Payment Processing 101: Learn How Your Money Gets To You. - PayPal

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Small BusinessPaymentsPayment ProcessingHow online payment processing works PayPal Editorial StaffPayPal Editorial Staff

October 1, 2025

October 1, 2025

5 mins read

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

  • What is online payment processing?
  • Online payment processing components
  • How does online payment processing work?
  • How to set up payment on a website
  • Online payment processing benefits
  • Choose PayPal for online payment processing
  • Frequently asked questions

What is online payment processing?

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.

Online payment methods

Many systems support a range of online payment methods, allowing customers to pay how they prefer:

  • Debit and credit cards are widely used payment types that allow customers to pay instantly by entering their card details online.
  • Digital wallets (like PayPal, Apple Pay, or Google Pay) let users pay with saved credentials for a fast checkout.
  • Bank transfers move money directly from a customer’s bank account to the business's, often through services like ACH (Automated Clearing House).
  • Electronic checks (eChecks) are digital versions of paper checks that pull funds straight from a customer’s checking account.
  • Prepaid cards are loaded with a set amount and function like debit cards, often used for gift cards or limited spending.
  • Direct debit allows the business to automatically withdraw funds from a customer’s account on a recurring basis, which is common for subscriptions or billing plans.

Online payment processing elements

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

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

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.

The payment gateway

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.

The customer

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.

How does online payment processing work?

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.

  • Authorization: This is the initial step where the customer’s payment details are sent through the processor to their bank (the issuing bank). The bank checks for things like available funds or potential fraud. If everything looks good, the transaction is approved.
  • Settlement: Once the payment is authorized, the funds are transferred through the card network to the business's merchant account or bank (the acquiring bank). This is when the money officially lands in the business's bank account.

Card authorization

Here’s how credit card authorization works during online payment processing:

  1. A customer makes a purchase on a business website using a credit or debit card.
  2. The payment gateway encrypts the card details and securely sends them to the payment processor.
  3. The processor forwards the request to the customer’s issuing bank to check for sufficient funds or available credit.
  4. The issuing bank responds with either an approval or a denial.
  5. The processor relays that response back to the website and notifies the merchant bank to credit the business's account if the payment is approved.

Settlement

The second piece of the online payment system process (where you get paid) is the settlement:

  1. The card issuer sends the funds to your merchant bank, which deposits the money into your account.
  2. The funds are available.

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.

Associated pricing and fees

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:

  • Interchange fee: Paid to the issuing bank. This is a percentage of the sale and can vary based on the card type, transaction size, and industry.
  • Assessment fee: Charged by the credit card networks (like Visa or Mastercard). It’s another percentage added on top of the interchange.
  • Merchant account fee: Taken by the merchant bank. This also varies depending on the business model, sales volume, and risk level.
  • Processor fee: A flat fee (for example, $0.30) per transaction, plus potential charges for account setup, monthly access, or refunds, even for declined payments.

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:

Overview of types of pricing models of online payment processing systems.

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

How to set up payment on a website

Setting up payments on a website might seem like a big lift, but the steps are pretty straightforward.

  1. Choose a payment processing partner

    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.

  2. Create a merchant account

    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.

  3. Integrate payments into the site

    There are a few ways to add payments depending on the setup:

    • Use an e-commerce platform (like Shopify or WooCommerce) with built-in payment processing
    • Add a payment gateway to the custom-built website
    • Use hosted solutions like PayPal payment buttons or forms for quick setup

  4. Meet PCI DSS compliance requirements

    Payment Card Industry Data Security Standard (PCI DSS) guidelines helps protect customer data.

  5. Run test transactions

    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.

  6. Monitor and maintain

    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.

Online payment processing benefits

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:

  • Convenience: Customers can pay almost anytime, from almost anywhere, without needing to visit a physical store. Modern payment processing systems support multiple methods like credit and debit cards, digital wallets like PayPal and Apple Pay, Venmo, and even buy now.
  • Expanded customer reach: By accepting payments online, the business can serve non-local and even international buyers. That’s why online payment processing for small businesses is a key driver of growth.
  • Fast transactions: Payments are processed almost instantly, which helps speed up order fulfillment and improve cash flow.
  • Stronger security: Leading payment processors use encryption, tokenization, fraud detection, and PCI DSS compliance standards to help protect sensitive data and reduce risk.
  • Better customer experience: Saved payment methods, one-click checkout, and subscription billing make repeat purchases frictionless — key to keeping customers coming back.
  • Smooth integrations: A solid payment processing system can plug into an e-commerce platform, inventory software, and CRM. This not only reduces manual work but also provides actionable data for tracking trends.

Choose PayPal for online payment processing

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.

Start accepting payments with PayPal →

FAQs

How does online payment processing work for small businesses?

For small businesses, online payment processing works by connecting a website or sales platform to a payment processing system that handles each step of the transaction, from securely collecting customer payment info to transferring funds into the business account.

Using a provider like PayPal, small businesses can accept a range of payment types like credit and debit cards, digital wallets, and even buy now, pay later options without needing to set up a separate merchant account.

The system also includes built-in fraud protection, PCI compliance, and tools to help build customer trust from the very first transaction.

How do I set up online payment processing?

To set up online payment processing, a business can set up a merchant account with a provider like PayPal.

Some providers have video or text tutorials that walk through the process, and customer service representatives can also assist merchants who need further help.

Many online payment processing services integrate with bookkeeping and website software for convenience.

How much does online payment processing cost?

The cost of online payment processing may depend on the quantity of transactions the business plans to process, plus factors like the geographical location of the payer and payee, the credit card being used, or the account level the business has subscribed to with the payment processor.

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