Published: 28 March 2024
Contributors: Josh Scheider, Ian Smalley
A transaction processing system (TPS) is a type of data management information-processing software used during a business transaction to manage the collection and retrieval of both customer and business data.
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.
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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.
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.
Any number of transactions—including invoices, bills, coupons and other types of orders like a purchase order—may be treated as inputs in a TPS. Theoretically, any type of order entry can be considered input data.
A TPS can generate a variety of use-case-specific outputs ranging from cash flow reports to receipts, and it can be utilized for record-keeping, data analysis, tax reporting and other official business purposes.
The processing system of a TPS reads the input, completes any data modifications or updates, and creates a useful output, such as a confirmation of sale or inventory report.
While storage may, in some cases, refer to physical data storage hardware, an average TPS will also create easily navigable directories for storing both input and output data, typically in some form of database.
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:
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Online transactional processing (OLTP) enables the real-time execution of large numbers of database transactions by large numbers of people, typically over the internet.
OLAP, or online analytical processing, is technology for performing high-speed complex queries or multidimensional analysis on large volumes of data in a data warehouse, data lake or other data repository. OLAP is used in business intelligence (BI), decision support, and a variety of business forecasting and reporting applications.
Mainframes are data servers that are designed to process up to 1 trillion web transactions daily with the highest levels of security and reliability.
Data management is the practice of ingesting, processing, securing and storing an organization’s data, where it is then utilized for strategic decision-making to improve business outcomes.
Data security is the practice of protecting digital information from unauthorized access, corruption or theft throughout its entire lifecycle.
EDI (electronic data interchange) is the intercompany communication of business documents in a standard format. The simple definition of EDI is that it is a standard electronic format that replaces paper-based documents such as purchase orders or invoices.