What is online payment processing, and how does it work? (2024)

Let’s start with a definition. Payment processing is how businesses complete credit and debit card transactions and essentially collect payments. This form of payment is used by millions of people on a daily basis, and touches every aspect of our daily lives, yet very few people fully understand the process in its entirety. Receiving a payment happens in seconds but so much happens behind the scenes.

Fun fact: One of the first companies to execute an online payment was Pizza Hut in 1987, when they made it possible for consumers to order pizza delivery on their homepage.

In this blog post we will explain what goes on behind the scenes when a payment is made, and discuss the benefits of a payment processor that understands your business.

The process

In the case of vacation rental payment processing, the customer is the guest, and the merchant is the vacation rental or property management company. The product or services refers to the accommodation and any other additional services (such as early check-in/ late check-out) that the guest wishes to purchase.

Step 1: Customers select the product or service they wish to purchase and proceed to checkout.

Step 2: They choose their preferred payment options, like credit/debit card, e-wallet, or wire transfers.

Step 3: Payment information is collected and sent as encrypted transaction data to the payment processor. This is enabled by a payment gateway, a consumer-facing interface used to collect payment information. With online payments, the payment gateway comes in the form of a checkout portal, where credit card information can be entered. The gateway securely transmits data to the payment processor, so money from the issuing bank (the customer’s bank) can be transferred to the acquiring account (the merchant’s account).

Step 4: Transaction details are sent to the issuing bank for authorization.

Step 5: Issuing bank authorizes the payment.

Step 6: The acquiring bank is informed about the payment authorization, and facilitates all electronic payment transactions on behalf of the merchant.

Step 7: Funds are transferred from the issuing bank account to the merchant’s account.

The agreed amount of funds to be transferred is called the settlement. Another term commonly associated with this step of the process is merchant processing.

Online payment processing for property managers

Every professional property manager needs to have secure and efficient ways of accepting online payments.

How do you choose one?

The payment processor you choose will depend on the property management software you’re using. For example, Guesty has its own in-house payment processor, GuestyPay (US only). We created GuestyPay specifically for property managers and vacation rental companies operating in the hospitality industry. It’s currently only available in the US, but coming to the EU and UK later this year.

Guesty’s best-in-class technology can identify the unique trends and behaviors of travel merchants and their guests. This translates to helping reduce fraud, increased acceptance rates, and mitigating risk.

To summarize

A lot goes on behind the scenes when a payment is made, understanding how this works will help you make the right decision when it comes to choosing a vacation rental payment processing solution.

What is online payment processing, and how does it work? (1)

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What is online payment processing, and how does it work? (2024)

FAQs

How does the online payment process work? ›

To make a purchase, customers enter their credit or debit card information into a payment gateway. This method involves the transfer of funds directly from the customer's bank account to the business's bank account, not their merchant account.

How does online transaction processing work? ›

Online transaction is a payment method in which the transfer of fund or money happens online over electronic fund transfer. Online transaction process (OLTP) is secure and password protected. Three steps involved in the online transaction are Registration, Placing an order, and, Payment.

What is online payment short answer? ›

What are online payments? Online payments are payments that are initiated over the internet for goods or services purchased either online or offline. Common methods to facilitate this include: Bank Debits via online mandate (often referred to as Direct Debit - which is the terminology we'll use in this guide)

What is a payment processor and how does it work? ›

A payment processor is a company that manages the credit card transaction process, acting as a kind of mediator between the bank and the merchant. Put simply, the payment processor communicates information from your customer's card to your bank and the customer's bank.

What is the online payment processing flow? ›

Online payments flow

Acquirer: A bank that processes credit card payments on behalf of the merchant and routes them through the card networks (such as Visa, Mastercard, Discover, or American Express) to the issuing bank. Sometimes acquirers may also partner with a third party to help process payments.

What are two examples of online transaction processing? ›

Everyday examples of OLTP systems include the following:
  • ATM machines (this is the classic, most often-cited example) and online banking applications.
  • Credit card payment processing (both online and in-store)
  • Order entry (retail and back-office)
  • Online bookings (ticketing, reservation systems, etc.)

What are types of online payments? ›

Online payments refer to the process of transferring money electronically over the Internet to complete a purchase or transaction. This can be done through various methods such as credit cards, debit cards, e-wallets, bank transfers, mobile payments, cryptocurrency payments, prepaid cards, and even cash on delivery.

How to do online payment from bank account? ›

Entering Account Number & IFSC – This is the traditional way of payments and it is also supported on UPI. You may enter the account number & IFSC of the person you want to send money to, specify the amount and enter your PIN. Your payment will be completed in a few seconds.

What is the best online payment system? ›

9 Best Online Payment Processing Services of May 2024
ProductBest for▼
PaymentCloud Read Review4.5/5 Best for High-risk merchants
Amazon Pay Read Review4.5/5 Best for Streamlined checkout
Adyen Read Review4.0/5 Best for Omnichannel commerce
BlueSnapBest for Splitting payments with other vendors
5 more rows

How does payment processing make money? ›

Payment processors make money by receiving a commission. The fee is calculated as a percentage of the transaction between the customer and the merchant and relies on the last one. It also could be a fixed price per transaction.

Why do we need payment processing? ›

Payment processing allows your business to manage frictionless merchant. transactions with customers across multiple channels. For example, you may partner with an aggregator (large-scale payment processor.

What are the stages of online transaction? ›

There are three stages of online transaction i.e. first - registration, second - placing the order, and third - online payment. This online transaction is completed by combining all three stages. Online transactions are used to buy or sell any item on an online platform such as Flipkart, Amazon, or eBay etc.

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