Payment processing: What it is and how to choose a payment processing service

Payment processing involves the steps needed to accept and complete a payment, which can include authorisation, capture and settlement. Payment processing systems support financial transactions between customers and merchants. They cover the entire journey of handling and moving funds from a customer's account to a business's account after a cashless transaction is initiated online, in-person, or in an app. 

Payment processing has evolved over decades. Today, it’s a modern digital ecosystem that keeps business moving. Its core goal is simple: transfer funds securely and efficiently at scale.

What is online payment processing?

Online payment processing is specifically designed for digital environments where the shopper and the card are not physically present. Unlike retail stores, online checkouts rely on digital gateways to capture and encrypt sensitive shopper data.

Payment processing technologies

Part of what makes payment processing so impressive is its speed. That’s only possible because of a sophisticated tech stack that balances two competing priorities: frictionless speed for the customer and strongsecurity for the business. 

As consumers, we’re all familiar with the critical touchpoints where data is captured, protected, and moved: 

• Payment gateway: A service portal that securely captures, encrypts, processes, and transmits payment data between point of sale systems and banks

• Point of Sale (POS) device: Physical devices or digital platforms where a customer initiates the payment

• Credit cards and debit cards: Physical or digital financial instruments used by customers to initiate payments

• Digital wallets: A common electronic payment method that lets customers store their payment information on a phone or smart device for payments without presenting a physical card

There is also an invisible infrastructure that ties all of these touch points together. A few of these core technologies include:

• Payment networks (card schemes): These are the global "highways" like Visa, Mastercard, and American Express. They provide the central infrastructure that sets the rules and communicates between the merchant's acquirer and the customer's bank.

• Acquiring host (processor): Processors connect the merchant to the payment networks. They’re responsible for the technical heavy lifting: routing the transaction to the right network and ensuring the data follows the correct protocols.

• 3D Secure (3DS): A security protocol that adds an authentication step to verify the cardholder's identity for online payments. It often runs in the background, though some transactions ask the shopper to complete an extra step.

Payment processing is a sophisticated, fast, and secure workflow. Authorisation usually takes seconds, while the time until funds reach a merchant’s bank account depends on the payment method, capture timing, payout schedule and bank processing. For a typical card payment, it’s broken into two phases: the transaction and the settlement. Other payment methods can follow different processes.

The first part of the payment processing workflow is the payment approval process. As soon as a customer initiates a transaction, several events occur in rapid succession:

1. The gateway captures critical data: The payment gateway will capture critical customer information like their name, payment credentials, and other identifying details. Then, it encrypts that data so it stays safe. 

2. The gateway forwards that information: Once encrypted, the data gets sent to a merchant service provider. The merchant service will then validate the information and forward it to the card processing network associated with the card. 

3. The processing network communicates with the issuing bank: In seconds, the processing network communicates with the issuing bank and provides the transaction details. The issuing bank will then complete extra verification checks and confirm whether there are enough funds or available credit to cover the transaction. 

4. The issuer’s decision comes back: The issuing bank approves or declines the transaction, and the processing network relays that decision back to the merchant terminal or gateway so the customer can finish the transaction.

5. The customer can walk away with their purchase: Each of these payment processing steps happens fast. All it takes is a few seconds, then the customer can walk away or close their browser window. 

Authorisation approves the payment but does not itself pay the merchant. Capture, settlement and payout follow.

Phase 2: Settlement and reconciliation

Instead of immediately receiving cash after a transaction, merchants receive authorisation codes for approved transactions that must be forwarded to their payment processor. The processor will forward the codes to card networks, which then forward it to the issuing bank. 

At that point, the bank takes over and handles the settlement process. Within 24-48 hours the funds get deposited directly into a merchant account. 

This diagram illustrates all payment processing steps from payment initiation to settlement:

Read next: How to choose the right merchant services provider

Payment processing systems stay secure through a combination of data protection technologies, advanced fraud detection mechanisms, and strict regulatory compliance.

The primary methods used to maintain security include:

Tokenisation

Tokenisation involves substituting sensitive payment card information with a unique placeholder, known as a "token". Depending on the integration, using a token lets merchants process charges, perform refunds, or void transactions without storing the actual card data on their systems, significantly reducing the risk of exposure.

Encryption

Encryption technologies help protect cardholder data during transmission. This ensures that clear-text payment information is never accessible within the merchant's network.

Address Verification Service (AVS)

AVS acts as a fraud-prevention tool, particularly for online (card-not-present) transactions. Where supported by the card scheme and issuer, it verifies the cardholder's submitted billing address against the address on file with the card issuer.

