The pandemic accelerated the shift toward online payments, and many merchants adopted online banking services.
Shoppers have embraced the convenience of paying for goods and services at the touch of a button instead of carrying cash around.
As a merchant, you likely recognize the need to adopt online payment services, particularly if you want to keep your existing customers happy and reach all your potential buyers.
In this article, we will show you how online payment services work and what providers charge for those services.
TL;DR
- A payment processor helps to facilitate fund transfers between a merchant and a customer by routing the transaction via the relevant card network to the issuing bank that approves the payment.
- Your payment processor or digital payments company will provide you with the POS systems and digital software tools you need to accept card and digital payments from customers.
What are online payment services?
Online payment services are solutions that companies offer to help businesses seamlessly accept and make payments over the internet.
This can happen via an electronic (credit or debit card) or digital (smartphone, tablet, or computer) medium.
Essentially, the service provider will give you all the tools you need to accept whatever payment method is chosen by your customer.
On the surface, the entire online payment process is seemingly completed within seconds, but a lot goes on in the backend to facilitate these transactions.
Five entities are usually involved in the process, and we will explain the role of each party below:
- The cardholder: The customer paying for your goods or services physically with a card at the point of sale or digitally via shopping cart software on your ecommerce website.
- The merchant: The business owner accepting the electronic or digital payment from the customer. The funds will be deposited to the business’s merchant account if the card is valid and the transfer is approved.
- The card network: The company that connects the merchant with the card issuer (bank) to facilitate a fund transfer from a paying customer. The four major networks in the US include Visa, Mastercard, Discover, and American Express.
- The issuing bank: The financial institution or card issuer that provided the credit or debit card to the paying customer. The bank is the custodian of the customer’s funds and is responsible for confirming the buyer’s ability to pay.
- The payment processor or acquiring bank: The payment processor sends transaction data through the network. The acquiring bank is the financial institution that issues the merchant account and receives the funds.
Ecommerce business owners will also need a payment gateway to be able to accept digital payments.
A payment gateway is the secure, internet-based version of your physical POS system. Its primary role is to encrypt and securely transmit the customer’s financial details to the payment processor for authorization.
Basically, your payment gateway validates your customer’s means of payment, while your payment processor encrypts that financial information and then sends it to the issuing bank via the card network.
The good news is that the very best online payment services companies (like Stax) will provide both the payment gateway platform and payment processing services.
Payment processing costs
Of course, access to online payment services will cost you money.
The cost is usually a combination of charges per transaction and a monthly subscription for use of the provider’s software to process payments and manage other aspects of your business.
The exact amount of the transaction charges varies from one payment services company to another, and they include the following fees:
- Interchange fee: It is the largest expense per transaction, set by the card networks, and paid to the issuing bank to cover their costs for funding the transaction, managing the cardholder account, and providing rewards.
- Assessment fee: This is a flat-rate percentage of your monthly sales that is paid monthly to credit card associations (Visa, Amex, Discover, and others). It is the second largest cost of card processing.
- Processor fee: This is paid to your payment processor for facilitating each transaction and can be a flat rate or a percentage of the transaction amount. The fee is usually higher for credit cards than debit cards.
Together, these are the network fees you must pay to process online payments. The pricing structure of these fees differs from one provider to another, but they all fall under three models.
- Flat-rate pricing
Under this model, the provider charges a flat-rate for each transaction, regardless of the type of card the customer is using or the interchange rate.
This model is ideal for small businesses that don’t have the transaction volumes to negotiate for a favorable rate since you at least always know how much is being charged for each transaction.
On the other hand, it can be more expensive for businesses that process more than $7,000 to $10,000 per month in transaction volumes, as they miss out on savings from lower-cost cards like debit, where the markup is often substantial.
- Interchange-plus pricing
With this model, the payment services company charges you the relevant interchange rate plus a processing fee that can be a flat rate or a percentage of the transaction.
The processing fee will usually depend on the type of transaction. For example, card-present transactions are usually cheaper than card-not-present transactions.
