Businesses are the backbone of society. However, in order for a business to function, it needs to get paid for its goods or services. In the past this was a fairly straightforward process. Merchants received cash or checks for payment.

Things are a bit different today. Cash and check transactions represent a smaller and smaller percentage of overall transactions. More people are using electronic means of payment than ever before. This includes things like credit cards and debit cards. It also includes things like eChecks, online sales, and payment apps that let people pay using their smartphone as a wallet.

This situation has dramatically increased the speed of commerce. It’s given consumers more ways to pay. It’s also given merchants more ways to sell their goods and services. But it’s also created a new challenge, how do you get paid for the goods and services you’re selling?

The answer is payment processing. This article will cover the basics of payment processing. It goes over the different types of payment processing. Finally, it walks you through the steps you should take to find the best payment processing service for your business. Use this information to boost your profit margin and grow your business.

What is Payment Processing?

Payment processing is the series of steps that allows you to get paid for your goods and services when someone uses a card. There are several steps to successfully process a payment. Even though there are many steps, and some of them are quite complex, modern payment processing services reduce the time needed to mere seconds.

Broadly speaking, there are 3 steps to payment processing. Authorization, settlement, and funding. Let’s look at each step so you can understand exactly what this service entails.

Step 1: Authorization

Authorization is an essential step to payment processing services. Without authorization you can’t accept credit card payments. This undermines your business and hurts your ability to make sales.

The authorization process confirms whether or not your customer has enough credit or funds to pay for the goods or services you’re selling. Authorization also ensures that the card the customer is using is valid. The authorization process can start in several different places, including a credit card machine, over the phone, or through your website.

The authorization steps are as follows:

  1. The customer gives you their credit card information to make a purchase. They can do this over the phone, in person at your store, or online on your website.
  2. You send the customer’s information to your payment processing service.
  3. Your payment processing service checks with the card payment brand, like Visa or Mastercard.
  4. The payment brand then sends your request to the organization that issued the card. This is usually the customer’s bank or credit union.
  5. The card issuer either approves or denies the transaction based on the funds in the customer’s account. They send this information back to the payment brand.
  6. The payment brand forwards the response to your payment processing service.
  7. The payment processing service sends the response back to you so you can either complete the sale or ask for another form of payment.

Step 2: Settlement

Once you’ve made the sale, the process isn’t over. Now the payment needs to be settled. Settlement refers to the act of clearing and funding electronic payments.

You present the approved transactions to your payment processing service. The payment processing service then submits the transactions to the payment brands to be cleared. Sometimes these transactions are called deposit transactions.

The steps in settlement are:

  1. You submit your transaction information to your payment processing service. You can do this a few different ways. One of the most common is to send the transactions as a “batch” at the end of the day. Most merchants do this through their point of sale station or credit card machine.
  2. The payment processing service forwards the settlement request to the payment brand.
  3. The payment brand confirms the transaction with the customer’s card-issuing bank.
  4. The payment brand then issues credit to your payment processing service so that you can get paid. The card issuer then pays your payment processing service.
  5. The customer’s card issuer puts the transaction on the card’s account. They send a list of all transactions to your customer at the end of the month in the form of a monthly statement.

Step 3: Funding

So far, the payment processing steps involve a lot of communication between banks and payment brands. However, this last step is where you finally get paid. Your payment processing service deposits money into your bank account for the transactions processed.

Sometimes people roll steps 2 and 3 together. When they do this, the entire process is called settlement. This information won’t affect your services, but it’s good to know that some companies use funding and settlement interchangeably so that you don’t get confused when you’re researching different payment processing services.

Are there Different Types of Payment Processing?

Different payment processing companies work with different types of payments. Some companies cover more payment types than others. It’s important to understand how your customers like to pay for your goods or services when you’re deciding on a payment processor.

For example, if most of your customers pay with an American Express card, you’ll want to be sure your payment processor works with American Express. The same is true for merchants who get paid with automated clearing house, or ACH payments, or those that take eChecks.

Credit Card Payment Processing

Credit card payment processing is the basic steps described above. The main differences between payment processors when it comes to credit card processing are the cards they work with. Nearly every payment processing service works with Visa and Master Card. However, not everyone works with other cards, like American Express or Discover.