Artificial intelligence and advanced anti-fraud measures

Payment processors conduct real-time checks using parameters like the card's country of issue and previous payment history to gauge the legitimacy of a transaction. Modern platforms also deploy AI and machine learning to help detect fraud in real-time, reducing false declines while optimising the overall conversion rate.

Security standards and compliance

Robust payment solutions must adhere to applicable legal requirements and industry standards such as PCI DSS (Payment Card Industry Data Security Standard). Processors also help businesses meet the card scheme and regional requirements in the markets where they operate. 

The right payments setup improves your bottom line and sets your business up for growth. Optimising your payment processing reduces costs, increases conversion, and even opens up entirely new ways to make money.

Reduced transactional and operational costs

Every transaction has a price tag, but smart processing keeps those costs down:

• Intelligent routing: For dual-network debit cards, some processors can automatically route payments through an eligible network to help lower costs while managing authorisation rates.

• Local acquiring: Processing payments locally instead of cross-border can help reduce international fees for eligible transactions and keep conversion rates high.

• Cheaper payment methods: Some local payment methods save businesses an average of , compared to credit and debit cards.

• Operational ease: A single, unified platform automates manual tasks like reconciliation. This frees up your team for higher-value work.

Increased conversions and revenue

A streamlined payment flow helps you avoid losing customers at the finish line:

• Higher conversion rates: Advanced fraud detection can help distinguish potentially fraudulent transactions from legitimate ones, which reduces false declines and boosts success sales.

• Reduced cart abandonment: By offering a customer’s preferred local payment method and automatically keeping card details updated where supported, you can help stop sales from falling through.

Unlocking new revenue streams

For SaaS companies and platforms, payments can transition from an expense to a profit center. 

• White labeled service: By , platforms can offer payments to their users under their own brand, while the underlying payment services are provided by the payment provider. 

• New revenue through fees: Platforms may earn revenue from fees charged for integrated payment services, subject to their commercial arrangements. Payment processing and other provider fees still apply.

Following RBA reforms, eftpos, Mastercard and Visa introduced no-surcharge rules from 1 October 2026, and American Express also removed surcharging from that date. Merchants must comply with the applicable network rules, subject to any relevant exceptions. Certain domestic interchange fee caps were lowered at the same time, but payment processing fees still apply, so it’s important to review the overall cost of accepting payments.

The payment processing platform you use needs to match your business needs. When evaluating, consider a platform’s security features, its global footprint, currency options, and integrations. 

Other critical factors to consider include:

• The quality of the customer checkout experience

• A unified reliable architecture with minimal points of failure and consistent uptime

• The availability of real-time analytics and reporting

• Dependable 24/7 customer support

• The overall total cost of ownership, which includes transaction and setup fees

You should also look at the architecture of the platform. At Adyen, payment processing is part of our solution, which lets you connect payments data across your channels. That way you can deliver consistent, smooth payment experiences across supported channels and markets through one platform. 

The right solution depends on your business needs. A platform that combines the gateway, processing and acquiring can simplify payment operations. This consolidated approach is why brands like have seen such growth, with a 118x increase in GMV and a 50x increase in revenue after switching to a unified payments setup with Adyen.

Payment processing is the foundation of modern business

In a world where customer expectations and security threats are constantly evolving, your payment processing strategy cannot afford to be static. By understanding the journey of a transaction, you can optimise your operations, reduce unnecessary costs, and provide a frictionless experience for your customers.

Curious how to reduce the overall costs of payments? Contact our sales team today to simplify your operations and reach more shoppers globally. to learn how things like intelligent routing and local payment methods can help you reduce costs.

• What is payment processing?: Payment processing is the underlying infrastructure that securely handles and moves funds between a customer's account and a merchant's account.

• Speed relies on a complex tech stack: A sophisticated ecosystem of payment gateways, processing networks, acquiring hosts, and 3D Secure balances fast, frictionless checkouts with strong impenetrable security.

• The process happens in two phases: For a typical card payment, authorisation usually takes seconds, while settlement and payout happen afterwards, on a timeline that depends on the payment method and payout schedule.The initial transaction and approval happen in mere seconds, while the settlement and reconciliation phase takes roughly 24 to 48 hours to deposit the actual funds.

• Multiple layers help protect payments ensure security: Sensitive payment data is protected through a combination of tokenisation, ePoint-to-Point Encryption, AI-based fraud detection, and strict PCI DSS compliance.

• Optimised processing boosts profitability: Smart payment strategies can reduce operational costs via intelligent routing, improve conversion rates with local payment methods, and can even unlock new revenue streams like white-labeled financial services.