Online payment processing enables your e-commerce business to accept payments from customers anywhere in the world, but how exactly does this process work?
The ability for a business to accept online payments is facilitated through a payment gateway, a merchant account, and a payment processor.
The process is broken down into two primary components, and these are card authorization and transaction settlement. With a closer look at the online payment process, you can set up a solution that is most well-suited for your needs and advantageous for your customers.
1. Card authorization
Credit card authorization is initiated by the consumer when he or she inputs their credit card number, expiration date, CVV, and other details into the online payment portal.
As soon as the information is entered correctly and the customer submits it through the merchant’s website, the behind-the-scenes authorization process takes place through an encrypted transaction.
Your payment gateway connects with the consumer’s credit card issuer to confirm that funds are available to process the transaction and to verify that all of the information that the consumer provided is accurate.
Once this step is completed, a message regarding the transaction’s approval or decline will be provided. If the transaction is approved, payment gateway systems generally send the consumer a confirmation outlining all purchase details.
If the credit card transaction is declined, the consumer will receive a notification that outlines the possible reason for a decline via an error code.
For example, the consumer may have insufficient funds in the account or may have entered the information into the portal incorrectly. Other possible reasons for the decline of a transaction include possible fraud and an expired credit card.
Behind the scenes, once the credit card transaction has been authorized with the issuer, those funds are captured or placed on hold so that the consumer cannot access the money for other purchases while the rest of the transaction process is completed.
Funds capture is typically done in real-time, which ensures that the merchant can receive funds once the entire transaction has been processed.
2. Online payments transaction settlement
The second stage of online payment processing is transaction settlement, which describes the process of the issuer sending funds to the merchant’s account and finalizing the transaction.
Some payment processors dispatch funds immediately or per individual transaction, and others may settle transactions in batches at the end of the day.
The second transaction confirmation is sent to the issuer. Once the transaction is confirmed a second time, a credit will be posted to the merchant’s account. The transaction process then fractures into two components. On the merchant’s end, the merchant account sends a deposit to the merchant’s primary bank account.
The funds are then made available per the bank’s policies. On the consumer’s end, a charge is posted to the credit card account. Online payment services generally provide merchants with a payment gateway and a payment processor.
Payment gateway solutions vary dramatically in terms of their features and benefits, so merchants should carefully review and compare online payment solutions before setting up their e-commerce system.
3. What is a payment gateway?
Payment gateway systems are an integral part of an online transaction because they enable communications between the website and the merchant’s bank.
The best payment gateway systems have strong encryption and complete transactions quickly. This is an aspect of the online transaction that is not visible to consumers, but it directly affects their experience and the merchant’s accessibility to funds.
When comparing online payment solutions, merchants may benefit from a payment gateway that accepts payments domestically and internationally.
It also should work with ACH and e-check processing networks. The solution should be PCI-compliant so that transactions can be processed as securely as possible.
The customer experience should be taken into account as well. The online payment solution selected should accept all major credit cards, be mobile-optimized and complete the transaction quickly.
Keep in mind that the cost for online payment services varies considerably, so the merchant must find the most suitable solution available that is aligned with their budget.
4. What is a merchant account?
Before a merchant can accept online payments, it must set up a merchant account by meeting a vendor’s qualifications.
Each vendor has unique requirements, and these may be based on the business owner’s credit history, how long the business has been operating, the type of activities that the business is involved in, and more.
In some cases, merchant accounts are provided by the business’s bank rather than by a third-party vendor.
A business that does not rank high enough in these areas may not be able to obtain a merchant account in some cases or otherwise, may be required to pay higher transaction fees or have a merchant account reserve.
The purpose of a merchant account is to accept credits from issuers for online transactions. The merchant account then connects with the merchant’s bank to finalize the transaction through a deposit.
In addition to differences in fees, merchant requirements, and encryption, vendors may vary in terms of the types of credit cards they accept and their transaction reporting capabilities. Because these factors play a critical role in a business’s overall e-commerce experience, they should be compared thoroughly.
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William Dawsey is the VP of Finance and Payments at Chetu. The company houses elite programmers with expertise in utilizing the cloud-based, web, and mobile solutions for financial service modules such as payment gateway and POS development software, accounting & tax preparation software, plus banking and finance service modules.