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How does a payment work?

It is crucial when running a business to understand the path a payment makes to get to your business as this will allow you to understand how to streamline your processes to make this journey as quick as possible. Ensuring a smooth and quick path for a payment from a customer means increased cash flow for your business, so it is important you get it right from the start.

There is a set path that a transaction takes from the customer making the payment to the funds being received into the businesses bank account. Below is a diagram of the journey a transaction goes through before being accepted or declined by the card issuer. In order for this process to happen, a business must have relationships with a variety of providers who offer a payment gateway, merchant bank account and business bank account.

Diagram showing how payment processing works

  • Company website: the online shopper adds a product/service that they wish to purchase into the websites shopping basket. Once the customer is ready to make a purchase they go to the website checkout. The purchase details are then sent to a Payment Gateway to process the payment.
  • Payment Gateway: the shopper is directed to the Payment Gateway where they choose a payment method and enter their payment details.
    The Payment Gateway sends the payment details to the business's Merchant Account provider, who sends them via the card schemes to the shoppers card issuing bank for authorisation.
  • Card Issuer: The card issuer will check if the card details are correct, the cardholder's account has sufficient funds and that the card hasn't been reported lost or stolen. If everything is OK, the card issuing bank authorises the payment requested, and debits those funds from the shopper's bank account.
  • The confirmation of the payment is sent to the Payment Gateway, which notifies the shopper and the business that the payment has been authorised - normally via a confirmation screen and an email. Businesses should only dispatch goods to the shopper once they have received notification of the payment's authorisation.
  • Merchant Account: the funds for the purchase are then sent from the shopper's card issuer, to the business's Merchant Account. This can take 1-2 days to show in the Merchant Account.
  • Business Bank Account: from the Merchant Account, the funds are paid into the business's bank account, normally with a short delay that's specified by the Merchant Account provider. The Merchant Account provider will deduct the cost associated with processing the payment with the card schemes - normally a small percentage of the value of a credit card transaction or a flat fee for a debit card.