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What is Transaction Processing?

By Garry Crystal
Updated: May 16, 2024

Transaction processing is a computer-based group of logical operations. For it to work, all the operations must succeed or fail as a group. A simple example of transaction processing is paying a utility bill from your bank account. The process of paying a bill from your account consists of debiting your account by say, 100 US dollars (USD), and crediting your utility provider’s account.

This may seem like a simple transaction, but it may actually consist of several sub-operations. If the debit of 100 USD was successful, but the credit did not go through to the utility provider’s account, then the transaction would fail. Your 100 USD would be lost somewhere in the transaction. The transaction processing system allows all the operations to be grouped into a single transaction in order to prevent problems in consistency.

Systems capable of transaction processing must pass tests for atomicity, consistency, isolation and durability, otherwise known as the ACID test. Transactions are known as atomic, meaning that the transaction will either happen or not. If one account is debited, then another account has to be credited.

The transaction processing system must always be consistent with its own rules. If errors occur in the transaction on either side, then the transaction will fail. Isolating transactions means that other processes never see information during the transaction. They may see information before or after the transaction, but not during the transaction. For example, if two people are booking the last theater seat at the same time, they can both see the seat before the booking, but only one person will succeed in booking that seat.

Transactions must be durable. This means that when that final seat in the theater has been booked and you have received notification that the seat is yours, it is permanently recorded. No matter what problems occur to the system, there are back-ups in place in the transaction processing system to ensure that the record stays permanent.

Transaction processing systems have been available since the 1970s, and nearly all businesses use them. The advent of the Internet has seen a boom in these systems and software. Over the years, the cost of buying and implementing the necessary software has dropped so much that most businesses can apply it profitably.

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Discussion Comments
By winslo2004 — On Jul 28, 2011

@sunnySkys - Smart phones will play a huge role in transaction processing as time goes by.

There are already applications for specific stores like Chipotle and Amazon which allow you to do everything from your phone, including browse, order, and pay (with a preset secure credit card number).

This is very common in other parts of the world, with people using their phone as an "electronic wallet". As electronic devices get smaller and more powerful, I would expect to see more and more of this.

By BigManCar — On Jul 28, 2011

@Veruca10- Another thing about phone processing is that it is often a tool used by con artists. They frequently target elderly or other lonely people, and they take them for millions of dollars a year. There is little in the way of a paper trail, and few of these people get caught.

There is also a scam where they call an office and nonchalantly ask for the model number or serial number of the printers or copy machines, and then send huge shipments of substandard paper and toner with a bill due on arrival. They have the name of the person they talked to and they frequently threaten to send the bill to collections if it is not paid.

To me, it is risky to deal with people strictly by phone. In my business, we use transaction processing solutions that are set up to provide confirmation and proof of the transaction for both us and the customer.

By Veruca10 — On Jul 27, 2011

@idemnifyme - I agree with you. A confirmation number is nice, but it does not match a receipt if something goes wrong. Besides, the person calling you could just make up a number if they weren't legit. It's one thing if you call them, but if they call you how do you know who they are?

I used to live with a roommate who was always letting the utilities go late, and he would get calls from bill collectors who would take a "phone check" from him, getting his bank account and check number from a check that he would then void, and they would process the payment that way.

It seemed nuts to me because it could be anyone calling. Don't remember it going wrong on him, though.

By indemnifyme — On Jul 27, 2011

@sunnySkys - Transaction processing on a phone sounds neat in theory, but I think a lot of people would want to have a receipt. Although, I'm sure there are ways around that.

For instance, most transactions that are processed remotely come with a confirmation number. At my job I process payments over the phone all the time, and I always make sure to give that number to my customers as proof of payment. That said, some of our customers aren't comfortable making payments over the phone and prefer to make their payments in person in the office.

I suppose if you were processing transactions on a phone you could give them a confirmation number. Or maybe email them a receipt!

By sunnySkys — On Jul 26, 2011

Online transaction processing sure has changed the way we do business. And new transaction processing methods are being invented all the time!

I was reading an article awhile back about payment processing using iPhones and android based phone. Apparently they now have apps that allow you to process a credit card transaction right on your phone! I think something like this has a lot of potential for small businesses and business people on the go.

By StarJo — On Jul 26, 2011

It’s good to know that online concert ticket transaction processing systems won’t give the same seat to two different buyers. I wondered what would happen if two people clicked to buy tickets at the same time. I’m glad that it is set up to ensure that doesn’t happen.

I have been buying my tickets in person because I didn’t know what to expect from online ticket vendors. Now that I know it is reliable and secure, I may give it a try. It sure would beat having to drive fifty miles to the nearest arena!

By seag47 — On Jul 25, 2011

I feel more comfortable dealing with exchanges of money online now that I know there is an ACID test. I’ve often worried about what would happen if one end of a process failed and the money had nowhere to go.

One payment processing system that I rely on is PayPal. If I am selling something through PayPal, the buyer uses it to send money to my account. Once the money is in my account, I can tell PayPal to send it to my bank account, and it will automatically be deducted from my PayPal balance.

It is a highly secure way to do business. I don’t have to worry about giving my bank account number to strangers, and I have learned that I can trust PayPal with that sensitive information to act as my middle man.

By anon77762 — On Apr 15, 2010

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By anon2467 — On Jul 12, 2007

HOW TO design database in TPS?

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