Payment Processing Online in 2022: Everything You Need To Know

Payment processing system – Know the definition, how does payment processing work, players in the payment industry, types & more in just one click. Check now!

After selecting a product of their choice, the customer clicks on the ‘CHECKOUT’ button, enters the payment details, and the order is placed. The product or the service is delivered in a few days. From a distance, it all seems logical and straightforward. But in reality, this logical chain of events requires a complex system for processing the payment.

A business owner needs to understand the nuances of a payment processing system and how it can aid their overall enterprise. A business owner must be careful about choosing a partner for payment processing. An efficient system will add value to the business by providing a smooth and happy experience to the customers, whereas a faulty one might drive them away.

With a tremendous increase in online shopping, choosing the right payment partners for processing accounts, managing queries, and taking care of all other ancillaries is more vital than ever before.

This article discusses the online payment process and the elements involved in it.

What Is a Payment Processor?

A payment processor helps you manage all the transactions on your portal to ensure a smooth experience for your customers. A payment processor is a part of an online payment processing system, and it serves the purpose of an online accountant. It transmits the information from the credit/debit card to your and your customer’s bank.

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The payment processor is also responsible for cross-checking the validity and transaction limits of the credit card as well as the overall transaction security. It enables the transaction to take place between the buyer and the merchant.

What Is a Payment Gateway?

The payment gateway is the front-facing technology that is responsible for sending payment information to the payment processor. It approves or declines the transaction between the buyer and the merchant. 

Pro Tip: What Is Payment Gateway?

A payment gateway can provide multiple payment options like cards, wallets, UPI, net banking, EMI, pay later, etc. Several banks and fintech players offer payment gateway facilities to enable online transactions to e-commerce and other business entities.

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Major Players Involved In Payment Processing

When it comes to debit and credit card payments, there are three primary players irrespective of the nature of the transaction (in-person or online):

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Players Involved In Payment Processing

The Merchant

A merchant cannot accept card payments without partnering with some key players. So if a merchant wants to incorporate cashless transactions in their business, they must partner with an acquirer or a merchant bank. A merchant account with an acquirer will enable them to approve and disburse payments.

The Customer

For a merchant to receive payments, someone must be willing to pay. A merchant needs a customer with a working credit/debit card to make online payments from an issuing bank. A customer is someone who knows about the existence of the merchant and how to reach them. Only then can they pay for the merchant’s services/products.

The Payment Processing System

A payment processing system comprises of two significant techs:

  • The payment gateway that links the merchant’s shopping cart to the processing network
  • A payment processor capable of initiating and completing the payment. It includes services like carrying the transaction through the processing network, preparing and disbursing a billing statement, requesting the bank to clear the amount, and sending the payment to the merchant’s account.

How Does a Payment Processor Work?

Here is the mechanism of a basic payment processing system explained for a card transaction

  • The customer initiates the process by adding chosen products to the shopping cart and heading over to the checkout page.
  • The customer enters the card details, and the information is transferred to the payment gateway. The gateway then transmits the information to the payment processor.
  • The payment processor transfers the transaction details to the card provider for verification.
  • Once the verification is complete, the payment processor requests the provider to process the payment.
  • The card provider verifies if there is enough balance in the account. After confirming other details, it approves or declines the request. This information is communicated to the payment processor. 
  • If approved, the payment processor requests the issuing bank to transfer funds to the merchant’s account.

Well, this explains us how a payment processing system works for a card transaction. But what about UPI payment processing?

Well, to understand that, we will have to list out the partied involved in UPI payment processing.

Players in UPI Payment Processing 

Here are the parties involved in ensuring a successful UPI transaction:

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Players in UPI Payment Processing 

Payment Service Provider (PSP)

Apps like GPay, PhonePe, Bhim, and others, let end-users create UPI handles, enabling them to accept or make transactions.

National Payment Corporation of India (NPCI)

A non-profit organisation set up by RBI, which acts as a bridge connecting banks with PSPs. 

Issuing bank

An active bank account is essential to be able to send money. The issuing bank lets you transfer funds on NPCI’s request to the acquiring bank. 

Acquiring bank

The acquiring bank is entrusted with the job of crediting the receiver’s account on NPCI’s request.

Payer and Payee PSP

A payer initiates the payment using their PSP. The payee’s PSP validates the request and shares the financial address so that the transaction can proceed.  