Sometimes payment processing services will work with other payment brands. But they’ll charge a higher fee for working with those brands. That’s one of the reasons that every business doesn’t accept every card. A business owner or operator needs to be sure that the extra fees are worth the amount of revenue they’ll create by accepting another payment brand.

ACH Payment Processing

Automated Clearing House, or ACH, payment processing is similar to credit card payment processing. The main difference is that the transactions go through an automated clearing house instead of payment brands.

ACH is an increasingly popular way to transfer funds. The funds are usually made available quickly. It can also involve fewer fees for both the customer and the business. Moreover, it saves customers money because they can use cash directly from their bank accounts instead of using a credit card and incurring interest.

eCheck Payment Processing

Some companies accept payment via eCheck. This is similar to ACH payment processing. However, the payment processing company communicates directly with the bank instead of a clearing house or payment brand.

Businesses realize that not everyone has a credit or debit card. There are still some people who prefer to conduct business or buy goods and services using old-fashioned cash and checks. eCheck processing is an important aspect of getting paid for companies that have a wide customer base. Some examples include utility companies and doctors offices.

How Do I Get the Best Payment Processing Service?

Finding the best payment processing service can be tricky. After all, different businesses have different needs. Finding the best payment processor is a matter of getting the right combination of features and fees to maximize your business’s profit.

Moreover, payment processing services can set up their fee structure in different ways. This can make it difficult to do an apples-to-apples comparison of payment processing services. This situation also applies to merchant services generally.

One helpful way of approaching this problem is to calculate the total percentage of your transactions that will go toward covering payment processing fees for different providers. For example, one payment processing company might have nominally lower rates, but include fees that increase the overall cost of services. If you find that it will take 8% of your sales to pay for company A’s services, and 6% of your sales to cover company B’s services, then company B is a better choice for your business.


The first thing you should look for in a payment processing company is transparency. The best payment processing services offer interchange-plus pricing. That means they charge a fixed amount on top of the cost of conducting the transaction.

This pricing system creates predictability when it comes to your merchant services costs. And any business owner will tell you that predictability to essential when it comes to making plans to grow your business.

You should also check out what kinds of fees each company charges. Some companies don’t charge any additional fees. Others include a fee for starting up your payment processing service, fees for accepting specific payment brands, fees based on the volume of transactions, and more.

Many companies don’t advertise all of their fees on their website. Therefore, you’ll need to call or email customer services to get a complete list of fees. Have basic information about your business ready. That includes things like the number and value of your transactions. Ask them for a bottom line figure given the information you have. This will give you a clear idea of which payment processing service creates the most value for your business.

Value-Added Benefits

The next thing you should look for in the best payment processor is the value-added benefits they offer. Many companies that offer payment processing services also offer other merchant services. This includes things like a payment gateway and merchant accounts.

That means you can consolidate your merchant services into one account with one company. This can be good for some businesses, but it might not be the best option for everyone. The best way to determine this is using the total percentage of transactions method described above.

One of the reasons why you might consider using one company for your payment processing and other merchant services is that the company will usually waive some of the standard fees. They’ll also throw in extra benefits. For example, many companies will provide you with a point of sale system for your brick and mortar store. They might also include things like scheduling and payroll software or the ability to do a customer rewards program.

Whether or not these things are worth it depends on your specific business model. For example, if you don’t have a brick and mortar store, then you don’t get any value from a point of sale device. In the same way, if you don’t conduct business online, then a payment gateway doesn’t add any value to the service for you.

Payment Processing Reviews

The final thing you should do when looking for the best payment processing service is look at reviews for different payment processing companies. Payment processing reviews will give you a better idea of how the company treats its customers. You can find out important information, like how often there are network outages or what kinds of problems other people have had.

One thing that’s important to keep in mind when looking at reviews for payment processing companies is that payment processing is the kind of service that people will go out of their way to give good reviews for. When it’s working properly it’s easy to forget it exists. Therefore, don’t be put off when you find that almost every payment processor has more bad customer reviews than positive ones.

Instead, the way you should evaluate these reviews is by seeing how the company responds to them. Check for follow-ups and try to understand how responsive the payment processing service is to their customers.


In the end, you need to get paid for your business. The modern mode of commerce, online transactions, credit cards, debit cards, and eChecks, means that you’ll almost certainly need a payment processing service to make your business a success. Use the information in this guide to pick the best payment processing service for your business.

See also  The Positive Points and the Drawbacks Small Businesses Consider About Credit Cards