The pandemic accelerated the shift toward online payments and most consumers adopted online banking services.
Shoppers have embraced the convenience of paying for goods and services at the touch of a button instead of hauling cash around anytime they need to get something.
If you’re reading this, 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, what providers charge for those services, and the top online payment solutions on the market.
- 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.
- Major online payment services companies include Stax, Clover, Helcim, Braintree, PayPal, Amazon Pay, and many others.
What Are Online Payment Services?
Online payment services are solutions 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: is 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: is the business owner accepting the electronic or digital payment from the customer. The funds will be deposited to the businesses’ merchant account if the card is valid and the transfer is approved.
- The card network: is a 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: is 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: is the financial institution that processes the payment on behalf of the merchant by sending information about the transaction to the issuing bank via the relevant card network.
eCommerce business owners will also need a payment gateway to be able to accept digital payments.
A payment gateway is basically the internet-based version of your physical POS system. Its role is to approve or decline the transaction after reviewing the validity of the financial details provided by your customer.
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 and is paid to the issuing bank for taking on the risk to back the customer’s credit card. The fee is usually calculated as a percentage of the transaction amount and all providers charge this fee.
- 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: it 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.
1. 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.
For example, PayPal uses this model and charges 2.9% of the transaction amount plus a 49¢ flat fee for card payments.
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 significant transaction volumes, since it denies them the cost-savings they would have obtained from cheaper transactions like debit card payments.
2. 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 that per transaction cost is difficult to track since it varies from one transaction to the next.
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.
3. 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, whenever a customer pays for your product by swiping their card physically through your POS system, the transaction will be classified as Tier 1, and you will pay a 0.7% interchange rate plus a 25¢ flat fee.
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.
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: the most common payment method. 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: it 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 taps 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.
- Electronic checks: it lets you simply type in the customer’s routing and account number, then the money will be electronically transferred from the buyer’s checking account to your account. Electronic checks use the ACH network and are more convenient than traditional paper checks, but they are still subject to fraudulent practices because the fund transfer is not effected immediately.
- Mobile pay: the 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.
The Top 7 Best Online Payment Services
For each company listed below, we have reviewed them and we are sure that they each offer robust online payment services, so we focused on highlighting the unique strengths of each provider.
Stax offers a membership-style, interchange-plus pricing model without any markup on the interchange rate.
The monthly membership subscription fee gives you access to the Stax platform with its many features, including inventory management, CRM, invoicing, analytics tools, and support for a large number of third-party apps.
You also get all the hardware you need to accept both in-store and on-the-go payments.
Interchange-plus pricing includes the applicable interchange rate plus 8¢ to 15¢ in transaction fees depending on the payment method.
Since there are no markups or hidden fees, all the associated costs and platform services are covered by your fixed monthly subscription fee.
And this is why Stax is such a great solution for most businesses, especially those that process at least $5000 in transactions each month. The more you process funds, the more cost savings you will get.
It is a full-service merchant provider that supports both in-person and digital payments. The company provides a mobile card reader and thermal printer for in-store payments, while its online payment gateway is notable for its low cost.
What truly sets Helcim apart are the volume discounts it offers to users that handle large volumes of transactions each month. The company operates a tiered pricing model.
The company lets users choose between an all-in-one plan (merchant account and payment gateway) or a gateway-only plan.
Customers subscribing to the gateway-only plan will have to obtain a merchant account from another provider.
Fees are predictable and the all-in-one plan costs 2.9% + $0.30 per transaction processing fee and a $25 per month gateway fee, while the other plan costs $0.10 per transaction (excluding the fee charged by your merchant account provider), a $0.10 daily batch fee, and the $25 per month gateway fee.
What’s notable about Square is how easy it is for new users to set up and start processing payments.
The POS software is free, it doesn’t charge any subscription fees, and there is suitable POS hardware for each budget type.
It also uses a flat-rate pricing model, which further buttresses the argument that it is ideal for new businesses with low transaction volumes that want to start receiving online payments without spending too much.
This company built its name as a provider of productivity apps like time tracking and invoicing tools to freelancers and professional service companies.
It got on this list because it now includes payment processing among its services.
Users get access to productivity tools as well as a digital wallet for sending and receiving payments to anyone in the world. Its flat 2.7% processing fee is just perfect for its freelancer user base.
PayPal is probably the most popular payment gateway-only provider on this list among both consumers and small businesses.
There is no monthly subscription fee, and it charges a flat rate depending on your transaction type.
The company ensures users can make and receive payments with ease, and it’s more likely than not that visitors to your eCommerce site already own a PayPal account.
Just like PayPal, Stripe is a payment gateway-only provider and it also uses a flat-rate pricing model.
What sets it apart is the range of API customization options available to users.
The provider’s payment platform is flexible enough to be customized to meet the needs of any eCommerce business. It also integrates well with a wide range of popular business software apps.
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.
The company will handle all your payment processing needs and provide you with a robust software platform for a subscription fee that is tailored to the size of your business without roping you into any binding long-term contract.