How Do Electronic Payments Work?

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How Do Electronic Payments Work?

While most people use electronic payments daily now, they are a black box for most. Yeah, you just enter your CC details on some vendor’s site, click a button, and voila — you’ve ordered a product or service through electronic payment. But what is an electronic payment, actually? What does the “electronic money institution” or EMI term mean? How does it all work under the hood and how to use this technology to help your business prosper?

Let’s find out!

What is an electronic payment?

Electronic payment is a transfer of funds from one banking account to another using a payment gateway system, without sending any paper checks or fiat money over. Financial organizations able to provide electronic payment processing services and issue electronic money are called electronic money institutions. They need to obtain an electronic money institution license from a regulatory body prior to engaging in such an activity.

There are three main types of using EMI or electronic money:

  1. One-time payments from customer to vendor, like when you pay your bills, top up your mobile carrier account or purchase something on an eCommerce site.
  2. Recurring payments customer to vendor, which are best represented by monthly automated renewals of gym subscriptions, Spotify subscriptions and so on.
  3. Automated bank-vendor payments on behalf of the customer, like when a person entrusts the bank to pay their bills automatically

Other types of using EMI or electronic money include virtual credit cards and Automated Clearing Houses or ACH. Virtual credit cards are one-time items you can create with your online banking providers, adding an extra layer of security to your online transactions and ensuring your actual credit card number is not entered online. ACH stands for account-to-account transactions that do not involve using credit card details at all. These can involve payments to IBAN number, SEPA account, and others.

How does an electronic money institution process payments?

Let’s take a look under the hood and see what happens when you press that purchase button.

The first to act is the payment gateway used by the vendor, which has to approve or deny the transaction. At this step, it should validate you as a credit card owner, and perform all the required AML/KYC checks and other risk mitigation procedures using some anti-fraud system like Covery.

If the transaction is considered legitimate, the payment gateway uses its encryption protocols and security measures to safeguard the data in transit to an issuer bank or credit card company.

The latter checks whether there is a sufficient sum on the account. If there is enough money, the transaction is approved and your payment for the product or services ordered goes to the vendor’s account. If there is not enough money, the transaction is declined and you are informed of the situation.

Benefits of electronic payments

The most important benefits of electronic payments are speed, security and low cost of payment processing by an electronic money institution. Let’s take a closer look at why these bring so much value to your business:

  • Speed. Electronic payment goes through in a second (sometimes less), while check payments take a while to reach their destination
  • Security. A properly validated electronic payment from a verified customer is much harder to forge. Of course, there are lots of types of card-not-present fraud, but this is what anti-fraud tools are there for.
  • Low cost of payment processing. By transferring monetary values from one banking account to another, no paper is wasted, no postage services are used and no mailman has to be paid. Of course, there are expenses to pay for risk mitigation, KYC, AML and other electronic money institution services, but these are spread across thousands of transactions and are barely noticeable for a merchant.

In short, your payments are instant, secure and don’t cost a fortune for you. These are the reasons behind electronic payments becoming so increasingly popular in the USA, Europe, and developed countries worldwide.

Conclusions

Now you know what an electronic payment is, how it works, and the benefits it provides. You also know that you will need an anti-fraud solution to ensure electronic payments you accept don’t fire back at you due to fraudulent activities. 

Covery is ready to lend a hand and help with end-to-end risk mitigation, transaction monitoring, customer authentication and chargeback prevention. Contact us for a free demo and learn more about how Covery can provide value for your business