Customers in this age of instant gratification always expect a smooth and seamless online payments experience.
As a business owner, you must have a clear understanding of how online payments processing works to be able to create a hassle-free checkout process that will keep buyers coming back to your eCommerce store.
This article will show all you need to know about online credit card processing and how you can select the best payment services provider for your needs.
TL;DR
- Online payments processing in each transaction brings together multiple parties and platforms including the customer, the merchant (you), a payment gateway, a payment processor, the card issuing bank, a merchant account, the acquiring bank that issues the merchant account, and your own bank to facilitate the movement of funds from your customer to your business bank account.
- There are six main payment methods used in online payments, including credit & debit cards, digital wallets, ACH & bank transfers, direct debit, Buy Now, Pay Later (BNPL) services, and cryptocurrencies.
- You need the services of a reliable payment service provider to securely accept and process card payments and the right provider for you will be one that supports your preferred payment methods, sales model (one-time payments or subscriptions), and geographical reach (international sales).
How Online Payment Processing Works
On the surface, online credit card processing happens in seconds. Your customer visits your online store or mobile app, selects a product or service to fill their cart, inputs credit/debit card details on the checkout page, and receives payment confirmation mere moments later.
It happens over and over again without people thinking much about it.
However, there are several activities going on at the backend to make this seemingly simple process possible.
Eight different entities/platforms are involved in the process, and they include:
- The cardholder: this is the customer looking to purchase goods or services on your eCommerce store or mobile app.
- The merchant: this is you, the business owner, who receives the customer’s credit card details via your website’s checkout page to be sent for processing.
- The payment gateway: this is a cloud-based payments software integrated with your website that’s responsible for the secure transfer of your customer’s credit card information to your payment processor.
- The payment processor: this is the payment services provider that handles the verification and transfer of data and funds between the financial institutions involved in that transaction.
- The issuing bank: this is the customer’s bank that issued the credit card to the customer on behalf of the card networks, such as Visa, American Express, Mastercard, and Discover.
- The merchant account: this is a special bank account that allows you to accept and process credit and debit card payments.
- The acquiring bank: the is the financial institution that issued the merchant account and receives the funds from the transaction into that merchant account until the payout date.
- The business account: this is your primary account where the funds from the transaction are finally paid into after the payout date for you to use at your discretion.
Now that we have established all the players and platforms involved in the online card payment process, here is a high-level breakdown of the steps involved in the transfer of the funds from your customer’s bank account to your business bank account.
Payment initiation
The customer kickstarts the process by selecting a preferred payment method from a range of options—credit cards, digital wallets, and so on—via your checkout page to pay for a desired product or service.
The customer will input the required payment information on the page and then click “Pay” to authorize the transaction.
Encryption and transfer of payment information
The payment gateway that underpins your checkout page will now encrypt the customer’s payment details as stipulated by industry data security regulations like PCI DSS (Payment Card Industry Data Security Standard) before transferring the data to your payment processor.
Some payment gateways use tokenization to secure sensitive customer details. It’s a process where the credit card data is replaced by placeholder values on your local system, while the original data is stored externally in a secure data vault.
Payment verification
Once the payment processor receives the now-encrypted payment information, it will be sent to the issuing bank for verification.
The goal here is to check the authenticity of the card details, availability of required funds, and absence of fraud.
Payment authorization
The issuing bank will do a quick check to ensure everything is in order—which is usually an automated process.
If there are no issues, the bank will inform your payment processor that the transaction has been approved.
Confirmation
Once the transaction is given the go-ahead, the payment processor will relay the information to your payment gateway, which will be communicated to your customer as a “Payment accepted” message.
You, the merchant, will ideally also receive a message via email or another means of communication to alert you to the successful transaction.
Settlement and funding
At the time the payment processor sends a confirmation message to your payment gateway, it will also facilitate the transfer of funds from the customer’s account to your merchant account—this is known as the settlement process.
