It's no secret that today's consumer is online. The share of non-cash payments in the U.S. has increased dramatically, rising as fast as 9.5% per year from 2018 to 2021. At the same time, fraudulent activity affects consumers daily. In 2024, 43% of consumers have already been victims of payment fraud. With more and more transactions being done online, businesses must be able to securely and efficiently process digital payments both for the business and the customer. Especially those using high risk merchant accounts.

Payment processing ensures that customers have a smooth and hassle-free experience during checkout and protects customer data to reduce the risk of fraud and data breaches. With the right payment processing system, business owners can prioritize customer satisfaction and security measures, ensuring a smooth and secure payment process and leading to happy customers and a strong reputation.

What Is Payment Processing?

Payment processing is a service that enables businesses to accept payments from customers online. Payment processing companies facilitate electronic transactions between customers and businesses, including providing ecommerce merchant account providers for seamless transactions.

Types of payments commonly processed by payment processing service companies include:

Debit and credit cards: Credit and debit card payments provide a convenient way for individuals to pay for goods and services. With credit cards, users have a line of credit and can make purchases using borrowed funds that must be repaid.

Digital wallets: Digital or mobile wallets allow users to store their card information and make electronic financial transactions without needing physical cards. Digital wallets offer convenience and security when making in-person and contactless payments.

Bank transfers: Electronic fund transfers that primarily occur between businesses. This method allows for seamless and efficient funds transfer between two or more bank accounts. Bank transfers are often used for large transactions, such as making payments for goods or services between companies.

Electronic checks: Payments made via paper checks converted into automated clearing house (ACH) transactions. This method eliminates the need for physical checks and allows faster processing and clearing of funds. Electronic checks are commonly used for recurring payments, such as monthly bills or rent.

Components of Payment Processing

Although the exact steps may vary depending on factors such as the payment method, the nature of the business, and the payment processor, the components for payment processing are relatively consistent.

Merchant Account

The first component of payment processing is setting up a merchant account. A merchant account is a holding place for funds received from customer payments. Businesses must have a merchant account to accept credit or debit card transactions.

Payment Gateway

The business must integrate a payment gateway once a merchant account is set up. A payment gateway is a software application that securely connects the business's website or point-of-sale system with the payment processor. It encrypts the customer's payment information and sends it to the payment processor for authorization.

Payment Processor

The payment processor is a financial institution or a company like Zen Payments that facilitates the transaction between the merchant and the customer's bank. It receives the payment information from the payment gateway, verifies the card's authenticity, checks for available funds, and processes the transaction.

Issuing Bank

The issuing bank is the financial institution that issued the customer's credit or debit card. When the payment processor receives the payment information, it contacts the issuing bank to validate the card and authorize the transaction. The issuing bank confirms if the customer has sufficient funds and if the card is valid and not reported as stolen.

Settlement

After the payment is authorized, the payment processor initiates the settlement process. Settlement involves transferring the funds from the customer's account to the merchant's merchant account. The payment processor deducts its processing fee from the transaction amount before transferring the funds.

Deposits

Finally, the settled funds are deposited into the merchant's bank account. The timing of the deposits depends on the payment processor and can vary from one to several business days.

How does payment processing work?

Payment processing is a complex system that involves several steps and multiple parties. Here is a step-by-step explanation of how providers process payments:

1. Initiation: The payment process is initiated when a customer makes a purchase by providing their payment information, such as credit card details or bank account information.
2. Authorization: Once the payment details are provided, the payment processor sends the information to the respective card network or bank to verify the transaction's authenticity and whether the customer's account has sufficient funds to cover the purchase.
3. Communication: The card network or bank communicates with the merchant's payment processor to authenticate the transaction. This step helps prevent fraud and ensures the payment details are valid and accurate.
4. Capture: After the transaction is authorized, the payment processor captures the funds from the customer's account. This process involves deducting the purchase amount from the customer's bank account or temporarily holding the funds until settlement.
5. Settlement: The settlement process occurs at the end of the day or a predetermined period. The payment processor transfers the captured funds to the merchant's bank account, deducting any applicable transaction fees.
6. Reconciliation: Once the settlement is completed, the merchant reconciles the payment with the corresponding transaction by matching it with the customer's purchase. This step helps ensure accurate accounting and record-keeping.
7. Funding: Finally, the merchant receives the funds in their bank account, completing the payment processing cycle.

Benefits of Payment Processing Solutions

Payment processing solutions offer numerous benefits to businesses and their customers, particularly those utilizing a subscription merchant account for recurring billing cycles.

Improved Sales: Businesses that accept debit and credit cards tend to see improved sales, as customers using these payment methods are more likely to spend more than cash users. Plus, the convenience of multiple payment options leads to higher sales and customer retention.

• Customer Experience: By giving customers the option to pay with credit cards, debit cards, or other digital payment methods, businesses can cater to the diverse preferences of their customers. This enhances the customer experience, leading to higher satisfaction and repeat business.
• Efficiency: Payment processing solutions improve efficiency by streamlining payment processes. This saves time for both customers and businesses, reducing manual effort and human error. In addition, payment processors maintain detailed transaction records, simplifying accounting and reconciliation processes for end-of-year books.
• Customer Insights: Businesses can also gain valuable customer insights from transaction data. This allows them to better understand customer behavior and preferences, which can inform marketing strategies and product offerings.
• Brand Trust: Customers appreciate seeing multiple payment options available, as it reassures them that the business is legitimate. In contrast, cash-only businesses may face the perception of an "under-the-table business" if not properly presented.
• Reduce Risk: Non-compliance with relevant laws can lead to penalties and closure of the merchant account. Payment processing solutions reduce the risk of fraud, ensure data security, and maintain compliance with relevant regulations and industry standards.

