How does an online payment system work

pos system software

Going online is the very need of the hour. With the ongoing pandemic situation, for even the small business to be in the market and keep going, it is important to take their stores online. All thanks to the eCommerce platform and internet payment processing software solutions, it is possible for small businesses to have their online store and do business online.

People now want to do everything at home, which is now what we know is one of the safest ways of living due to the pesky virus reeling our world like anything. And with such a move, it is also important that payment procedures go digital. And when talking about digital payments why only online stores, even the customers of brick and mortar stores too, prefer digital payments these days. In today’s post, we will try to understand how the online payment system works.


 Basically, there are three components in this while fiasco-

  • Merchant account – A business bank account that enables the processing of online payment at the business end. 
  • Payment processor – This is generally a bank or a financial institution that settles the payment. It’s the responsibility of a payment processor to check whether card information is correct and to protect you from fraudulent activities. 
  • Payment gateway – This is basically an online POS of point of sale. This basically works as a mediator between the merchant account and the payment processor.

This is how a basic digital payment process works:

  1. The customer picks up an item and draws their payment card at the business POS. If paying online, the customer enters his/her card details.
  2. The merchant/business submits transaction details to the payment gateway.
  3. The payment gateway securely sends the transaction to the processor.
  4. The processor verifies and approves the transaction.
  5. The customer’s bank sends money to the processor.
  6. The processor sends money to the merchant’s bank.
  7. The processor sends the status of the transaction to the gateway – either approved or denied
  8. The merchant receives the message of approval or denial.
  9. The merchant receives the money and the item is sold.

To create a payment gateway, one has to be a Member Service Provider (MSP) or an Independent Sales Organization (ISO). Usually, large banks provide all the necessary financial, corporate and technical requirements for companies to get MSP and ISO status.

Read our article on “5 Reasons Your Offline Business Must Have an Online Presence

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