- Payment processing is how your money gets from your bank account to someone else’s when you pay for something; in other words, it’s essential for our modern world.
- Payment processors are the companies who handle the transactions of finances from one account to another.
- AI and blockchain technologies are set to significantly impact this massive industry, which is expected to be valued at nearly 20 trillion by 2026.
Payment processing is crucial in our digital age, as it handles daily transactions such as booking flights and paying mortgages. These systems must be efficient and secure.
Whether you’re handling personal or business transactions, understanding the ins and outs of payment processing is not negotiable. It helps with making informed decisions and ensuring secure and efficient transactions.
Who Are the Payment Process Stakeholders?
The principal parties involved are:
- The payer: The payer is the individual or organization making the payment.
- The payee: The person or entity that receives the payment. The payee might be a person, firm, or organization.
- The financial institution: Financial establishments are responsible for handling the transfers between buyers and sellers. The financial institution is typically a bank or a credit card company.
Depending on the payment method and platform used, other parties may also be involved:
Secondary payment parties may include:
- Payment processors: What is a payment processor? The company or service that facilitates electronic transactions between different parties. Electronic payments are made using debit and credit cards, and online payment processing services make this happen. Regarding payment processing, the processors often collaborate with merchants and vendors.
- Merchant: A merchant receives payments from clients in exchange for their products or services.
- Payment provider by 3rd party: The third-party payment providers act as intermediaries and facilitate the transfer of funds between merchants and their customers.
Be sure to be in the habit of exercising caution when transacting.
How Does Payment Processing Work?
Payment processes may differ depending on the website or service being used. In general, the payment process involves a few key steps:
- The buyer selects the item or service they want to purchase and the payment option.
- The purchaser inputs their payment information, including credit card specifics or other account details.
- The funds are safely transferred from the buyer’s account to the seller’s account through a trusted gateway.
- The seller receives the payment notification, fulfills the order, or provides the service.
- The buyer may obtain confirmation of the payment and their order or service status.
Different platforms or services may have other payment policies or procedures, such as holding funds until an order is fulfilled or offering refunds in certain situations.
Getting in the habit of thoroughly reading the terms and conditions will work in your favor. When processing payments, ensure you understand the terms and pay close attention to the fine print. This knowledge will help you avoid falling into unnecessary pitfalls.
What Are the Main Transaction Types?
The primary transaction types are cash, credit, and debit transactions.
- Cash transactions involve exchanging physical currency, such as coins and bills or notes, between the buyer and seller.
- Credit transactions entail using credit cards or lines of credit. In this instance, the buyer undertakes to repay the borrowed sum with interest over time.
- Debit transactions are immediately deducted using a debit card from the buyer’s bank account to supply funds.
- Wire transfers include check payments, and online payment options are alternative types of transactions.
Which Payment Processing Fees Should You Consider?
Payment processing expenses vary based on the payment type and the payment processor. Here are some expected costs to consider:
- Processing fees: The payment processor charges processing costs. They are typically a percentage of the transaction.
- Chargeback fees: The payment processor may assess a chargeback cost if a client disputes a transaction.
- International fees: If you process payments from customers in other countries, there may be additional fees for currency conversion or processing international payments.
- Integration fees: Integration of the payment processing system with your website or application may incur additional fees. Examine payment processing costs and select a provider with transparent and competitive pricing.
- Transaction fees: a fee per transaction that the payment processor charges for each transaction.
What Are the Pricing Structure Options?
Depending on the purpose of the type of transaction, there are a few pricing structures to choose from. The most widely used pricing structures include flat-rate, interchange-plus, and tiered pricing.
- Flat rate: The payment processor charges a fixed percentage of the transaction value, often around 2.9%, plus a fixed fee per transaction.
- Interchange-plus pricing involves a markup on top of the interchange fee charged by card networks, with the markup often being a fixed percentage plus a per-transaction fee, typically ranging from 1.5% to 2.5% of the transaction amount.
- Tiered pricing entails categorizing transactions by volume, card type, and value and charging them differently.
There are numerous pricing structures to choose from. Each with its unique selling points. You’ll need to make choices tailored to your goals.
What Does the Future of Payment Processing Have in Store?
When we analyze current payment process trends, it’s easy to foresee that ongoing technological advancements and rapid changes in consumer behavior will powerfully drive the future of payment processing.
Current payments trends that are setting the tone for the future of payment processing:
Mobile payments: This way of payment processing is expected to become the dominant form of payment in the future as it continues to gain widespread popularity.
Digital wallets: Serve as storage for consumers’ payment information and allow for quick and easy transactions. Digital wallets are becoming more popular as consumers seek convenience and security. Recent research shows that the digital payment market is anticipated to rise to $ 19.89 trillion by 2026, translating to a compound annual growth rate (CAGR) of 24.4%.
Contactless payments: Examples are tap-to-pay and QR code payments, also growing rapidly. This shift was motivated by the increased emphasis on contactless transactions that followed the COVID-19 epidemic.
Blockchain technology: Blockchain technology is breaking new ground in secure and transparent processing methods. This trend is expected to revolutionize the payment and verification processes.
Artificial intelligence (AI): AI is expected to play an increasingly more significant role in the future of payment processing. Using AI technology will improve malpractice detection and reduce fraud. AI also improves transaction speed and accuracy and provides personalized customer experiences.
With technology playing a larger role in transactions, and based on current trends, the future of payment processing is on a positive trajectory, becoming increasingly convenient, fast, and secure.
With a solid understanding of payment processing, you’ll be better positioned to make more confident decisions when handling your payment processes. When you constantly equip yourself with up-to-date information, you are better positioned to choose a payment process that aligns with your goals.
Feeling more confident about payment processing? Check out this post to learn more about payment processor partnerships.
At Segpay, we feel the answer to which is better, a monthly vs. annual subscription is that there is no definitive answer we do know that the subscription market is a great place for company growth. UBS, a financial services firm, predicts the “subscription economy” will grow to a whopping $1.5 trillion by 2025, more than doubling its current $650 billion, according to the Washington Post.
Even businesses not traditionally linked to subscription models are embracing subscription strategies (e.g. look at what the movie theater business is strategizing to retain customers who now have plenty of streaming options). We feel businesses should evaluate all the pros and cons to determine which option best suits their brand while simultaneously meeting the needs of their primary audiences.