Payments overview

Payments are the transfer of funds from one party to another. People make payments for various reasons, including settling a debt, purchasing goods or services, fulfilling a contractual obligation, or transferring money as a gift or donation.

Payment processing is the series of actions that facilitate the transfer of funds from a customer to a merchant. Payment processing involves several steps, such as initiation, authorization, authentication, settlement, confirmation, fees, security, and compliance.

Payment systems provide the infrastructure and processes that enable the execution of payments. Several stakeholders, including customers, banks, financial institutions, payment processors, technology providers, and business and regulatory bodies, develop, manage, and regulate payment systems.

Payment types include the following examples:

• Electronic fund transfer (EFT): EFT includes methods such as wire transfers and automated clearing house transactions that move funds electronically between banks.
• Credit and debit cards: Plastic or digital cards with which holders can pay for goods and services on credit or directly from their bank account.
  • Credit card: A credit card is a payment card that allows you to spend money on credit. It is issued by a bank or financial institution that allows cardholders to borrow funds to pay for goods and services with merchants that accept cards for payment. 
  • Debit card: A debit card is a payment card that draws money directly from your checking account when you make a purchase or payment. It allows you to make secure payments both online and in-person, and can also be used to withdraw cash from ATMs. Debit cards let you spend only the money that you have in your account.
  • Gift card: A gift card is a type of prepaid debit card loaded with funds for future use. Gift cards are designed to be used as a form of payment allowing the recipient to buy goods or services up to the value loaded on the card.
• Peer-to-peer payments: Direct transfers between individuals facilitated by platforms (for example, Venmo or Zelle).

Familiarize yourself with the following key finance terms frequently used in the world of finance:

Customer (Payer): The individual or entity that initiates the payment for goods or services.

Merchant (Payee): The business or service provider that accepts the payment from the customer.

Payment methods: The method the customer uses to make the payment, such as credit cards, debit cards, electronic wallets, or cryptocurrencies.

Point-of-sale (POS) system: The physical or digital platform where the transaction takes place, such as a retail store terminal, e-commerce website, or mobile app.

Payment gateway: A service that securely captures and transmits payment information from the POS system to the payment processor or acquiring bank, which helps ensure the encryption and security of sensitive data during the transaction process. Square is an example of a payment gateway. PayPal is a blend of gateway and processor.

Payment processor: A third-party company that handles the technical aspects of the transaction, including validating payment information, obtaining authorization, and managing communication between the acquiring and issuing banks. Payment processors facilitate the movement of the money. Visa is a payment processor.

Acquiring bank or acquirer: The financial institution that holds the account of the merchant, receives the payment on its behalf, processes the transaction, and settles the funds in the account.

Card network: Organizations (for example, Visa, Mastercard, American Express, Discover, JCB, and UnionPay) that establish the rules, standards, and infrastructure for processing transactions by using their branded payment instruments.

Issuing bank or issuer: The financial institution issues the payment instrument to the customer and is responsible for authorizing or declining the transaction based on the account status of the customer, available funds, and other factors.

Payment security: Technologies and standards, such as the Payment Card Industry Data Security Standard, tokenization, or encryption, that help ensure the safety and integrity of payment information and protect against fraud and data breaches.

On-Us transaction: On-us transactions refer to financial transactions in which both the sender and the receiver of funds are customers of the same financial institution or bank. In these transactions, the funds do not move between different financial institutions; instead, they stay within the same institution. Banks can choose to resolve On-Us transaction disputes internally instead of resolving them through the payment processor.

Authorized transaction: An authorized transaction is a debit or credit card payment that has been approved by the cardholder’s bank. An authorization only transaction is a type of payment transaction where the processor obtains approval from the customer’s credit card issuer to reserve a certain amount of funds without actually processing the payment.

Posted transaction: A posted transaction is a completed transaction that has been fully processed. Banks handle several kinds of transactions through different payment methods, some are instantly posted, while others arrive in batch after some time.

Settlement and reconciliation: The process of transferring funds between the issuing bank and the acquiring bank, followed by updating the account of the merchant and generating transaction records for both the customer and the merchant.