How Does Online Payment Processing Work?

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How does payment processing work online? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.

Answer by Alec Maddison, works at Internet Brands, on Quora:

How does payment processing work online? There is not a single payment process with which to answer this question. Broadly speaking, you can divide the process of payment making methods into two categories: payment cards and everything that is not a payment card.

For the purposes of this question I will describe the typical process for payments through cards (e.g. credit, debit, prepaid, etc). These processes will not necessarily be the same for services that offer voucher or account based payment (e.g. PayPal, Neteller, etc), which again may or may not be markedly different from each other. For the latter category of payment methods you will need to read the specific documentations to understand the logical flows.

The typical payment life cycle begins with an authorization request from the merchant to a layer known as the payment gateway that sits between the merchant and the payment card issuing authority’s payment processor. A payment gateway (e.g. Datacash, Trustmarque, etc.) provides, among other services, routing of requests from merchants to the issuing authorities (e.g. your bank or card provider).

The authorization request to the payment gateway will have the effect of checking with the issuing authority via the payment processor if a transaction can occur for the payment card details provided. Checks that may happen at this stage include, but are not limited to, validation of card number, expiry date, card status and fund availability.

In systems that hold the concept of an account balance the result of the transaction will generally be reflected as debited or credited at the point of authorization. However, the transaction will not yet have been debited or credited to the account associated with the payment card.

Following authorization, the merchant will send a settlement request to the payment gateway and the same chain of events will occur as it would for the authorization request with an important difference. The additional step taken for a settlement request is to remove or add the funds to the account associated with the payment card and subsequently perform the opposite transaction to the account associated with the merchant.

The settlement request may happen immediately following authorization, or according to a time span governed by conditions that may include business logic, regional regulation and type of product.

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