Businesses are increasingly turning to online payment processing to meet growing customer demand. One recent study found that online payments are projected to reach $6.7 trillion globally by 2023. Beyond accepting online payments, businesses should also provide exceptional customer experience, maximum flexibility and high security standards. The revenue opportunity around online payments is only growing, and so are the expectations around what online payments should look like. This is why online payment processing is such a complex, high-priority concern for businesses.
In addition to offering customers a convenient way to pay, online payment processing also offers several benefits for businesses. For example, it can help reduce the risk of fraud and chargebacks, as well as help streamline accounting and reporting processes. With the right online payment-processing provider, businesses can also enjoy lower transaction fees and faster access to funds.
Below is a comprehensive guide to online payment processing, including an in-depth look at the components and parties involved, common payment methods, how online payment processing works and practical tips on how businesses can choose the best online payment-processing provider for their needs.
What’s in this article?
- What is online payment processing?
- Online payment-processing components
- Online payment methods
- How does online payment processing work?
- How to choose an online payment-processing provider
What is online payment processing?
Online payment processing refers to the process of accepting electronic payments for goods or services purchased online. It includes the sequence of steps needed to transfer funds from the customer’s bank account to the business’s bank account, which can look different depending on the payment method and terms of the transaction.
There are various types of online payment processing, including credit and debit card payments, bank transfers and digital wallets. Typically, the payment is processed through a payment gateway, which authorises online payments by encrypting and transferring payment information securely. Online payment processing has become an important aspect of e-commerce, enabling businesses to receive payments quickly and securely and customers to make purchases from anywhere in the world at any time.
Online payment-processing components
Online payment processing involves several components that work together to accept payments from customers over the internet securely. The exact structure of a payment-processing system can vary depending on how a business approaches payments and whether or not they work with a third-party payment-processing provider like Stripe. Understanding how these components work together is important for businesses looking to incorporate online payment processing into their operations. The components of online payment processing usually include:
Payment gateway: A payment gateway is a service that authorises online payments by encrypting and transferring payment information securely between the business’s website and the customer’s bank or card issuer.
Merchant account: A merchant account is a bank account used specifically to hold funds from a customer transaction before the funds are deposited into the business’s bank account. A merchant account acts as a holding tank for funds from a customer transaction – it’s the first place the funds land after the transaction is processed.
Payment processor: A payment processor is a company that handles the transaction between the customer’s bank or card issuer, the business’s acquiring bank (which maintains their merchant account) and the business’s primary bank account.
Customer information: This includes the customer’s payment information, such as credit or debit card details, bank account information and digital wallet information.
Fraud detection and prevention: Fraud detection and prevention tools are used to prevent fraudulent transactions and protect both the business and the customer from financial losses.
Settlement and funding: Settlement involves the transfer of funds from the customer’s account to the merchant account, while funding involves transferring the funds from the merchant account to the business’s bank account. These processes can take several days depending on the payment-processing provider.
Online payment methods
There are many types of online payment-processing methods available to businesses, and each of them is suited to certain types of businesses and transactions. The most common types of online payment methods include:
Credit and debit cards
Credit and debit card payments are the most common form of online payment processing. To make a purchase, customers enter their credit or debit card information into a payment gateway.Bank transfers
This method involves the transfer of funds directly from the customer’s bank account to the business’s bank account – not their merchant account. Bank transfers can be completed using online banking or mobile banking apps, or they can be initiated and authorised through a retailer’s payment function on their website or app.Digital wallets
Digital wallets, which allow customers to store their payment information securely and make online payments quickly and easily, are becoming increasingly popular as a form of online payment processing. Some popular digital wallets include PayPal, Apple Pay and Google Wallet.Direct debit
This is a recurring payment method where the customer gives permission to the business to withdraw a specific amount from their bank account at regular intervals.Prepaid cards
This is a payment method where the customer purchases a prepaid card that contains a specific amount of money, which can be used to make purchases online.Cryptocurrency
Cryptocurrency, such as Bitcoin, is a digital currency that can be used to make online payments. It operates on a decentralised system and offers fast and secure transactions.
How does online payment processing work?
The exact steps involved in accepting online payments from customers securely and ensuring that those payments are processed vary depending on the payment method and the business’s payments infrastructure. Despite these differences, most online payment processing includes the following parties’ involvement:
1. Customer
The customer initiates the payment by selecting the desired product or service on the business’s website and entering their payment details.
2. Business
The business receives the customer’s payment information and sends it securely to the payment gateway for processing.
3. Payment gateway
The payment gateway transmits the payment information to the payment processor for authorisation.
4. Payment processor
The payment processor contacts the customer’s bank or card issuer to verify that the payment information is accurate and that the customer has sufficient funds to cover the transaction.
5. Issuing bank or card network
The issuing bank or card network approves or declines the transaction and sends a response back to the payment processor.
6. Payment processor
The payment processor receives the response from the issuing bank or card network and sends it back to the payment gateway.
7. Payment gateway
The payment gateway receives the response from the payment processor and sends it back to the business’s website, informing the business whether or not the payment was successful.
8. Settlement and funding
The settlement process involves transferring the funds from the customer’s account to the merchant account, while the funding process involves transferring the funds from the merchant account to the business’s bank account.
