Varos Glossary

Payment Processing

What is Payment Processing?

An ordinary payment is only one side of a trade in which one party provides money and the other party provides goods or services in exchange. The recipient of the payment gets the seller's products or services in exchange for the money.

Sometimes an issue arises that prevents a transaction from going through. It might be that the vendor requires an alternative form of payment or identity, or that the transaction was denied.

It's annoying for the customer, but the bank will take care of it, and there's no risk to their money or the transaction itself; all they'll experience is a little delay. Due to the high costs of processing, such as those connected with taking specific forms of payment, and the much higher expenses associated with consumer returns and complaints, this is of paramount importance for business owners.

  • The retailer stands to lose part of the transaction costs incurred in the course of the sale if customers decide to return things.

If a payment is reversed because of a disagreement, the business not only loses the original transaction amount, but also usually incurs additional costs in the form of penalty charges and the loss of the items themselves. Too many chargebacks might result in a loss of acceptance of credit cards for the business.

Both of these perspectives overlook crucial aspects of the larger payment processing system. There are at least three parties in every financial transaction, and sometimes as many as five or six additional parties are involved.

  • To prevent fraud and ensure only genuine transactions result in a transfer of money, steps must be taken that can only be performed in a certain order.

In addition to the sender and the receiver, there are many more parties to consider, as well as the law, regulations, and the possibility of payment processing problems like criminal conduct or fraud in the transfer of funds.

What is Processing Payments?

Merchants and company owners may accept payments from clients using means other than cash and checks thanks to a vendor service known as a payment processor.

The terms, "payment gateway" and "payment processor," are sometimes used interchangeably, yet they serve distinct purposes in the financial transaction process. Both the data and the money are sent securely by a payment processor via a payment gateway. Payment processing companies act as an intermediary between a business and the financial institution processing a credit or debit card transaction.

Their goal is to:

  • Seek authorization to complete a transaction;
  • Talk to the cardholder's bank; and
  • Deposit money into your business account.

How It Works

A credit card purchase may seem easy at first glance, but there is quite a bit more going on behind the scenes. When you make a purchase with a credit or debit card, a number of technological processes are carried out in the background. Payment is processed, validated, approved, or denied, and funds are transferred all in the space of a single card transaction. While the actual exchange may only take a few seconds, the mechanisms at work are rather intricate.

  • Initiate interaction at the time of purchase. Your order total is calculated and confirmed at the time of placing your purchase, at which time you offer your chosen mode of payment. You've reached the checkout counter. This may be done either in-store or online. At the register, you may pay with a variety of options, including cash, a credit card, a check, or money order.
  • Link up with some kind of financial transaction processor. A payment gateway is a piece of software that facilitates the transfer of sensitive data between a customer's bank and the merchant's bank.
  • Have the data sent through a payment processor. Merchant accounts are the final resting place for accepted payments, and payment processors function as a shuttle service between the issuing bank of a credit card consumer and the merchant.
  • Verify with the issuing bank that payment was received. In the context of credit cards, the issuing bank refers to the financial institution that actually issued the card to the cardholder. It is the responsibility of the payment processor to verify the authenticity of the card and to transmit funds from the card issuer to the merchant.
  • Move the money to the merchant's account. If a customer pays with a credit card and the transaction is accepted, the payment processing firm will transfer funds from the card issuer to the business' bank account. It is possible to take credit cards, debit cards, and online payments after you open this kind of bank account for your company.

Between placing an order and receiving a physical or digital receipt, a lot occurs in a short amount of time. You won't even have time to set the table before you're sitting down to eat.


It takes cooperation between all of these players in the payments system to complete a transaction. This intricacy explains why almost no transactions, outside of monetary ones, happen in real-time. While a customer may hand over their card, complete the purchase, and accept delivery of their items in minutes, the actual transfer of funds to settle the transaction might take several days.