Similar to a payment processor in a card transaction, a switch company integrates the PSP with NPCI and the issuing and acquiring banks. 

How Does UPI Payment Processing Works?

Here is how the UPI payment processing works – 

User Downloads UPI App

The user (sender) downloads a compatible UPI application and registers his official phone number (same as that used for his bank account). The UPI-enabled payment apps use the official UPI SDK (this can be explained as a common library) to generate the device fingerprint. Afterwards, this fingerprint works as a means of authentication.

User Sets Up UPI ID

The user enters and sets up a unique UPI ID (his payment address) to enable him to send and receive payments.

Then he connects the UPI ID to a bank account. The issuing bank sends an SMS containing a unique code for the same. It is important to note that every UPI-enabled app (except BHIM) ties up with the acquiring bank.

Consequently, the UPI app makes API requests to create the VPA desired by the user. Usually, the payment apps map the phone number to the UPI ID/VPA to improve the user experience. For instance, a user can send money by entering the recipient’s UPI ID or phone number.

User Verification and UPI PIN 

Next, the user links his UPI ID to a bank account. After the user selects the bank account, the UPI-app makes a setcredentials request to NPCI. 

Thereafter, the user provides the card details and PIN for verification. After the verification, the user sets a 4 or 6 digit pin. This PIN is a knowledge factor in the 2-factor authentication.

Now here’s something interesting:

This PIN cannot be stored by banks- even if it is encrypted, The banks have to transport it through an encrypted channel. The issuing bank has to create a salted hash of the PIN and store the hash in the database.

Consequently, the issuing bank confirms the bank’s validity and return account information. Thereafter, the Acquiring bank receives this information and updates its database. Its maps this new UPI to the received bank account information.

The Transaction Flow

Now, how does the transaction actually happen in UPI payment?

Let’s say, Sam uses the PhonePe app which is connected to his HDFC Bank account. His UPI ID is sam@ybl. 

He wants to send money to Bobby who uses Google Pay. Bobby’s UPI ID is bobby@axis which is linked to his State Bank of India account.

Also, let’s assume that PhonePe’s acquiring bank is ICICI bank and Google Pay’s acquiring bank is Axis Bank.

Sam enters Bobby’s UPI ID and enters the amount he wants to send on his PhonePe app. PhonePe collects and encrypts Sam’s UPI PIN by invoking a method from the official UPI SDK. Thereafter, PhonePe invokes another method to configure the device fingerprint.

The PhonePe app will verify this fingerprint and match it to the fingerprint on the server. Additionally, It will verify the bank account and IFSC code. If verification is successful, it sends the data to NPCI via their acquiring bank- ICICI.

NPCI Gets To Work

Now, The NPCI already has Sam’s authorization and his bank account/IFSC. But it doesn’t have Bobby’s bank account and IFSC.

So, NPCI will check Bobby’s UPI ID and map it to the provider, Since @axis is handled by Axis bank, it will require address verification from Axis Bank. Now, the bank will confirm that bobby@axis exists and is linked to a bank account. Furthermore, it will provide Bobby’s bank account and IFSC to NPCI.

Thereafter, NPCI will send instruction to HDFC bank to verify Sam’s PIN and debit money from his account. HDFC will check if the fingerprint and PIN are the same as the ones in their database. It will also verify if Sam has enough funds in the account or if he has crossed his daily transaction limit.

Finally, after verification, HDFC will debit the amount and send back a response to NPCI. 

Now NPCI will check the handle mapping to see where the funds have to be credited. Bobby’s bank is with SBI. So, NPCI will direct SBI to credit money to his account.

If money is successfully credit, SBI will send a success-response to NPCI. 

But how will Sam and Bobby know if their transaction was successful?

Well, NPCI will notify GooglePay (via Axis Bank) and Phone Pe (via ICICI bank) of the successful transaction. Consequently, both the apps will send the appropriate push notification to the user.

How Does E-Wallet Payment Processing Work?

A lot of customers use apps like Paytm and Phonepe. Nowadays, customers prefer to pay using their wallets as it is faster and more efficient.

But how do businesses offer wallets as a mode of payment to customers?

Well, businesses use payment aggregators or payment gateways that offer wallets as a payment mode.