The funds will be held in the merchant account for a pre-determined period (a couple of days or hours) depending on the policies of your payment services provider before it’s finally transferred to your business’ bank account—which is the process known as funding.
Types of Online Payment Methods
Credit and debit cards
Credit cards allow customers to make purchases from your eCommerce store using a line of credit guaranteed by their card network. Debit cards let customers pay for your goods or services using funds from their checking account that’s theirs without any encumbrances.
Most online shoppers opt for credit and debit card payments, and accepting them is a must for any online business.
Digital wallets
Digital wallets let your buyers make online payments quickly and securely via any internet-connected device using pre-stored financial details.
They are popular with buyers under 35 years of age and must be part of the mobile payment methods you support if your target audience falls within that demographic.
Popular digital wallet brands include Apple Pay, Google Pay, Samsung Wallet, PayPal Digital Wallet, and Venmo.
ACH and bank transfers
An ACH (Automated Clearing House) payment is an electronic transfer of funds from your customer’s bank account to your business account using the ACH network.
In a similar vein, a bank transfer is a direct transfer of funds from your customer’s account to yours using the bank’s mobile app or website.
These two closely related methods of payment—ACH payments and bank transfer—have lower processing fees, which makes them more cost-effective than card payments. However, credit and debit cards are more convenient.
Direct debit
A direct debit is a payment method where your customer authorizes your business to withdraw a specific amount from their bank account at pre-determined intervals over a period.
It’s a recurring form of payment perfect for businesses using a subscription business model.
The model is typically used by service-based businesses, but it can also be used by companies selling physical products.
A good example is Frank and Oak, a Canadian apparel brand that offers a membership model to customers where the company ships five items monthly to each subscriber.
Buy now, pay later (BNPL) services
BNPL is a payment method where your customer uses a short-term financing service to pay for your product or service.
You will receive your payment in full, while the customer will repay the loan in interest-free installments (but there are associated fees) to the credit provider.
Popular BNPL service providers include Klarna, Afterpay, and ClearPay. You will have to integrate the service into your checkout page so your customers can have the option when making payments.
Cryptocurrencies
Cryptocurrencies like Bitcoin, Ethereum, and Tether use decentralized blockchain technology and cryptography to ensure fast and secure transactions.
You must set up a cryptocurrency wallet to accept digital currency and also implement a medium for customers to provide their own wallet address and the payment amount they are sending.
The anonymity offered by cryptocurrencies is their main draw, but they are volatile due to constantly changing exchange rates and are subject to intense scrutiny by government regulatory institutions.
So, if you want to support this payment method, you must constantly stay aware of evolving regulations to ensure you are always on the right side of the law.
Choosing the Right Payment Processor
The size of the online payments market is expected to reach $24 trillion by 2030, and several companies are looking to tap into that market by offering their own suite of online payment processing services.
This can make it a challenge to select the right payment service provider for your business.
To make the decision-making process easier for you, here are some key factors to consider when evaluating the many options on the market.
Accepted payment methods
Customers today want to have a range of payment methods to pick from and you must ensure you support every payment option they desire at any point in time to keep them happy.
You must review the payment methods available on the provider’s platform and ensure all the preferred payment methods of your target customers are included.
Checkout experience
The payment gateway offered by the provider must give you the tools to tweak the checkout page’s design to match your brand.
You should be able to accept payments online on a portal that carries your logo, brand colors, font designs, and any other thematic features used to convey your brand identity.
Payment processing fees
Payment service providers (PSPs) always charge a fee per transaction to cover the costs associated with the processing of each payment.
This fee can be a percentage of the transaction amount, a flat fee, or a monthly subscription fee.
Some also have the bad habit of imposing hidden fees carefully buried in the contract document that can add up over time to eat up your cash flow. Setup fees, chargeback fees, and contract cancellation fees are examples of hidden fees.
You need to calculate the total costs of each provider and then compare their offerings to see who offers better value for money.