Overall, payment processing solutions are essential for businesses of all sizes.

Costs and Fees of Payment Processing

Payment processing fees are determined by various factors such as business type, transaction volume, and average transaction value. The total cost can vary depending on business specifics, pricing model, and credit card processor, typically averaging around 1.5% to 3.5% of total credit card sales.

Card-Issuing Banks

Interchange fees are collected by the company issuing the customer's card, often their bank. This segment constitutes the largest portion of the total fee pool, accounting for 50-70% of the credit card processing fees merchants pay, depending on factors such as pricing structure and the types of cards accepted.

Card Brands

Card brands refer to payment networks such as Visa, MasterCard, and Discover. When merchants accept cards with these associations, they are charged association fees. These fees usually account for 20-30% of the monthly payment processing fees, making them the second largest component.

In addition to association fees, merchants incur assessment fees directly to the card brands/networks. These assessment fees vary depending on the total processing amount, card origin, and number of requests.

Payment Processor

The payment processor is a third-party service provider that handles financial transactions between customers and merchants. Although the payment processor's fees are a significant component of the payment process, the merchant service provider typically retains the smallest portion of the overall fees, usually around 10-20%, depending on the processor and pricing structure.

Selecting the Right Payment Processor for Your Business

Selecting the right payment processor for your business is an essential decision that should not be taken lightly. It is crucial to consider several factors before making a choice. As your business evolves, you will better understand your business model, products/services, and target audience. This knowledge is valuable in determining your payment processing needs.

Customer Experience

Customer experience is a vital aspect to consider when choosing a payment processing provider. Choose a processor that offers 24/7 customer support through multiple channels, including phone, email, and live chat. This ensures that customers can easily reach out for assistance anytime, no matter the issue.

Integration

Ensure that your chosen payment processor seamlessly integrates with your website or e-commerce platform and other tools you use for your business. For example, integration with your accounting software enables automatic reconciliation of payments and simplifies the financial management process. Integration with your customer relationship management (CRM) system allows for seamless tracking of customer purchases and provides valuable insights into customer behavior.

Security

When choosing a payment processor, prioritize those that prioritize security measures such as encryption, fraud detection, and chargeback protection. Ensure that the processor complies with industry security standards, including PCI-DSS.

Payment Methods

Your payment processor should support the methods you want to offer your customers. Popular payment methods include credit and debit cards, e-wallets, and mobile payments. If you do business internationally, ensure the payment processor supports the currencies you accept.

Mobile-Friendliness

Your processor should provide customers with a seamless and intuitive experience on their mobile devices and seamlessly integrate with various mobile operating systems, such as iOS and Android. Your customers will need an interface optimized for smaller screens, responsive, and easy to navigate, to ensure a smooth transaction process.

High-Risk Payment Processing

Certain industries, such as CBD, e-cigarettes, credit repair, MLM, adult products or services, and pawnshops, are usually considered high-risk due to their higher likelihood of chargebacks, fraud, or other risk factors. Merchant service providers often avoid offering their services to high-risk businesses, limiting their ability to generate revenue and grow.

Payment processing companies that work with high-risk merchant accounts assist these businesses by offering processing support through financial institutions with more relaxed guidelines. A high-risk merchant account allows businesses in high-risk industries to accept credit and debit cards, with the funds being transferred to their business account within 24-48 hours.

Failure to comply with applicable laws may result in fines and the suspension of the merchant account. Therefore, it is crucial to find a high-risk payment processor that specializes in the specific industry and can provide effective support in compliance with laws and regulations. High-risk businesses can strengthen their protection against industry-specific risks by partnering with processors like Zen Payments.

High-risk businesses should consider extra services when selecting a payment processor, such as:

Chargeback Prevention Services

Chargeback prevention services can greatly benefit your business by combating fraud and reducing incidents where a sale goes through, even if buyers do not have sufficient funds in their accounts to cover the transaction. This can save your business considerable financial loss and protect your revenues.

At Zen Payments, our POS systems feature advanced security measures, real-time fraud detection, and transaction monitoring, and work to prevent chargeback and provide you with all the necessary information and tools to dispute a chargeback. This is crucial in ensuring you have a fair chance to recover disputed funds.

Enhanced Tracking

Today's tracking capabilities allow businesses to monitor and manage their inventory effectively. With the ability to generate detailed reports, businesses can track inventory more accurately and efficiently.

Enhanced tracking can also help high-risk businesses detect and prevent incidents of retail theft. By tracking inventory in real-time, businesses can identify any discrepancies or suspicious activities that may indicate theft to take action and minimize losses immediately.

Processing High-Risk Payments with Zen Payments

Processing high-risk payments can be daunting for businesses, but having a reliable partner can significantly reduce the associated risks. Zen Payments specializes in high-risk processing and has been a top provider of these services for years. Contact us today to start minimizing risk and maximizing success.