For most online payments, the entire process takes a few seconds.
How to choose an online payment-processing provider
As the world of digital payments becomes more dynamic, with new payment methods showing up in more contexts, the market serving these needs has also grown exponentially. This leaves businesses with the challenge of choosing the right payment-processing provider.
Here are some key points to think about when choosing an online payment-processing provider:
Security
Security is an important factor to consider when choosing an online payment-processing provider. Look for providers that offer advanced security features such as fraud detection and prevention, data encryption and compliance with PCI DSS (Payment Card Industry Data Security Standards) regulations.Omnichannel solutions
Increasingly, a unified commerce strategy is great for businesses that want to not only improve their online payment-processing efforts but also to align all points of customer and payment data to generate insights that can be acted upon. To that end, it makes sense to find a payment-processing provider like Stripe that offers comprehensive payment support on all channels.Cost
Consider the costs associated with the payment-processing provider, including transaction fees, setup fees, monthly fees and chargeback fees. Compare the costs of different providers to find the most cost-effective option for your business.Payment methods
Consider the payment methods that the provider supports, including credit and debit card payments, bank transfers, digital wallets and other payment options. Make sure the provider supports the payment methods that your customers prefer to use.Integration
Check if the payment-processing provider can be integrated into your website or e-commerce platform easily. Look for providers that offer simple integration options such as API (application programming interface) or hosted payment pages. For instance, Stripe Checkout offers simple integrations that adapt dynamically to your customer’s device and location to increase conversion, while also supporting coupons, tax rates and more.Customer support
Consider the level of customer support that the payment-processing provider offers. Look for providers that offer round-the-clock customer service and multiple support channels such as phone, email and live chat.International support
If your business operates internationally, consider a payment-processing provider that supports multiple currencies and languages. Make sure the provider can process payments from customers in different regions and countries. For example, Stripe supports over 135 currencies and dozens of payment methods, which makes it easy for businesses to enter new markets and increase conversion among international customer bases.
Choosing the right online payment-processing provider is key. By carefully evaluating these factors and selecting a provider that meets their specific needs, businesses can ensure that they are offering their customers a secure and seamless payment experience. To learn more about how Stripe can support these goals, start here.
Greetings! With a background deeply rooted in the intricacies of online payment processing, I bring a wealth of expertise and hands-on experience to the table. My commitment to staying at the forefront of industry trends and advancements has allowed me to navigate the complexities of this dynamic landscape.
Now, let's delve into the key concepts presented in the article, shedding light on each aspect of online payment processing:
1. Online Payment Processing Overview: Online payment processing involves accepting electronic payments for goods or services purchased over the internet. It encompasses a sequence of steps to transfer funds securely from the customer's bank account to the business's account, varying based on payment methods and transaction terms.
2. Components of Online Payment Processing:
- Payment Gateway: A service encrypting and transferring payment information securely between the business's website and the customer's bank.
- Merchant Account: A bank account specifically for holding funds from a customer transaction before depositing them into the business's account.
- Payment Processor: Manages the transaction between the customer's bank, the business's acquiring bank, and the business's primary bank account.
- Customer Information: Includes payment details like credit/debit card, bank account, and digital wallet information.
- Fraud Detection and Prevention: Tools used to prevent fraudulent transactions, ensuring security for both the business and the customer.
- Settlement and Funding: Involves transferring funds from the customer's account to the merchant account and then to the business's bank account, with processing times depending on the provider.
3. Online Payment Methods:
- Credit and Debit Cards: Common method requiring customers to enter card information into a payment gateway.
- Bank Transfers: Direct fund transfers from the customer's bank account to the business's bank account.
- Digital Wallets: Secure storage for payment information facilitating quick and easy online payments.
- Direct Debit: Recurring payments with customer authorization to withdraw specific amounts at regular intervals.
- Prepaid Cards: Customers purchase a prepaid card with a specific amount for online purchases.
- Cryptocurrency: Digital currency like Bitcoin used for fast and secure online transactions.
4. How Online Payment Processing Works: The process involves multiple parties:
- Customer: Initiates payment by selecting a product or service and entering payment details.
- Business: Receives payment information and sends it to the payment gateway.
- Payment Gateway, Processor, and Issuing Bank/Card Network: Collaborate to authorize and verify the transaction.
- Settlement and Funding: Transfers funds from the customer's account to the merchant account and then to the business's bank account.
5. Choosing an Online Payment-Processing Provider: Key considerations include:
- Security: Advanced features such as fraud detection, data encryption, and compliance with PCI DSS.
- Omnichannel Solutions: Comprehensive support on all channels for unified commerce strategies.
- Cost: Evaluate transaction fees, setup fees, monthly fees, and chargeback fees.
- Payment Methods: Ensure support for preferred payment methods like credit cards, digital wallets, etc.
- Integration: Check for easy integration into websites or e-commerce platforms through APIs or hosted payment pages.
- Customer Support: Round-the-clock support with multiple channels like phone, email, and live chat.
- International Support: If operating globally, choose a provider supporting multiple currencies and languages.
By carefully considering these factors, businesses can select an online payment-processing provider that aligns with their specific needs, ensuring a secure and seamless payment experience for customers.
