System Design Interview: Design a Payment Processing System

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What Is a Payment Processing System?

A payment processing system moves money from a buyer to a seller by orchestrating communication between the merchant, payment gateway, payment processor, card networks (Visa/Mastercard), and issuing/acquiring banks. Core requirements: exactly-once transaction processing (double charges are catastrophic), sub-second authorization, and compliance with PCI-DSS (cardholder data security). Stripe processes hundreds of billions of dollars annually.

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    • Payment Flow

    1. Tokenization: raw card number never touches merchant servers. Browser/app calls Stripe.js, which sends card data directly to Stripe and returns a payment_method_id (token). Merchant stores and uses the token, never the PAN (Primary Account Number). Reduces PCI scope dramatically.
    2. Authorization: merchant’s backend calls payment gateway (Stripe) to authorize the card. Gateway sends to card network (Visa). Card network routes to issuing bank (Chase). Bank checks: sufficient funds, card not blocked, fraud score. Returns approve/decline. Money is reserved (not moved) at this step.
    3. Capture: merchant confirms the amount to capture (can be <= authorized amount). Money moves from buyer's account to acquiring bank's escrow.
    4. Settlement: acquiring bank sends funds to merchant’s bank account, typically T+1 or T+2 business days. Batch process.

    Idempotency

    Exactly-once is the hardest problem in payments. Network timeouts cause ambiguity: did the charge succeed before the timeout? If the client retries, will it double-charge? Solution: idempotency keys. Every payment API call includes a unique idempotency_key (UUID). Server stores the key → response mapping. If the same key arrives again, return the stored response without re-executing. Implementation:

    BEGIN TRANSACTION;
SELECT response FROM idempotency_keys WHERE key = ?;
IF found: ROLLBACK; RETURN stored_response;
-- not found: execute payment
[execute charge against card network]
INSERT INTO idempotency_keys (key, response, created_at) VALUES (?, ?, NOW());
COMMIT;

    Ledger (Double-Entry Accounting)

    Every financial movement is recorded as a pair of entries: a debit from one account and a credit to another. The sum of all entries must be zero (invariant). This prevents money from being created or destroyed. Example: customer charges $100 →

    • DEBIT customer_account $100
    • CREDIT merchant_account $100 (pending settlement)

    Ledger table: append-only, never update or delete. Balance = SUM of all entries. Audit trail is implicit.

    Reconciliation

    Compare internal ledger against bank statements and card network reports. Discrepancies: fees not recorded, failed settlements, reversed transactions. Nightly batch job: fetch settlement files from Visa/MC (ISO 8583 format), compare with internal ledger, flag mismatches for manual review. This is how payment companies detect bugs and fraud that slips through real-time checks.

    Refunds and Chargebacks

    Refund: merchant-initiated return of funds. New transaction on the original payment_intent. Chargeback: bank-initiated dispute by the cardholder. Bank reverses the charge and sends a chargeback notice. Merchant must respond with evidence (transaction records, shipping proof) or accept the loss. High chargeback rate (>1%) triggers account termination by card networks. Fraud detection reduces chargebacks; dispute management system handles evidence submission.

    PCI DSS Compliance

    Payment Card Industry Data Security Standard. Never store raw card numbers (PAN), CVV, or full magnetic stripe data after authorization. Use tokenization (Stripe handles this). Encrypt data in transit (TLS 1.2+). Network segmentation: payment servers isolated from public internet. Annual audits and penetration tests for Level 1 merchants (>6M transactions/year).

    Interview Tips

    • Idempotency key is the central correctness mechanism — explain it clearly.
    • Double-entry ledger demonstrates financial systems knowledge — distinguishes senior candidates.
    • Tokenization: card data goes directly to gateway, never through merchant backend.
    • Auth + capture separation: important for hotels (auth at booking, capture at checkout).
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