Understanding how payments work is a key foundation to selecting the right vendors for your subscription or membership business.
This guide will help you understand the mechanics of a payment, key terms, and the key players involved from the moment your customer submits a payment to your business, to when the money for that customer’s subscription gets into your bank account.
Remember, there is no ONE right set up of payment vendors. Some vendors support one part of the payment process while others support many. The right set up is what works for you and your business. So, its imperative you understand the process, what your business needs, and know the right questions to ask when selecting your payment partners.
Your customer submits his/her credit card for a Payment for your subscription or membership service. This payment can be done online, over the phone, or even via a mobile app. The payment can be set up to be hosted either on your site or on a payment page (that looks like your site) that is actually hosted by your subscription management or payment vendor.
The charge “Authorization” process begins. Your Payment Gateway provider manages the complex routing of the data on behalf of you, the merchant. A Payment Gateway is an application that connects your site’s shopping cart or online order form with the other pieces of the credit-card processing chain. Some Payment Gateways are point solution vendors, while others include the Payment Gateway as part of a larger offering.
It is important to note that you should make sure you understand how your Payment Gateway supports failed payments both initially, and upon a renewal payment. Using an Account Updater service is a best-practice for recurring (subscription) billing. This service is provided by credit card Issuers like Visa and MasterCard to provide merchants with updated payment card information and not all Payment Gateway vendors provide access to it. Some Payment Gateway vendors provide an “Account Updater-like” program to update payments cards using their own data as well. Either way, make sure you understand the specifics of if, and how, your vendor supports failed recurring payments. Payment Gateway vendors also can provide additional services such as fraud detection, address verification, and Account Updater types of services.
Your Payment Gateway provider passes the transaction information via a secure connection to the Payment Processor either in real-time for your initial subscription transaction or in “batch” mode, which is typically daily, to process your subscription renewal (Recurring) transactions.
Payment Processors, also known as Merchant Acquirers, are the only transaction-handling entity required between the merchant and the card companies (Visa, MasterCard, etc.) known as the “Issuers”. The Issuers use a Global Interchange Payment Network that connects all payment card Issuers globally with Payment Processors to support payments globally, in real-time.
Your customer’s Payment Card Bank, the “Issuing Bank“, approves or declines the transaction based on the customer’s available funds and passes the transaction results back to the Global Interchange Payment Network.
The Global Interchange Payment Network then relays the transaction results to your Payment Processor. Your Payment Processor then relays the transaction results to your Payment Gateway. Remember, for the initial transaction, all of this is happening in real-time. For renewal or recurring charges, this would typically happen in a “batch’ with multiple transactions together on a daily basis.
Your Payment Gateway now stores the transaction results and sends them to your subscription management vendor and “front-end”, or website shopping cart page, for your customer to see if the charge for your subscription or membership product was approved or declined. Your Payment Gateway also provides reports and alerts for merchants on successful new transactions and batched transactions.
Assuming the payment was successful now its time for you, the merchant, to provide your subscription or membership product to your customer.
You’ve made the sale. Your customer considers the sale complete. For you, however, the transaction is still in process, since it must now be “Settled” and “Funded”. Your customer’s issuing credit card bank sends the appropriate funds for the transaction to the Global Interchange Payment Network, the network for issuing credit cards such as Visa, MasterCard, or Discover. The Network passes the funds to the bank where your merchant account is. Your bank then deposits the funds into your merchant bank account. This is called ‘Settlement’ and typically the transaction funds are deposited into your primary merchant bank account within two to four business days. When that happens, that is called “Funding“.
Note that with some Payment Gateways and Payment Processors, the funds are not passed directly to your merchant account bank. They are instead passed from the Global Payment Network to your Gateway/Processor and then to your merchant account bank. How your payments flow will determine your fees, when fees are taken out, and timing of Settlement and Funding.