What Is a Transaction Processing System (TPS)?

By Indeed Editorial Team

February 4, 2022

An illustration of a hand taking a credit card out of a wallet.

Purchasing an item at a store or online requires an exchange of currency that happens through a series of processes that help transition the money to the store and the product to a customer. Each transaction depends on the functionality of transaction processing systems to complete the sale.

In this article, we explore how a transaction processing system works, its two systems types, the main components of a TPS and the benefits of using one.

What is a transaction processing system?

A transaction processing system is software that ensures the completion of a business transaction and also keeps track of transactions. An OTPS, or online transaction processing system, is an equivalent system that online merchants use for e-commerce.

The transaction processing system, or TPS, ensures that each transaction is successful by storing, sending and receiving information via a database. It supplements the business point of sale system (POS), which is the unit that reads credit cards, prints receipts and accepts and stores cash.

For example, if a customer purchases a book from a shop, they might pay with a credit card. A transaction processing system takes the customer's card information, communicates with their bank and approves or declines the purchase based on their account balance.

Related: What Is OLTP and What Are the Benefits? (Plus Examples)

Types of transaction processing systems

There are two types of transaction processing systems:

Batch processing

Through batch processing, a TPS interprets sets, or batches, of data by grouping items based on similarities. Batch processing can create a time delay because it reviews several sets of data simultaneously, requiring more computing power.

Example:  A customer pays for a subscription service at the end of the month, The TPS system processes the transactions as a batch because they occur at the same time. In this case, a delay in processing transactions is acceptable because the system only interprets batches once per month.

Related: Cashier Skills: Definition and Examples

Real-time processing

Real-time processing is a method to process transactions as they appear. This helps prevent delays in processing and can provide a more accurate result. 

Example: An e-commerce website might use a TPS to process credit card transactions in real time to ensure payment before the company starts its fulfillment process. Processing transactions in real time also helps the company identify and address errors quickly, as well as increase its overall response times.

Related: What Are the Different Types of Databases?

Transaction processing system components

Each TPS has four major components that help it function:

1. Inputs

An input is an original request for a product or payment that an outside party sends to a company's TPS. If your company uses batch processing, its TPS stores groups of inputs and then processes them at a later time. In comparison, if your company uses a real-time system, it processes each input as it arrives. 

Inputs typically include:

  • invoices

  • bills

  • coupons

  • custom orders

2. Processing system

The processing system reads each input and creates a useful output, such as a receipt. This element can help you define the input data and what the output should be. Based on the kind of TPS your company is using, processing times can vary.

3. Storage

The storage component of TPS refers to where a company keeps its input and output data. Some companies store these documents in a database. The storage component ensures the organization, security and accessibility of every document for later use. 

For example, if a vendor would like to confirm that your company has paid an invoice, you can check your system's storage to find the invoice and determine if you delivered a payment.

4. Outputs

TPS outputs are documents the system generates once it completes processing all inputs, such as receipts the company stores in its records. These documents can help validate a sale or transaction and provide important reference information for tax and other official purposes. 

For example, if a vendor sends your company an invoice, you can pay the invoice and send the vendor confirmation of your payment. Then, you can amend the original invoice and mark it as "paid" in the company's TPS.

Related: A Guide to Purchase Orders (With FAQs)

TPS benefits

Here are some common benefits of using a TPS:

Increased transaction speeds

With a TPS in place, businesses can effectively increase the speed of each transaction to minimize wait times for customers. Some systems process transactions in real time, while others collect transaction information during a set period and then process it at a later time, often after business hours.

Improved cost efficiency

A TPS can potentially conduct and organize thousands of transactions throughout the day. This can save a company money by reducing the need to upgrade the system or use more than one system to meet demand.

Improved reliability

Using a TPS can ensure that you process customer transactions quickly and accurately. A reliable TPS can also help your organization save money on potential troubleshooting or coding costs for malfunctioning systems.

Automated management

ATPS automates much of a company’s internal resource and revenue management. By increasing automation, employees can spend less time reviewing transactions. Automation is an important part of increasing the profitability of a business because it offers employees more time to focus on engaging tasks that require critical thinking.

Related: OLTP vs. OLAP: What's the Difference? (Plus Benefits and Examples)

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