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Your guide to payment processing for small business

What is payment processing?

Payment processing is a series of actions that facilitate digital payment transactions. It may include opening secure gateways, processing credit card information and initiating a funds transfer from the customer’s bank. 

Payment processing differs from payment processors — the payment processor is a service provider that coordinates the payment process with the merchant and the customer's financial institutions. “Payment processor” isn't a universal legal term and can also be called “payment service provider” or “acquirer.” 

Types of payment processing

There are several types of payment processing, including credit cards, debit cards, and digital and mobile wallets. 

The debit card process is similar to credit card processing, but the bank doesn't issue credit. If the customer has the required funds in their account, the payment processes quickly. Debit card processing fees are often much lower than those for credit cards. 

Digital wallet payments use third-party payment processors like Apple Pay, PayPal and Google Pay. They’re convenient for customers, and processing fees are often similar to credit cards. 

Components of payment processing

Payment processing can be complex, involving multiple components that work together to facilitate the process. Among them include:

  • The customer, the person who wants to make payment

  • The merchant, the business that accepts payment from the customer

  • The payment method, such as credit and debit cards, digital wallets

  • The point-of-sale (POS) system, responsible for processing sales

  • The payment processor, which handles the actual transaction, including validating payment information

  • The payment gateway, which captures and transmits payment information securely

  • Payment security, including technology and regulations to protect businesses and customers from fraud

  • The card network, including Visa and MasterCard, that establishes transaction standards and infrastructure

  • The acquiring bank, the merchant's financial institution

  • The issuing bank, which authorises or declines transactions based on available funds and account status 

  • Settlement and reconciliation, which involves transferring funds between financial institutions and creating transaction records.

Understanding the payment processing cycle

The payment processing cycle varies depending on the chosen payment methods and the parties involved, but there are four steps in most standard cycles. 

1. Transaction initiation

The consumer makes payment, either by paying an online invoice for goods or services or using an online checkout process. They’ll choose a payment method and provide their information through the point of sale.

2. Verification and authorisation

The payment processor receives and verifies the customer’s transaction information. 

The first step is obtaining authorisation from the customer’s credit card issuer or bank. This is accomplished through a series of secure messages between the customer’s bank and the merchant’s payment processor using the Payment Card Industry Data Security Standard (PCI DSS) protocol. 

The bank or card issuer assesses the available funds or credit in the customer’s account and then approves or denies the transaction. Customers must use an alternative payment method if the financial institution denies the transaction.

3. Transaction completion and fund capture

After receiving authorisation, the payment processor captures and holds funds. This involves creating a transaction record and deducting funds from the customer’s account. The processor keeps the funds in a temporary holding account until the transaction is complete. At that point, they release the funds to the merchant. 

4. Settlement, reconciliation and reporting

During the settlement process, the merchant receives payment. They “settle” transactions with their sales records, including transaction fees charged by the acquiring bank or payment processor. The merchant and the customer receive transaction records reflecting the completed payment. 

Many payment processing tools batch and process transactions automatically, though some require manual input.

Payment processing best practices for small business

Consider your customers

Offering your customers’ preferred payment methods can improve their experience and increase the likelihood that they’ll pay promptly. Customers often prefer electronic credit and debit cards, though tap-and-go digital wallets are also popular. Offering a variety of different payment options can work in your favour, helping you sell more and collect online invoice payments faster.

Pick a processor that fits your budget

Payment processors have different pricing structures, so select one that aligns with your business’s industry, sales volume, budget and invoicing process. Keep in mind that many payment processors charge higher fees for online transactions due to fraud risk.

There are three common types of pricing:

  • Interchange-plus pricing consists of the interchange rate plus an additional markup, which may be a percentage of the purchase price, a fixed cost or a combination of both. Interchange rates may vary between transactions, making it less predictable than flat-rate or tiered pricing for large businesses.

  • Flat-rate pricing uses a single rate for all transactions, regardless of interchange rates. You may, for example, pay the interchange rate plus 30 cents for each online order. While this can be predictable, it may be more expensive. 

  • Tiered pricing combines the interchange-plus and flat-rate pricing models. In these models, interchange rates are divided into tiers, each with its own costs. You may pay 1.5% + 20 cents for a debit card and 2.9% plus 30 cents for a branded company credit card. Rates are often lower than flat-rate pricing, and costs are more predictable. 

Some payment processors won’t publish pricing on their site, but it's worth the effort to get a quote if you like the features they offer. There may be differences in rates among processors based on factors like sales volume, industry or subscription level. 

Focus on security to reduce vulnerabilities

Security and privacy are essential for payment processing. Robust security measures can protect your customers’ sensitive payment and purchase information. You should also do the following:

  • Implement fraud prevention tools like card verification value (CVV) and address verification service (AVS).

  • Monitor all transactions for unusual activity that may indicate fraud.

  • Use a reputable payment processor that offers secure payment processing, fraud detection and strong customer support. 

  • Update all payment processing services and software regularly to reduce any vulnerabilities in the system. 

  • Comply with PCI DSS regulations and all established security standards.  

Make the most of payment data

Payment processing platforms provide payment data, often with advanced analytics regarding sales. You can take advantage of that by looking for trends, new opportunities and potential speed bumps in the checkout process.

You may also find that some customers prefer certain payment methods, so offering those options more readily during checkout can increase sales.

Get paid faster with MYOB

MYOB is a business management platform with in-built payment processing for all the major credit cards, BPay, Apple Pay, Google Pay and PayPal.

With MYOB, you can invoice customers, track the status of outstanding invoices, accept payments and account for income, expenses and GST to make tax time easy. 

And as an open platform, you can also connect your online store to MYOB. Check out the MYOB App Marketplace to see what integrations are already available.

Get started with MYOB today.

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