Payment Processing: Explained
What is payment processing?
Payment processing is the process of taking the series of numbers on your clients’ credit cards and turning it into real money in your bank account. The payment processor (either a bank or a third-party) has to verify that the numbers are correct, make sure that the person using the card is authorized to spend the money and then kick off all the steps to make sure that the money is moved from your client’s bank into your own.
There are three steps to payment processing:
Authorization is just how it sounds - that’s the part of the process where the processor is making sure that this payment is ok to proceed on through. They are checking to make sure the cardholder has enough credit available and whether the card is valid.
Settlement is the process of managing the electronic payments part of the process. You send your transaction information to your credit card processor, they send the transactions through the payment brands (like Mastercard, Visa, etc.) in batches to be cleared. This piece is called interchange (and that’s where you get those nice little interchange fees on your processing statement).
This is really a second phase of the settlement process, but this is where your processing company deposits the money into your bank account.
What does that look like?
Your client enters their Chase Visa card information on your website to pay you (yay!)
Your processor checks out their information to make sure it’s legit and to approve the payment to go through (Authorization).
The card gets approved and the transaction gets put into a batch of other transactions that get sent by your processor to Visa for payment. Visa charges Chase for the transaction amount and pays your processor that same transaction amount (and charges your processor fees). (Settlement)
Your processor then turns around and deposits the money that Visa just paid them into your bank account (and charges you some more fees). (Funding)
Why do you need a payment processor?
So your clients can pay you via credit card (or bank transfer). Without a payment processor, you can’t actually get that money into your bank and you have no way to ensure the credit card information is valid, that the card hasn’t been stolen or to make those series of numbers on the front of them into actual dollars in your account.
You could skip having a payment processor, but that would leave you the option of only accepting checks, ACH transfers through your bank and cash - and you really SHOULD accept credit cards.
Yes, merchant processing fees suck. No, don’t charge your clients the fees. It’s a cost of doing business in today’s online world - build it into your prices.
Major payment processors
There are a few major payment processors floating around out there that are the easiest ones to choose from.
Stripe, Paypal, Braintree, and Authorize.net are the big dogs in the online payment processing world. Most SaaS tools that allow you to accept payment have connections built to one or more of these services already.
Credit Card Processing Fees
Most of the online payment gateways now charge about the same (it’s usually 2.9% + 30 cents per transaction). If you have a physical location with a physical credit card machine that you’re swiping cards through, you’ll easily be able to find a processor with lower fees. Swiping cards charge lower fees because there is less of a risk that the card is stolen. Lower risk, lower fees.
With an online or virtual gateway, anyone could be typing in any series of numbers, whether they’re the cardholder or not, so the risk is much higher in online transactions, which is why the fees are higher.
Ease versus Cost
When it comes to selecting a processor, particularly in the online world, fees aren’t always the most important part of the decision. With most of the major players charging the same fees, it comes down to ease of use.
Stripe and Paypal are the easiest to integrate. Most SaaS tools have connections built to one of those services, so it’s easy to just sign into your Stripe account and voila, you can process payments just about anywhere.
Authorize.net is slightly lower on fees, but more difficult to hook up, even if the software says that it connects to Authorize.net to process your payments. It’s also not as reliable, in my experience, as Stripe or Paypal when it comes to processing, particularly international payments.
So, your choice is reliability + ease, or slightly lower fees. It’s always a trade-off.
When we’re selecting and integrating payment processors for clients, we normally recommend Stripe because of the reliability, fast deposit times and ease of integration with just about anything. Our focus is always on selecting tools that just work, and Stripe is a set-it-and-forget-it kind of solution. It's not the cheapest, but it's certainly the easiest to deal with. And we love easy.