Payments 101

Introduction

Payments are what keep your lending business going. As such, we understand how important it is to get them right. Our software was made with different types of lenders in mind, and we're confident we have a payment solution for whatever your lending model requires.

But you may be wondering, how do we define payments, and how does LoanPro handle them? This article will serve as an introduction to the topic of payments and will answer those questions. Here we provide the conceptual basics, and our Payments – Intermediate article explains how to actually log them.

What Payments Are

We'd say it's safe to assume that most people understand what a payment is on a basic, conceptual level—a transfer of something of value for a good or service of some sort. In your case, a payment is likely a transfer of money from a borrower who is repaying the loan that you offered them. While that's easy to understand, there is much more to payments below the surface.

For example, let's say you are out and have decided to use your credit card to purchase something that has caught your eye. When you use your credit or debit card to purchase something or make a payment, the transaction is often simple for you as the consumer. Your card is swiped or inserted into a machine, the funds leave your account, and the seller trades you their good. But there is much more going on here. The seller, otherwise known as a merchant, has had to pay a fee to a merchant services provider so that you can use a credit card at their business. And their card reader does more than just scan the card: it also connects them to the credit card company so that the funds can be transferred.

But instead of using your card, maybe you'd prefer to just send funds from your bank to the merchant's bank. Seems pretty straightforward after all. But the banks need a way to connect to each other as well, so a third-party processor needs to get involved to help.

As you can see, it can get a little complicated. As a lender whose business is dependent on receiving payments from borrowers, setting up the methods to do so can sound intimidating. There is no need to worry, though; we've got you covered. Our software is already integrated with third parties so that selecting a way to receive payments from your borrowers is effortless. Below, we'll break everything down in a simplistic way and explain how LoanPro can make receiving payments the easiest part of your business.

How Payments Work Within LoanPro

Let's begin by explaining how LoanPro categorizes payments.

Types of Payments

LoanPro's Loan Management System (LMS) separates payment methods into two categories: those that are only logged and those that are logged and processed. We categorize payments like this because the payment methods that they consist of work differently on a fundamental level in LMS.

Only Logged

Our first category is logged payments. This category is the simpler of the two, as it only consists of one payment method — cash payments. We call these "logged" payments since LMS is not directly involved in these transactions and only records a log. If you have borrowers that prefer to make payments with cash, LMS can handle this. While the software can't physically take cash from your borrowers (that's where you come in), our implementation of Cash Drawers makes it easy for you and your loan servicers to receive and track cash on a daily basis.

Logged and Processed

"Logged and processed" payments, on the other hand, are payments that LMS is directly involved in. These are the transactions that occur within LoanPro's software and it encompasses payments involving bank cards and integrated bank transfers. Logged and processed payments also include payments made through customer-facing payment portals and AutoPays. When a payment that falls under this category occurs within LMS, the transaction is completed within the software via our integrations and then logged within the LoanPro UI.

The Payment Process

Now that you understand how LoanPro categorizes payments, let's take a look at the overall process. We'll keep this breakdown simple and go into greater detail in our other payments articles.

  1. The process begins with the creation of a payment profile in the Loan Management System (LMS). While it seems like you are creating these in LMS, you are actually using Secure Payments via an iframe, which is kind of like a bridge between two websites. The payment profile is then selected as the method for the payment.
  2. The payment is initiated and processed in LMS, then sent to Secure Payments.
  3. Secure Payments then sends the payment information to the corresponding payment processor where it is processed on their end.
  4. Depending on the success or failure of the payment with the payment processor, a response is sent to Secure Payments which is then logged. Secure Payments relays this information back to LMS so that your payment records match in both places.
  5. LMS then updates the loan calculations to reflect the payment.

Here's a diagram of how everything works together:

Secure Payment's Role

The safety of your payment information is always a top priority of ours. To ensure your information is always safe, we created Secure Payments, a PCI-compliant product separate from LMS. Your payment profile information is stored here, and we tokenize it to ensure security. LMS stores only basic payment information and uses the token in Secure Payments to initiate transactions. Like we mentioned, the two products are separated, but they communicate with each other to match payment information.

Secure Payments is also where you will create payment processors — third-party entities that facilitate the transfer of funds. Once you create a processor in Secure Payments, it can be used for payments in LMS. However, we'll cover that topic in greater detail in our intermediate article.

Terminology

There are a few terms that you will need to know to understand the payment process. Here is a list of common terms:

Term

Definition

Payment Method

The type of a payment your borrowers use in a transaction. Payment methods are broad categories such as cash, bank cards, or direct bank transfers.

Payment Profile

The specific account used for a payment method. Payment Profiles are the individual credit cards and bank accounts that your borrowers supply so they can make payments.

Merchant

The entity receiving a payment. In the instance of lending, you, the lender, are the merchant.

Merchant Services

A third-party entity that provides merchants with the ability to accept payments through credit and debit cards. Credit and debit card transactions are made through a terminal, which can be a physical swipe at a cash register, or virtual through an online provider like Authorize.net.

Payment Processor

A third-party entity that processes payments for you. Payment Processors facilitate the transfer of funds between banks.

Secure Payments

A separate product we have created that stores payment profile information to maintain security and PCI compliance. Secure Payments is separate from LoanPro, but the two communicate with each other to match payment information.

What LoanPro Does Not Handle

While we can help with most things, there are a few things that we won't be able to help with. For example, we can't handle your relationships with payment processors for you. And if a payment fails for some reason, it will be much more helpful to contact them.

It's also important to be mindful about how payment processors differ from each other. Each processor offers a different set of expertise, and one may fit your lending model better than another. We can't choose your processors for you, but we recommend researching which processors are right for your company.

Next Steps

At this point, you have a good foundational understanding of how payments work. Now, we suggest you read Payments – Intermediate, which explains how to set up payment profiles and how to make payments within LMS. We also recommend reading Payment Processors 101 for more information on processors, and Secure Payments 101 for an overview on the product.


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