, are a type of electronic payment system that allows users to store and use digital versions of traditional payment methods, such as credit and debit cards, as well as other types of payment methods, such as loyalty cards and coupons.

Along with the internet, the evolution of mobile phones has allowed financial services to grow exponentially, including phone payments.

• Mobile payments: Mobile payments are electronic transactions made via mobile devices like smartphones and tablets. Transactions are usually processed through an app or mobile website, including contactless payments, mobile wallets, SMS payments, and more.

Some examples of e-wallets include Apple Pay, Google Pay, and PayPal. These e-wallets use near-field communication (NFC) technology to allow users to make contactless payments by holding their device near a merchant’s NFC-enabled payment terminal. These can also be used to make online purchases.

• Cryptocurrency: Cryptocurrency is a digital or virtual currency that uses cryptography for security. Cryptocurrency transactions are processed through a decentralized blockchain network, allowing for fast and secure transactions without a central authority. Online crypto payments are processed using blockchain technology, the underlying technology behind most cryptocurrencies.

When a customer confirms a purchase online and chooses crypto as their payment method, the transaction is broadcast to the blockchain network for validation. The transaction includes the customer’s public key, the merchant’s public key, and the amount of cryptocurrency being transferred. Once the transaction is added to the blockchain, it is considered confirmed. The customer’s digital wallet will be updated to reflect the new balance, and the merchant will receive the cryptocurrency in their digital wallet.

How Does Electronic Payment Processing Work?

Electronic payment processing is a secure and efficient way to process transactions and is a standard method used by businesses of all sizes to accept customer payments. Processing is slightly different from one payment type to the next. Each requires different actions and protocols, as indicated in the above section. However, the overall process typically involves the following steps:

1. Authorization: The customer’s payment information is sent to the payment processor, usually through a payment gateway, for authorization. This step verifies that the customer’s payment information is accurate and that the funds are available.
2. Settlement: Once the payment has been authorized, the funds are transferred from the customer’s card account to the merchant’s account. This process is known as settlement.
3. Clearing and Funding: The payment processor sends the settlement information to the customer’s and merchant’s banks. The customer’s bank verifies the transaction, deducts the funds from the customer’s account, and then sends the funds to the merchant’s bank. The merchant’s bank will then credit the merchant’s account with the funds.
4. Reconciliation: The payment processor reconciles the transaction, ensuring that the funds were transferred correctly and that the merchant has been credited for the sale. The payment processor then sends a statement to the merchant detailing the transactions that have taken place and the funds that have been transferred.
5. Chargeback: In case of any disputes or errors, the customer or the merchant can initiate a chargeback, which is a transaction reversal. The payment processor will investigate the chargeback and will take the appropriate action.

Pros and Cons of Electronic Payment Processing

Electronic payment processing has many benefits and is typically necessary in today’s marketplace. However, it also has some drawbacks. Understanding both sides of the issue is important before making decisions for your business. Some of the pros and cons of electronic payment processing include:

Pros:

• Convenience: Electronic payment processing allows customers to make purchases quickly and easily without needing cash or checks.
• Security: Electronic payment processing is generally considered more secure than traditional methods, as sensitive information is encrypted and transmitted securely.
• Increased sales: Electronic payment processing can increase sales, allowing businesses to accept payments from customers who prefer to pay with cards, e-wallets, or other methods.
• Time savings: Electronic payment processing eliminates the need for manual processing of checks and cash, which can save businesses a significant amount of time.
• Data tracking: Electronic payment processing allows businesses to track and analyze transaction data, which can help identify trends and make informed business decisions.

Cons:

• Fees: Electronic payment processing can be expensive, as businesses must pay transaction fees to the payment processors. In addition to the processors’ fees, merchants are responsible for other fees charged by card networks and financial institutions.
• Potential fraud: While electronic payment processing is generally considered more secure than traditional methods, it is still vulnerable.
• Technical difficulties: Electronic payment processing systems can be complex, and technical problems can occur, which can disrupt business operations.
• Risk of chargebacks: Electronic payment processing increases the risk of chargebacks, which are transaction reversals. Businesses may face financial losses if chargebacks are not appropriately handled.
• Dependence: Merchants may become dependent on electronic payment processing, which can be a problem if the system goes down or if there is a power outage. A backup plan to take payments is highly recommended when the system goes down.

Conclusion

Overall, electronic payment processing offers many benefits and can be a valuable tool for your business. It’s crucial to weigh the pros and cons before implementing it. If you’re already running electronic payments, take the time to discuss current challenges with your processor. Finding solutions to those challenges can help your business run more efficiently.