All You Ever Wanted to Know About Payment Processing

The global population has finally surpassed 8 billion people in the second half of 2023. In the perspective, that’s a lot of potential online buyers. As the number and volume of online payment methods are growing simultaneously with the world’s population, people exchange more assets than ever in the digital realm. 

Each such transaction is part of payment processing, i.e., the procedure that ensures that money is sent and received in a secure and smooth manner. 

This article delves into all you ever wanted to know about payment processing.

What Is Payment Processing?

Payment processing is a process of mediating monetary transactions between consumers, merchants, and financial institutions. 

It ensures that the money sent by the consumer is securely verified and submitted to the receiver, i.e., the merchant. 

TPP Intel: Every business, big or small, must seek a secure and convenient payment processing provider, to safeguard its assets and ensure financial growth. Our billing and processing experts, united with the high-tech payment gateway, simplify your financial activities and let you focus strictly on your core business operations. 

The Main Elements of Payment Processing

Payment processing comprises the following participants:


A consumer – aka a cardholder – is a person who opens an account at an issuing bank and buys tangible goods or digital services using a debit or debit card linked to that account. 

Consumer’s Bank

The consumer’s bank, also called the issuing bank, confirms that the consumer meets the legal and financial requirements to open an account and use a bank card to make payments or receive money. 


A merchant is a company or natural person from whom the consumer buys tangible goods or digital services. 

In a payment processing procedure, this entity is on the receiving end (no pun intended), i.e., they receive the consumer’s funds on the merchant account, opened at their acquiring bank. 

When the consumer makes a payment for the purchased items, the merchant forwards the payment data to the acquiring bank. This data is then sent to the consumer’s bank – the card issuing bank – through a card association company (Visa, American Express, MasterCard, or any other). Once the issuing bank verifies that the submitted data is correct and the consumer has enough money on their account, it accepts the transfer request and sends the money from the buyer’s account to the merchant account. 

Conversely, if the consumer’s bank card information is inaccurate or there aren’t enough funds on the linked account, the transaction request is rejected. 

Digital Wallets and Payment Processing

Google Pay, Apple Pay, Samsing Pay are only some examples of digital wallets. As the report released by Juniper shows, the global value of digital wallet transactions will go over $9 trillion in 2023, with the prediction of reaching $16 trillion in 2028. 

Given that many Internet users – especially younger consumers – pay their subscriptions using digital wallets, ThePayPortal handles such payment processing requests with ease. 

In this case, when a buyer makes the payment, the merchant forwards the transfer data to the wallet operator, which then submits it to the acquiring bank, payment processor, and all other relevant entities. 

Merchant’s Bank

A merchant’s bank is a financial entity that opens and maintains a merchant account on merchant’s behalf. 

Whenever a customer buys a product or service from that merchant through a credit or debit card transaction, this acquiring bank collects the money and sends it to the merchant account.

TPP Intel: Bear in mind that a merchant account is not the merchant’s business bank account. It’s rather a pit stop where the assets are collected until the settlement has been completed. The merchant and their bank arrange a certain settlement date, at which the money kept in the merchant’s account is forwarded to that business bank account. 

Payment Gateway

A payment gateway is the digital counterpart of the offline POS terminal. Picture it as cutting-edge, technically secure software that allows for a free flow of financial information between the merchant’s website and the consumer’s bank, which confirms that the transaction can be accepted or rejected. It’s the payment gateway that contains all the tech features necessary for fraud detection and data protection. 

Payment Processor

A payment processor is a financial entity that serves as the middleman between merchants, merchant banks, credit card companies, and all other parties included in card transactions. Its key obligation is to keep all the relevant payment processing procedures in compliance with the Payment Card Industry Data Security Standards (PCI DSS). 

Credit Card Companies

Credit card companies are financial organizations that determine payment terms and conditions, guidelines, and interchange rates for all interested parties in card payment processing. 

The popular and widely used ones are Visa, American Express, Discover and MasterCard. Also, national regulatory bodies can allow the issuance of domestic credit cards. 

Every financial institution that issues a bank card must do it in accordance with the principles issued by these companies. 

When a dispute occurs between an issuing bank and a merchant’s bank, it is the relevant credit card company that mediates in the process. 

The Main Steps of Payment Processing

Now that we know who’s who in the payment processing procedure, let’s see what happens behind the scenes as you enter your card information for a digital purchase or swipe it at a POS-terminal.


In the authorization stage, each participant in the payment procedure proves and verifies they’re eligible to carry out the operation in question, in order of appearance:

  1. The consumer, i.e., the cardholder, decides to buy a digital product and enters the credit card number at the merchant’s checkout. For an online transaction, the payment request is forwarded through a payment gateway. For a payment at a brick-and-mortar shop, the payment request is sent through a POS terminal.
  2. The merchant submits the payment request for authorization to their selected payment processor, or a digital wallet, which then sends it to the payment processor. 
  3. The payment processor forwards the payment request to the card company in question, with a notice regarding the issuing bank. 
  4. The issuing bank gets the transaction request and credit card data – the card number, verification value (CVV), address verification services (AVS), and expiration date.
  5. Having received all the relevant payment info, the issuing bank accepts or declines the transaction. If the payment request has been rejected, it means that there’s not enough money on the consumer’s card/account, the account is out of order, the card has expired, or the due date has passed. 
  6. The issuing bank sends the notification on the acceptance/rejection of the payment request to the merchant (acquiring) bank, relevant card company, and the merchant. 


Once the transaction request has been approved by the issuing bank, the last phase of each payment processing procedure is settlement. At this stage the merchant should receive the funds that the buyer has paid for the goods or services in question. 

Here’s how payment processing settlement works:

  1. The merchant delivers a batch of authorized transactions to their payment processor. 
  2. The payment processor sends the payment information to the relevant card company. 
  3. The issuing bank receives a notification from the card company regarding that payment and withdraws the requested funds from the consumer’s account. 
  4. The issuing bank sends the desired amount of money – minus the interchange fees – to the merchant bank.
  5. The merchant bank transfers the funds to the merchant account. 

TPP Intel: The credit card interchange calculation is a science of its own. Card companies charge their part, payment processors have their fees, and issuing/acquiring banks also take their share. We’ll cover this topic in one of our new blog posts. 

The Final Word

This was our crash course in payment processing. By now, you have learned the role of each participant in online and offline payments, as well as the stages of the authorization and settlement procedures. Every merchant out there, regardless of the industry, should have their designated payment processor to handle the payment operations. ThePayPortal provides merchant account, payment gateway, and fraud-prevention services. Contact us for more information and we’ll prepare a tailor-made offer for your payment needs.