What is a transaction processing system (TPS)?

A TPS creates a fast and accurate execution environment, ensuring data availability, security and integrity through various forms of information processing. A TPS also provides customization and automation features to expedite computer system processing activities and enable reporting for business intelligence (BI) forecasting and higher-level trend analysis.

The first TPS, Sabre, was built by IBM for American Airlines in the early 1960s. Sabre was designed to process up to 83,000 daily transactions and ran on two IBM 7090 computers. Later iterations of Sabre, such as Airline Control Program (ACP) and Transaction Processing Facility (TPF), would be adopted by large banks, credit card companies and hotel chains. These days, companies across every major industry rely on modern TPS software for processing business transactions.

Distinct from a merchant’s point of sale (POS) system—which is used for activities like reading credit card data, printing receipts and managing cash payments—a TPS stores, sends and receives transactional data necessary to validate and complete a business transaction. For example, a customer at a grocery store purchasing a bag of coffee beans with a credit card will swipe their card at the POS, and the TPS will collect their card information, communicate with the customer’s bank and approve or decline the purchase.

An online merchant will also use a TPS called an online transactional processing (OLTP) system to verify and complete a similar purchase. In this case, the OLTP might also communicate with the merchant’s fulfillment center to check product availability and distribute shipping instructions for fulfilling customer orders.

When considering online transaction processing systems it is worth noting the distinction between OLTP and similar online analytical processing (OLAP) systems. Although both are used for data processing, each serves a different function.

OLTP is designed for executing online database transactions. These types of systems are typically built for service workers (cashiers, bank tellers, airline desk clerks) or customer self-service portals (online banking, e-commerce, hotel or travel bookings).

Conversely, online analytical processing (OLAP) systems are optimized for complex data analysis. These types of systems are used to generate useful reports and insights from complex data sets and are typically used by data scientists and business analysts to facilitate business intelligence (BI), data mining, and improve big-picture decision-making.

Regardless of the provider, a sufficient TPS fulfills three main functions.

1. System runtime functions: Basic functions associated with the purpose of processing a transaction while maintaining data integrity, availability and security—all with fast response times and high transaction throughput.
2. System administration functions: Functions associated with system administration, such as the configuration, monitoring and management of the TPS.
3. Application development functions: To better suit the particular business application, a modern TPS offers customization features to access data, perform intercomputer communications and design and manage unique user interfaces.
   

Transaction processing systems (TPS) and online transactional processing systems (OLTP) can be categorized into two main information processing methodologies. A company’s TPS choice will be dependent on their unique business needs, while a hybrid model may also be employed.

Batch transaction processing methods collect transactions over a set period of time and process them all at once in scheduled intervals. Batch processing is an ideal method for handling large volumes of transactions efficiently, such as payroll transactions or bulk data updates. While batch processing is designed to efficiently process complex data sets, there is an inherent delay in response time.

TPS systems like OLTP use a real-time processing methodology in which the TPS will process each transaction as it occurs. These systems offer an immediate response which make POS transitions, online purchases and reservation systems possible.

For both batch processing systems and real-time systems, a transaction processing system (TPS) can be divided into four main components.

The goal of any transaction processing system (TPS) is to enable smooth business transactions. To this end, a viable TPS should offer the following critical features:

• Controlled access: As a critical component of any business’s information processing system, a robust TPS should provide secure controlled access for only authorized users and administrators.
• Connection with external environments: By definition, a TPS is designed to connect seamlessly with various external systems to distribute and receive information between customers, merchants, suppliers and, where applicable, banks and creditors.
• Expedited response times: For real-time TPS, fast response times are considered table stakes for businesses seeking to provide quick and easy transactions for their customers.
• Inflexibility: Although a TPS might be customizable to suit different organizational demands, it’s important for a TPS to also provide a rigid, replicable experience so that all transactions are processed similarly despite variables like time of day, location, user or customer.
• Reliability: Stability and security are critical components of a quality TPS. Transaction data must be secured without error, ensuring that source documents are regularly backed up and available for validation.
• Inter-system distribution: A company’s TPS does not operate in a vacuum and must be able to distribute data and instructions with other internal information systems, such as sales processing systems or ledger systems.