How Do Merchant Accounts and Payment Processing Work?

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If your business accepts credit cards then you are using the services of a Credit Card Payment Processor. Or was it a Merchant Account? Or maybe a Payment Gateway?

What does it all mean and how does it work?

You are Larry and you are the proud owner of “Sunshine Gifts and Oddities” in Lincoln, West Nebraska. Your niece Bianca is studying web design and set you up with a really fantastic website that’s been getting good traffic. A few people have asked how they can order over the internet!

Payment Gateway: The credit card terminal attached to the cash register POS System – But in virtual form.

The payment gateway is the facilitator (link, or messenger) between you and the payment processor and the bank that issued the buyer’s credit card. In order for a customer to be able to buy directly from your website you need a shopping cart that is connected to a Payment Gateway via API.

Examples of Payment Gateways: ApplePay, SecurePay, Amazon Pay and PayPal

So Bianca adds a Shopping Cart with a Payment Gateway to your website and the next day Mr. Shnieder places an online order for The Limited Edition Rose & Tears Figurine. And this is where the magic begins!

When the customer presses the “submit order” button on your website the customer’s web browser encrypts the information and sends it to your business web server, or directly to the payment gateway. The payment gateway forwards the transaction information to the Payment Processor.

Payment Processor: Manages transactions between the Payment Gateway and Credit Card Associations and Banks.

A business can open a payment processing account (merchant account) directly from a Member Bank (member banks have agreements in place with credit card companies), or through an authorized agent for the bank who is registered with the credit card companies. These agents are called Independent Selling Organization (ISO) or Member Service Provider (MSP)

Alternate names used for Payment Processors: Merchant Services Providers, Merchant Acquirers, Acquiring Banks, and Merchant Account Providers.

Popular Payment Processors: Wells Fargo, Chase, Heartland, TSYS, Global Payments

Popular ISOs: Everlink, Paywire, Square, PayScape, VersaPay

Now Mr. Schnieder’s credit card information is being sent by the Payment Processor to the Credit Card Association.

Credit Card Association: A group of card-issuing banks or financial institutions that set transaction rules for merchants. Examples: Visa, MasterCard, American Express, and Discover.

The Credit Card Association then routes the transaction information along to the bank that issued the buyer’s credit card (called a Credit Card Issuing Bank, or Issuing Bank).

The Credit Card Issuing Bank receives the pay authorization request and verifies if Mr. Schnieder has the needed credit available. The Issuing bank sends the approval or denial message back to the processor, which forwards the response to the payment gateway.

You may be feeling sorry for Mr. Schneider, sitting in front of his computer, anxiously awaiting the verdict of whether he has been approved to purchase your beautiful figurine that reminds him of his wife. But, you don’t have to worry Larry!

All of that took only 2-3 seconds.

If it is not set up automatically, at the end of the day Larry will submit all of his approved authorizations in a batch (end-of-day) to the Merchant Services Processor who will work with the Credit Card Organizations, who will work with the Credit Card Issuing Bank, who will settle the payment with the acquiring bank to deposit the money (where you have indicated your money should go).

This takes about 3 days.

In conclusion, Larry is happy to have finally sold The Limited Edition Rose & Tears Figurine, Mr. Schnieder got his beloved wife a gift for their anniversary, despite his broken leg, and we have a better understanding of what takes place behind the scenes when we purchase something online. understands that POS Systems and Payment Processing are not a one-size-fits-all solution, just like your business is not like everyone else's. No matter the size or industry of your business we want to help you succeed. has the expertise and experience to answer your questions and support you in this process. We take care of your POS System, so you can take care of your customers.

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