Home Technology Electronic Payment System: How do they work?

Electronic Payment System: How do they work?

Last updated on August 11th, 2020 at 04:21 pm

With the rise of digitalization, payments are no more about cash. Electronic payments or online payment is very fast growing these days as it is an easy and convenient way of carrying on transactions. Today there is no need to visit banks or ATMs anymore. If you want to go shopping, a card or even your mobile phone is also enough for you to keep going. But, have you ever thought about how the entire dynamics behind these electronic payments work? Let us take a tour through the entire process.


You’d think, what may appear to be complex about online payments? There is one simple form on a website where a customer submits his payment details and presses the button “Pay”. Then a merchant waits for transferring money to his account. Well, in a perfect world, that’s what happens, but in the real world, it’s a bit more complicated.

Traditionally, to make this happen an online retailer needs:

  • a special bank account to hold the funds received from online payments until they are transferred to a business bank account – this is a merchant account;
  • a secure service to verify and authorize payments to the account – this is a payment gateway.


A type of bank account that allows accepting Visa, MasterCard, American Express, or any other debit or credit card payments is known as a merchant account. A merchant account implies a contractual relationship between your company and a bank according to which funds derived from your sales and paid by credit or debit cards are transferred to your business account.

A bank or a payment processing company (you will read about payment processors in greater detail below) will assign a unique merchant identification number to your company and your bank account in order to uniquely identify your business among billions of others all over the world. Merchant ID is present in every payment that takes place on your website.

When applying for a merchant account, a bank or a processing company will review your application taking into account the type of products or services you’re selling, planned total sales, countries of business operations, and currencies of payment cards.

There are various fees associated with a merchant account such as monthly minimum, transaction fee, chargeback fee, and others. It is necessary to understand all the fees of a merchant account in order to ensure a business will be profitable.


A payment gateway represents software that connects a merchant e-commerce website and his bank. Payment gateways, such as Authorize.net, require a merchant account. Similarly to the point of sale card terminal a payment gateway:

  • checks the validity of cards;
  • determines the issuing bank of the card;
  • encrypts the numbers associated with the card;
  • tells a merchant bank whether to initiate a funds transfer;
  • sends the answers back to your site.
online payment infographic

Payment gateways can roughly be divided into the following types: direct, redirect.

Direct (a.k.a. non-hosted) gateways process payment details within a merchant store, and the customer never leaves the e-commerce website to enter his card information. To take direct payments a merchant website should be SSL encrypted, which means an URL of a checkout page should start with “https://secure.” This also involves passing the Payment Card Industry Data Security Standard.

Redirect payment gateways (a.k.a. hosted) send the customer to a payment processor website. Once the customer has paid, he will be returned back to the e-commerce site to complete the checkout process. In this case, a merchant doesn’t need to worry about PCI compliance, as he only collects order details.

For the use of a gateway, a merchant also pays fees: monthly fees, transaction fees, setup fees, chargeback fees. When it comes to fees and rates, it is important to take the time and make sure you fully understand what you are being charged for.

Acquiring an internet merchant account and payment gateway software involves lots of effort. There is a far simpler way to accept payments online – all-in-one payment solutions.


Visa and Mastercard are undoubtedly the largest payment processing platforms in the world. They allow to speed up the payment cycle between different banks serving as mediators between issuing and acquiring banks in authorizing credit card/ debit card transactions. A seller and a buyer may use the services of different banks, and in international trade, the banks are in different countries. There are thousands of various banks, billions of merchants, and buyers. When the bank of a seller (acquiring bank) and the bank of a buyer (issuing bank) are both attached to one payment system – the payment process is close to instant.

3rd party payment processors (a.k.a. payment aggregators, third-party merchants), such as PayPal, Stripe, and Braintree, offer services to facilitate accepting online payments and don’t require a dedicated merchant account at all. That’s why they have made life easier for online business owners unsophisticated in new technologies or for those who are engaged in selling and production.

Video Courtesy – Visa School of Public Policy (VSPP) 

Besides this, you can view our video and blog collections in the Video Section & Blog Section of the website.

Abhijeet is a 4th-year Undergraduate Student at IIT Kharagpur. His major inclination is towards exploring the science behind the things of our day-to-day life.

Abhijeet Mahatohttp://scilynk.in
Abhijeet is a 4th-year Undergraduate Student at IIT Kharagpur. His major inclination is towards exploring the science behind the things of our day-to-day life.


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