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Understanding how online payment processing works is important for any business that accepts payments online. Whether a business is launching an e-commerce store or adding digital checkout to a physical location, it helps to know what happens behind the scenes.
Knowing who’s involved and how fees work can help merchants choose the right setup for their needs.
In this guide, we’ll cover the basics of payment processors from how they work to their benefits for websites and e-commerce operations.
Table of contents
Online payment processing is how money gets from the customer (payer) to the business (payee). A payment processing system handles the full transaction, from authorizing the payment, moving the money, and making sure it lands in the business's account.
A few key players involved: gateways, processors, card networks, and banks. Each one plays a role in making sure the transaction is fast and secure.
Many systems support a range of online payment methods, allowing customers to pay how they prefer:
Online payment processing involves several key parts working together to complete a transaction smoothly and securely. Understanding these components helps clarify how money moves from a customer to a business.
The business, or merchant, is the one selling the product or service and receiving the payment. To process credit and debit card payments online, they'll need to work with a merchant account provider — a service that accepts funds on the merchant's behalf and routes into a business account.
PayPal combines both the payment processing and merchant account services allowing businesses to start accepting payments without setting up a separate account through a bank or third party.
The online payment processor is the system that moves each transaction through the network. It authorizes the payment, communicates with the customer’s bank, and makes sure the funds reach the business's account. This service is the core engine behind the scenes that allows merchants to process online payments securely while supporting fraud protection.
In many cases, the business's payment processor is also their merchant account provider, which simplifies setup and reduces delays. For example, with PayPal, payments are processed and settled directly into the business's PayPal account, with no separate bank transfer.
A payment gateway is the technology that connects a website’s checkout to the payment processing network. It captures a customer’s payment details, encrypts the data, runs fraud checks, and securely sends the information for authorization.
The PayPal payment gateway helps this while helping reduce checkout friction — an important factor, especially with over 70% of online carts abandoned before purchase.1 A smooth, secure payment gateway can help increase conversions and keep customers coming back.
A customer starts the online payment process by choosing a payment method. When they submit their payment details, the issuing bank (the bank that issued their card or manages their account) steps in to approve or decline the transaction.
The customer’s experience at checkout and the speed of the process can directly impact whether they complete the purchase. That’s why every part of the payment processing system should prioritize ease of use.
As a business owner, it’s helpful to understand exactly what it looks like to process online payments. Or, in other words, how money moves from a customer to the business.
There are two stages to online payment processing: authorization and settlement.
Here’s how credit card authorization works during online payment processing:
The second piece of the online payment system process (where you get paid) is the settlement:
Although the settlement process can sometimes take a few days, certain banks might allow you to access your funds even before they are officially transferred. They also may keep a portion in your account that you can’t touch – just in case the customer returns the item later (called a reserve in payments).
However, businesses can receive funds fast with payment solutions like PayPal to better manage business expenses and improve cash flow. Once funds settle into a merchant’s PayPal account, they are available for immediate use — there's no need to wait for a bank transfer. Check out our step-by-step guide to PayPal payment processing for sellers.
Every time a customer makes a purchase, several parties take a cut, including the issuing bank, credit card network, merchant bank, and payment processor.
Together, these charges make up the total payment processing fees:
In many cases, the first three percentage-based fees are bundled and quoted as a single rate (for example, 2.9% + $0.30 per transaction), making it easier to compare providers.
Pricing structures often fall into one of three categories:
Pricing model | How it works | Example fees (on $100 sale) |
|---|---|---|
Flat-rate pricing | Business pays a fixed, bundled rate that includes all processing fees, regardless of card type or method. | 2.9% + $0.30 = $3.20 total fee |
Interchange plus | Business pays the actual interchange fee (set by the card network) plus a fixed markup from their provider. | 1.8% interchange + 2.0% + $0.10 = $3.90 total fee |
Tiered pricing | Transactions are grouped into tiers (qualified, mid-qualified, nonqualified), with varying fees. | Fees may range from $2.50 to $3.50, depending on how the sale is classified |
Setting up payments on a website might seem like a big lift, but the steps are pretty straightforward.
Start by researching trusted payment processing companies. Look at transaction fees, platform compatibility, fraud protection, and support. A reliable payment processing system — like PayPal payment processing — can handle everything from authorization to settlement while keeping things secure and user-friendly.
Once a business has picked a provider, it can sign up and share the necessary business and banking information. This account is where payments will land and be tracked.
There are a few ways to add payments depending on the setup:
Payment Card Industry Data Security Standard (PCI DSS) guidelines helps protect customer data.
Before going live, test different scenarios: successful payments, declines, refunds, and more. This step helps confirm the system is working correctly and gives businesses a chance to fix issues early.
Once the system is live, regularly check transaction reports, review fees, and stay updated on any platform changes. The online payment process doesn’t stop at setup; it's an ongoing part of operations.
The right online payment processing system can do more than just accept payments. With the right payment processor, a business can improve the customer experience and scale faster. Here's how:
After learning how online payment processing works, businesses can make more informed decisions about the tools and providers they use.
Whether just getting started or looking to optimize an existing setup, PayPal Checkout offers flexible solutions that scale with the business. Accept credit and debit cards, digital wallets, and more — all with the security and support PayPal is known for.