The step-by-step process – and how it can be optimized
The following summary looks at each step in the journey of online payment processing – and the ways in which merchants can optimize their payment flow to maximize revenue and conversions.
See the infographic above for a visual description of what happens behind the scenes during an online payment.
Part 1: Authorization
- Each payment begins with the end customer – an online transaction is initiated when customers confirm a purchase after entering their payment information during checkout. Merchants can increase the number of successful checkouts (and therefore reduce the number of so-called ‘cart abandons’) by offering a wide variety of payment method options which are in line with the preferences of local customers.
- Once a transaction is initiated, the customer’s payment information is then transmitted and tokenized via a payment gateway, which in turn passes the encrypted information on to the payment provider/acquirer.
- The acquiring bank then captures the transaction and forwards the information to the customer’s card issuer (e.g. Visa, Mastercard) or alternative payment method provider.
- The card issuer then sends a request for approval. Sometimes the user will need to verify their identity at this stage via a 2-step authentication process.
- Next, the transaction receives a final ‘verdict’ whether it is approved or declined. The decision relies on multiple factors – but first the account needs to have the funds available to cover for the purchase. This process is therefore known as the authorization process, where if the transaction is indeed authorized, the cardholder’s funds are put on hold before they are transferred to the merchant account after all deductions (fees) are applied, in a subsequent process called the ‘settlement’.
Part 2: Settlement
- After authorization is received, the settlement follows, during which funds enter the merchant account.
- The acquiring bank where the merchant’s account is located sends the request to the card network for settlement, after which approved transactions reach the issuing bank, where the issuer sends the funds to the merchant’s acquiring bank, deducting the interchange fee from the overall sum. The issuing bank then bills the cardholder for the transaction, and the payment is complete.
- Although the settlement process is straightforward, as with the other steps there are countless places where the payment can go wrong or where the process can be optimized. Throughout the entire chain of online payment processing, each hand that touches the transaction is taking a cut of the merchant’s revenue by charging fees that can vary depending on the bank/payment acquirer. The job of a good online payment processor is to maximize approval rates and minimize unnecessary fees.
Tools to battle false declines
One of the biggest scourges for any merchant accepting online payments is that of ‘false declines’ – transactions which should not have any reason to be declined but are declined anyway, generally because they trigger one of many possible fraud filters which are typically determined by an algorithm.
There are many reasons for fraud filters to raise a red flag and trigger a false decline, from the shopper’s IP location, to the value of the transaction, to inconsistencies between the shipping and billing addresses (plus many more).
One of the ways that payment processors can help merchants to maximize the value of their online transactions is through solutions like PayU’s Instant Retry Feature, which allows merchants to configure their own set of custom routing rules that can attempt payments again in real-time using a different payment acquirer, in the event that a transaction is declined by the first provider.