Many of these providers may also add a markup to the official interchange rate to cover other associated costs.
The disadvantage of this model is the complexity of reconciliation; since the rate changes for every card, the merchant must analyze hundreds of varying rates on their statement.
However, this disadvantage is overwhelmed by the flexibility it provides. You can negotiate for favorable rates if you process high volumes.
And even if your business isn’t big enough to negotiate directly with the provider, you will get lots of cost savings due to the varying charges for the different types of transactions.
- Tiered pricing
Here, interchange fees are grouped into different tiers, depending on the applicable interchange rate for transactions that fall within each bucket. The provider will then attach a processing fee to each tier.
For example, a physically swiped card might be classified as “qualified” and charged a blended rate of 1.5% + $0.20.
The beauty of this model is that it combines the advantages of both flat-rate pricing and interchange-plus pricing. You can trace what each transaction costs and save more if most payments fall within lower-priced tiers.
The disadvantage is the ambiguity involved. The provider is the only one that determines which type of transaction falls within what tier and why.
This can get very costly quickly, especially if many of your customers are using payment methods that fall within more expensive tiers.
Besides, it is almost impossible to predict or control the types of payment methods your customers will be using to pay for your goods and services.
- Subscription pricing
This model charges a flat monthly membership fee in exchange for access to the direct wholesale cost of processing. Merchants pay only the non-negotiable interchange rate plus a small, fixed per-transaction fee.
This is the most transparent and cost-effective model for businesses with high processing volumes as it eliminates the percentage markup. Stax utilizes this structure.
What are the different types of online payment services?
Knowing the different kinds of online payments will help you choose the right provider that supports payment methods popular with your customers.
- Debit/credit cards: These are the most common payment methods. It can be used for in-store payments via your POS system or online where the customer inputs the card details into your checkout page.
- eWallets: This method eliminates the need for the customer to carry credit cards or enter card details for online payments. A digital wallet lets customers link their bank accounts to their wallet, and payment is with a simple wave or tap on their phone for in-store purchases and one or two clicks for online transactions.
- Bank transfers: Provided the user is registered for net banking, the customer can easily authorize the transfer of funds from their online banking account through the use of a customer ID and secret pin.
- ACH (Automated Clearing House) payments: This network is used for secure electronic fund transfers from the buyer’s bank account to yours. It includes electronic checks and direct bank transfers, offering lower processing fees than cards, though funding is slower.
- Mobile pay: This option is more common in developing countries, and its usage is fueled by the exponential growth in the adoption of smartphones globally. It lets users with internet access pay in-store for goods and services with a banking app, and it is similar to a digital wallet.
- Cryptocurrency: Customers with cryptocurrencies use encrypted virtual wallets based on secure, blockchain technology to send payments for goods and services. Digital currency doesn’t currently offer any discernible advantages to small businesses, but you should consider it if it’s a payment method used by your customers.
Why you need online payment services
For one, it would be impossible to run an ecommerce store without a payment gateway and processor to facilitate fund transfers from customers.
Other numerous advantages are also applicable to both brick-and-mortar and omnichannel businesses including:
- Convenience: Your customers want simplicity and the flexibility to make payments from anywhere. Online payment service providers make that possible.
- Wider reach: You will be able to reach more customers in your local client base since more people are choosing to shop online. You will also be able to sell internationally to the global market.
- Greater transparency: The whole process takes a few seconds, so you will know instantly whether the customer has the funds to pay for your goods or not.
- Security: Most providers pursue PCI compliance where all their platforms and tools are built to ensure effective anti-fraud and cyber security protection.
Conclusion
You are now equipped with the knowledge you need to select the right online services provider for your small business.
Your choice will play a great role in the success of your business, and that’s why you are better off signing up with a market leader like Stax.
Stax will handle all your payment processing needs and provide you with a robust software platform for a flat monthly subscription fee that gives you direct access to wholesale interchange rates, guaranteeing the lowest possible processing costs without roping you into any binding long-term contract.