In such a scenario, the payment processor itself acts as a wallet. Here, the funds already exist in the wallet’s bank account. So, when a customer makes a transaction, the funds are debited from their ledger internally. In other words, there is no external stakeholder. Consequently, the transaction gets settled at the end of day to the merchant’s business bank account.

How Can You Apply for Payment Processing?

There are multiple entities offering payment processing services. Traditional options like banks and modern ones, like online providers, are available. Most of them provide multiple-tier pricing.

When you are picking a suitable payment processor for your business, carefully study the services on offer. Some factors you should keep in mind: fees, customer support, add-on services, and payment type support. 

Traditional providers are likely to charge less, but their services will only include the basic amenities. On the other hand, a new-age payment processor will add on a host of additional, valuable services that will help you augment your overall business.

Wrap Up

The modern online customer demands versatility. Lack of options often deters them from completing a purchase. A robust payment processing structure and a reliable payment gateway will ensure that you give them the requisite leeway. The more options you offer, the higher the chance of converting a visitor to your store into a customer.

There is a significant difference between online transactions and in-person payments. The choice of payment processing partner and the payment gateway decides matters a lot. So you must do thorough research and select the one that suits your business model the best.

FAQs On Online Payment Processing

What is a merchant account?

A merchant account allows the business owner to receive and process electronic payments via card transactions. A merchant acquiring bank can provide such an account for your business. Essentially, it is a link between the payment processor and the merchant bank to process card transactions seamlessly. 

How to choose a payment processor?

A payment processor is an integral part of the success of your online business. You must be cautious and look at the following aspects while choosing the right one for yourself:

  • If you are operating an online store, you have a plethora of software, such as accounting and invoicing, running in unison. A payment processor must have wide compatibility to ensure it can work in sync with your other software requirements. 
  • High encryption standards to keep your customers’ data safe. A payment processor processes critical information for the business. They must ensure the highest level of security to prevent any data breach. Most businesses prefer gateways that are level-1 PCI DSS compliant.
  • For customers, payment is completed almost instantly. But the payment processor holds the money for up to 7 days. Look for a processor whose holding time suits your needs.
  • The total cost that you will incur impacts your choice. There are three fee components involved while choosing a payment processor – set up, monthly, and transaction. 
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I am looking to set up my payment gateway. What information do I need?

There are two steps in setting up your payment gateway. The first step is finding a gateway provider. You will have to share all the critical merchant account-related details with your provider. Next, you need to integrate the payment gateway to your website or app. 

Let’s have a look at the factors you must take into consideration while choosing a payment gateway:  

Modes of payment

Check if the payment gateway offers payment modes preferred by your customers. For instance, credit card, debit card, UPI, Wallets, PayLater options etc. Also, check if the payment gateway offers international payment support.

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Payment Settlement Cycles

Let’s assume the money has been debited from the customer’s account. How much time does it take for the money to be credited into the seller’s account?

Try to choose payment gateways that offer the fastest settlement cycles, between T+1 to T+2 days at most.

Easy Integration

Integrating your payment gateway to your app/website can be quite the task. Look for payment gateways offering plug-ins for the most popular eCommerce platforms like WooCommerce, Magento and Shopify. 

Also go for a payment gateway that has detailed integration guides for major computer languages such as PHP, Python, Ruby, C#, etc.

Swift Onboarding Experience

There are various processes included in opening a merchant account with a payment gateway which can cause a time lag.

Try to look for a payment gateway that can help you onboard quickly. 

Reliable and Timely Support

Make sure that your payment gateway provides consistent and quick support through live chat, emails etc.

Having a dedicated account manager can be a huge plus. 

Payment Analytics

Ensure that your payment gateway can provide a detailed report of past transactions. This can include the payment volume, payment modes used, number of transactions etc.

These analytics will help you gain a good understanding of your business transactions and help in predicting growth and scalability.


Most payment gateways charge 2-3% per transaction as a standard. It is important to look for a payment gateway that matches your budget.

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Head over to this blog for more information on how to choose a payment gateway.

Can I use my trusted analytics software with the payment processor?

It depends on the analytics software you use. Most payment processors have inbuilt support for a plethora of well-known software. If you do not find compatibility for your software, contact your vendor to understand if there is a way out. 

Moreover, nowadays, most payment gateways offer automated dashboards that give a real-time status of all transactions.