How Does Online Payment Processing Software Work?

How Does Online Payment Processing Software Work?

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With modern technologies coming into the market, businesses can easily get access to innovative software that helps them make their process very easy. This is why even small shops are now going global, thanks to an eCommerce platform, website, or internet payment processing software.

But when companies go digital, one of the most significant challenges that they have to face is online payments. Transferring money from complicated financial platforms needs specialized financial software development skills that can combine all the payment components into one website payment processing platform. For this, businesses hire experts from financial software development companies who can provide user-friendly solutions.

To learn more about it and understand how the payment processing industry works, let us go through this blog. 

What is Online Payment Processing Software?

When it comes to accepting payments online or sending money through online payment software, you will need to be aware of all three main pieces of the software. All these three components work together, and when one of those is missing, it can affect the software as it can stop working. So here we will go through a little bit of information about these key components -

1. Payment Gateway

The payment gateway is a very important online version of a point-of-sale device. It enables people to connect to your website and its payment processor. Besides, payment gateways also help merchants by connecting their accounts with debit/credit card issuers. Basically, a payment gateway is something that can easily handle the technical aspects of any transaction and it also has the capability to ensure that you, the business owner, can receive the payments done by your customers without any issues.

2. Payment Processor

The next in line is the payment processor. It has the capability to manage the card transaction process and this is done by transmitting information from your client’s credit/debit card to your bank or the customer’s bank. When it comes to payment processors, it deals with issues like credit card validity, card limits, security, and more. This means that if the business owner or the client has sufficient funds in his account, the processor will allow making the payment. In all,  the payment processor is just like a middleman between the merchant and the bank.

3. Merchant Account 

There is a specific type of account for merchants in the banks and it enables the business to accept online payments. Without this account, merchants cannot handle the money that the customers transfer. The merchants don’t have direct access to this account, but the funds from this account get transferred to the business bank account within a day or two.

Besides this, there are some online payment processing software packages in the market that offer an all-in-one solution that makes it easy to tie payment gateway, payment processor, and merchant account together. Other than this, there are cases where the payment gateway and merchant account can be combined with the third-party payment processor. 

But having said that, if you want to have a simple payment procedure, having an all-in-one solution like PayPal or Worldpay is the best option.   

Advantages of Online Payment Processing Software

Online payment is a process that enables merchants and users to have cashless payments for goods and services through mobile phones, cards, or a website. Some of the main advantages of using online payment are increased sales, cost and time savings, and reduced transaction costs. Besides, some of the other advantages of online payment are -
  1. Increases Sales
  2. Reduced cost of a transaction
  3. Outreach global market
  4. Payment Security
  5. Payment method acceptance
  6. Credit Cards for Low Balance Purchases
  7. Marketing tool
  8. Recurring Payments capabilities
  9. More appealing to impulse buyers
  10. Increase Speed and convenience
  11. Getting a competitive edge
  12. Low labor costs

How Does Online Payment Processing Software Actually Work?

After understanding the concept of online payment processing, let us explore the actual mechanism that goes behind it. 

Generally, there are eight different entities that get involved in online payment processing. And those are -  the business (you), the customer, the payment processor, the payment gateway, the credit card network,  the merchant account, business bank, and the customer’s bank. 

All these entities work in the following ways, to make online payment processing go smoothly - 

  1. First of all, the customer selects an item that he wants to purchase and completes the checkout process. After that, he will choose to pay via credit/debit card and enter the card details on the payment page of your website.
  2. Next, the website will transfer the card information to the payment gateway. And then, the payment gateway will immediately send the information to the payment processor.
  3. After that, the payment processor sends the transaction information to the network of credit cards to verify the details.
  4. After the verification process is complete, the card network requests authorization to let go of the funds with the customer’s bank. And later, after confirming that the bank account has sufficient funds, it runs verification checks to see that there is no fraud, and after everything is checked, the transaction has been approved.
  5. Once the transaction is approved, its information is sent to the payment processor, which requests fund transfer to the issuing bank. Then the funds are transferred to the merchant account.

These were the steps that show how exactly online payment processing for a small-medium business works. So, being a business owner, whenever you choose the payment processor for your business, select the one that fits your business. The main reason behind it is that every industry has a slightly different way of working and managing online payments. And this is why businesses hire software development companies to have a system that works for their selected platform.


Learning about online payment processing software may be overwhelming, but it is very important if you are a business that wishes to go digital and select the right online payment partner. Besides, there are software development companies that design unified payment platforms that completely focus on delivering the best customer experience. So, businesses can leverage those payment solutions and try to deliver enhanced online experiences to their clients.
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