We should add that the way the charges are calculated can make a seemingly expensive provider cheaper over the long run.
For example, Stax Pay charges a fixed monthly membership fee which might not be the best option for very small businesses with low transaction volumes, but could be extraordinarily cost-effective for businesses that process more than $5000 per month.
Ease of integration
You shouldn’t have to be a developer to integrate a payment gateway with your existing ecosystem of software tools, especially your website or the CMS (Content Management System) you are using to host your eCommerce store.
The provider should ideally have a user-friendly set-up process plus dedicated support staff to help you with the integration process.
You should also ensure the provider offers robust API (Application Programming Interface) tools so your in-house IT staff can easily integrate the platform with your custom-made in-house software tools.
Security
The ease with which card payments can be accepted and processed makes them incredibly convenient and the preferred payment option of most buyers and retailers.
However, accepting and processing card payments means you will be handling sensitive payment data, and there are strict regulatory standards that dictate how such information must be safely stored and transferred.
The PCI DSS is the most important industry regulation relating to financial data security and you want to ensure the provider you are evaluating is PCI compliant.
You also have a duty to obtain an SSL certificate for your website, which shows that every exchange of data between your site and your customer’s web browser is encrypted.
Analytics
You should be able to track what’s going on with your business; like revenues, seasonal sales, abandoned carts, conversion rates, and so on.
Such insights will expose areas that need improvement so you can take appropriate steps to level up your approach.
The right provider will offer robust analytics and reporting tools that let you track and analyze business data in real time directly from your dashboard.
Customer support
Things won’t always go smoothly, and when you hit a snag you’ll want a provider you can reach out to immediately to help resolve the issue.
You should evaluate the level of customer support options offered by the provider.
Prioritize companies offering 24/7 live chat, email, and phone support.
The availability of a comprehensive online knowledge base is also very important. It will let you troubleshoot simple problems yourself, instead of waiting on the provider’s customer support staff.
Online reviews
Your research will tell you a lot about each provider. You can even run a demo or use the free trial period to evaluate the platform’s compatibility with your needs.
However, you may still miss deal-breaker issues because you haven’t spent months or years on the platforms.
Online reviews help compensate for that knowledge gap. You will hear from the mouths of current and former users of the platform.
Focus on both positive and negative opinions to build a holistic picture of the strengths and weaknesses of the platform.
Integrating Payment Processing Into Your Business
Below is a step-by-step process to help you get started with accepting online payments in your eCommerce, SaaS, or service-based business.
Step 1: Define your business needs
You should start by outlining the peculiar requirements of your business. This usually relates to the payment methods you want to offer, your sales model, and whether you plan to sell to an international customer base.
Evaluate each provider and add the ones that support your chosen payment options to your shortlist.
You should also decide whether you want to opt for a one-time payment model, a subscription model, or a combination of both models. The provider must offer the features you need to facilitate your chosen sales model.
If you plan to reach a global audience, then a multi-currency payment gateway is a must. The provider must also support credit cards, debit cards, and other payment methods issued by local banks in the relevant foreign countries.
Step 2: Choose the right payment services provider
This is why the first step above is so important. If you know what you want for your business, you can easily identify a provider that’s got everything you need.
It’s important to take your short-term and long-term needs into consideration when selecting a payment services provider.
For example, let’s say your vision for your business includes international expansion, but you are currently at a stage where all of your customers are within the same geographical region. It will be more prudent to opt for a robust payment gateway with multicurrency and language support that can meet your current and future needs, instead of a more basic platform that is only perfect for today’s needs.
This is because switching from one provider to another can cost you time, money, and even customers if the data migration process is botched with issues and complications that affect the services your buyers have come to rely upon.
Step 3: Get your merchant account
We already established that you can’t accept credit card payments without a merchant account.
You can apply directly for one from a merchant acquiring bank, but we recommend getting one from your payment services provider to make the process faster and smoother.
