What Is Online Payment Processing, and How Does It Work?

April 07, 2022 |

Online payment processing is a term used to describe how businesses complete debit and credit card transactions when engaging in e-commerce or online business activity and is an integral aspect of the property management ecosystem. The rapid evolution of modern payment processing did not initially include online payments. The first modern-day credit card wasn’t issued until 1966 by Barclays in the UK, and the first debit card was only issued in 1987. Nevertheless, one of the first companies to execute an online payment was Pizza Hut in 1987, when they made it possible for consumers to order pizza delivery on their homepage.

This form of payment is now the norm and touches every aspect of our daily lives, yet very few people fully understand the process in its entirety. 

So, how does it work?

The Process

Step 1: The customer selects the product or service they desire and proceeds to checkout.

Step 2: The customer selects from the relevant payment options, which include credit/debit card or e-wallet and wire transfers. Examples of e-wallets and wire transferring services include PayPal, Venmo, ACH (in the US), Sepa (in the EU), and Trust Wallet (in Australia). 

Step 3: The customer’s payment information is collected and sent as encrypted transaction data to the payment processor. This is enabled by a payment gateway, which is a consumer-facing interface used to collect payment information. With online shopping, this comes in the form of a checkout portal, where credit card information can be entered. Payment processors, meanwhile, use customer information to collect payments on behalf of the merchant. Therefore, the gateway securely transmits data to the processor, so money from the customer’s issuing bank can be transferred to the merchant’s account. 

Step 4: The transaction details are sent to the issuing bank for authorization. 

Step 5: The issuing bank authorizes the payment. 

Step 6: The acquiring bank is informed about the payment authorization. The merchant—the individual who sells the goods—needs to partner with and acquire the services of this bank in order for their business to operate financially. The acquiring bank facilitates all electronic payment transactions on behalf of the merchant. 

Step 7: Funds are transferred from the customer’s bank account to the merchant’s account. The merchant account is a business bank account that allows the business to accept and process electronic payment transactions. One of the key factors determining the merchant’s choice of account provider is transaction costs. 

The agreed amount of funds to be transferred is called the settlement, which also refers to the reporting of the net financial position of issuers and acquirers for all transactions that are cleared. 

Another term commonly associated with this step of the process is merchant processing, which is the settlement of debit and credit card payment transactions by banks for merchants. This also involves gathering sales information from the merchant, collecting funds from the issuing bank, and paying the merchant. 

Online Payment Processing for Property Managers

Professional property managers need to have secure and efficient ways of accepting online payments if they want to succeed in the short-term rental industry. While certain channels provide property managers with built-in payment features, those who accept direct bookings will often have to find reliable payment solutions on their own. Property managers should consider the following factors when deciding how to receive and process guests’ payments: convenience, security, ability to integrate, and mobile compatibility. Additionally, It is essential for property managers not to rush their decision and to take their time in verifying that a processor ticks off the right boxes to match their unique business needs.

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