This is another factor to consider when evaluating third-party providers.
Some providers only offer a payment gateway and payment processing services, while some offer all-in-one services that include payment processing, payment gateways, merchant accounts, and other value-added services.
For example, Stax Pay is a powerful all-in-one platform that bundles a merchant account, payment gateway, and affordable payment processing in one package. It also lets you accept and process in-person, online, mobile, and recurring payments.
Step 4: Incorporate the payment gateway with your system (website, CMS, SaaS platform)
The next step after obtaining your merchant account is to incorporate the payment gateway (your online POS (Point of Sale) system) provided by your PSP with your website or platform.
Depending on your choice of PSP, you may have to integrate or embed the payment gateway.
Integrating the payment gateway with your website will create a situation where buyers are redirected away from your website to the provider’s platform to complete the online payment process.
PayPal’s payment button is a good example of a redirect payment gateway.
Whenever buyers click the “PayPal Checkout” button (payment link), they are redirected to PayPal’s official page to complete the transaction.
The buyer will then be sent back to your website once the payment is confirmed.
The main advantage of a redirect gateway is that it’s easy to implement, but you will have to give up control of the customer experience and the online checkout process will be longer.
In contrast, embedding the payment gateway makes it a part of your website’s infrastructure, ensuring buyers can complete payments directly on your website.
Visitors will no longer need to leave your site, giving you complete control over your buyer’s UX (user experience).
Stax Pay offers an embedded payment gateway you can easily incorporate with your website using the Stax API.
Step 5: Customize your checkout page
Once your checkout page is up and running, you want to ensure its color scheme and branding match the rest of your website or SaaS platform.
Once you are satisfied that visitors to the checkout page won’t think they have been suddenly teleported to a suspicious-looking page, you can then activate your preferred payment methods and adjust the currency settings to fit your requirements.
Another thing to activate are email notifications. This will ensure you and your customers get automated email alerts whenever a purchase is completed on your website.
There will be other configurations you may want to make to your own checkout page and it’s all up to your discretion.
Step 6: Test your online credit card processing system
Before going live with your new checkout page, you should first carry out a bunch of fake orders in a sandbox environment.
Go through each step of the process, from selecting an item within your catalog to getting a confirmation of your credit card payments.
Make sure you test the payment portal on different devices to ensure it displays and works well across all screen sizes.
If you encounter any issues during testing, make sure they are rectified before you take the site live for customers to access.
Step 7: Keep monitoring and improving your payments system
Now that your site is live and customers have started using your online payments portal to purchase items from your store or access services via your SaaS platform, you must constantly monitor the portal to ensure you can quickly react to any unforeseen complications.
A good payment services provider will give you the tools to monitor and analyze your payment processing system.
You should also listen to customer feedback. Customer input helps you stay abreast of the evolving needs of your buyers, so they won’t have any reasons to consider switching to a competitor.
Reducing Payment Processing Costs
Online payments processing comes with five main categories of fees that business owners must manage effectively to ensure good profit margins and sustainable business growth.
- Set-up costs: this is a one-off cost that may be imposed by your payment services provider for the incorporation and configuration of its payment gateway into your website or SaaS platform.
- Interchange fees: these fees represent the bulk of your per-transaction fees and they are set by card networks to be paid to the customer’s bank (issuing bank). The fee varies depending on the card type (e,g reward credit card, travel credit card), channel (in-person or online), geographical location, and industry type (e,g high-risk industries).
- Assessment fees: this fee is paid by the acquiring bank (your merchant account provider) to the relevant card network to finance its related operational expenses. It is much lower than the applicable interchange fee.
- Transaction fees: these are payment gateway fees imposed by your payment services provider for its role as an intermediary between your business and the relevant financial institutions. The fee can be calculated as a percentage or flat rate on the transaction amount.
- Add-on fees: these are associated costs that may be imposed on your business over a period due to circumstantial events or your utilization of some of your provider’s online payment processing services. Some of these add-on fees include chargeback fees, refund charges, PCI compliance fees, and so on.
All the charges mentioned above can significantly affect your profit margins, and fortunately, you can cut down the costs through negotiation.
Providers are often willing to offer volume discounts to merchants who can effectively prove they are deserving of it.
To make your case, you must first do your research and develop a winning negotiation approach.
First review how each of the five categories of fees mentioned above affect your business, then identify fees you feel you can bargain to a lower price.
Next, gather all relevant information about your transaction history, especially data that presents you as a reliable and profitable merchant for the payment services provider.
For example, a business with consistently high transaction volumes and a very low chargeback rate can successfully pitch itself as a model merchant deserving of lower-than-market-rate transaction fees.
Such a business owner can also research the offers of other PSPs to identify cheaper alternatives. That data can then be used as a threat to move to another provider if the current PSP is not willing to lower its rates.
In contrast, a small business with low transaction volumes that’s just starting out will find it difficult to pitch a case as a merchant with long-term loyalty and trouble-free history.
Small businesses lacking the negotiating heft of prolonged history (and even more established businesses) can focus on minimizing fraud and chargebacks as a way to reduce payment processing costs.
Good providers will equip you with advanced fraud detection tools and robust mechanisms for reducing and preventing chargebacks.
Trends and Innovations in Online Payment Processing
Biometric payment authentication
Cyber threats have continued to evolve in line with the increasingly sophisticated measures prescribed by regulatory institutions to help prevent and tackle fraud and other cyber-criminal activities.
We moved from relying solely on simple PINs to stronger passwords and then to two-factor authentication mechanisms.
The next not-so-new evolution is the incorporation of biometric authentication methods like face recognition, iris recognition, fingerprints, palm patterns, and voice recognition.
These mechanisms are not only more secure, they are also more convenient for customers.
AI-based fraud detection
Many of the algorithms that power the advanced fraud detection tools found on popular payment gateways are designed around rule-based fraud detection mechanisms.
If X happens, then the system should react in a certain way or alert the system administrator.
For example, if someone logs into the payments portal with an IP address from a pre-determined list of countries, then the login session should be flagged and brought to the attention of the platform administrator. The login attempt may even be blocked entirely.
AI-based fraud detection combines the peculiarities of rule-based detection with its innate machine-learning ability.
The AI is trained on vast troves of data to be able to independently discern legitimate transactions from fraudulent ones.
This means the system will learn the typical behavior of law-abiding users so it can instantly spot any suspicious activity different from what’s expected of a normal transaction.
Government-issued digital currencies
Since Bitcoin was launched in 2008, we have seen the introduction of several types of digital currencies, all launched and maintained by private institutions.
Governments have been trying to get into the cryptocurrency game for a while now, but its decentralized nature that will make it difficult for central banks to regulate such a currency has largely mitigated its adoption by most countries.
Nonetheless, the Eastern Central Caribbean Bank composed of the nations of Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, St. Vincent, the Grenadines, Anguilla, and Montserrat has issued Dcash, a cryptocurrency it guarantees and maintains.
Hong Kong and some 30+ countries also have pilot central bank digital currency programs.
All these make government-issued digital currencies a trend to keep an eye out for.
Mass adoption can happen suddenly and you don’t want to be unprepared for a major shift that could drastically change how online payments are done.
It’s Time You Get Started With Incorporating Online Payments Into Your Business
This article has shown you all you need to know about how online payments work, and how to set up a functional payments infrastructure for your business.
It’s also clear that accepting online payments requires many different entities and platforms to work together in harmony, which won’t be possible unless you sign up for the right payment services provider.
Stax offers everything you need to provide a seamless and secure online payments experience for your customers.
The platform supports all the popular payment methods, it will seamlessly facilitate both one-time and recurring payments, and it also comes with business management tools to help you run the financial aspect of your business operations from a single robust platform.
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