A Simple Guide to Online Payment Processing: What It Is and How It Works
Accepting online payments might seem simple on the surface. However, operationally, it is a complex process that involves harmonious cooperation between many different actors. Hence, a merchant needs adequate knowledge of how online payment processing works to deal with potential problems that may arise while accepting a variety of payment methods.
Are you a merchant or small business owner seeking information about accepting payment via credit cards, debit cards, digital wallets, and real-time bank transfers without hassles? Here is our simple guide to setting up and managing fast and secure online payment processing using modern techniques.
Meaning of Online Payment Processing
Online payment processing refers to how merchants accept digital money in settlement for goods and services sold over the internet and the ways they engage in smooth electronic transactions with their customers. It involves everything from the use of debit and credit cards to payment links, payment service providers, and different kinds of banking institutions.
How Does Online Payment Processing Work?
Giving your clients the best experience possible will depend on your understanding of how online purchases operate. We will now show you some of the fundamental components that operate in the background to allow the processing of funds.
In online payment processing, the personal and financial information of the buyer is shared with only the parties concerned with the transaction. This helps to ensure the frictionless authentication of the customer and the authorization of the money transfer.
In order to make a successful online payment, up to eight separate parties are usually involved in the process. They are, namely:
- the buyer or customer;
- the business, e-commerce seller, or online merchant;
- the card network (such as Visa, Mastercard, and American Express);
- the payment processor;
- the payment gateway (or online payment portal);
- the merchant account;
- the customer's bank or card issuer (such as Starling Bank, Capital One, Revolut, Monzo, bunq, N26, Klarna, Varo, and Curve);
- and the seller’s bank.
So, how does online payment processing work? An online payment typically involves the steps outlined below:
- Checkout: The buyer selects items to buy and proceeds to check out
- Payment method: The buyer chooses a payment method at checkout
- Payment gateway: The buyer enters their card or bank details into the payment gateway
- Payment processor: The payment gateway (encrypts and) transfers the payment details to the payment processor
- Card network: The payment processor (decrypts and) forwards the payment details to the card network of the buyer for verification
- Card issuer: Upon successful verification of the debit or credit card details, the card network asks the buyer’s bank or card issuer for authorisation to release the funds for the purchase
- Funds sufficiency and fraud checks: The card issuer checks whether there is enough balance to debit the account and verifies whether the transaction is not fraudulent, then uses the result to send a payment approval or denial message to the card network
- Merchant account: The card network sends the verification results to the payment processor who then notifies the buyer of a declined transaction if the balance or purpose was unsuccessfully verified. However, if the transaction was successfully verified, the payment processor sends the payment details to the buyer’s bank or card issuer who then transfers the money to the seller’s merchant account. The necessary fees are deducted during the process of payment processing.
Now that is how online payment processing works. The process above might sound like a long one to you, but everything often happens within seconds. Besides, neither the customer nor the seller has to do anything to make it faster as automated systems handle the tasks.
How Does International Payment Processing Work?
We just showed you how complex it is to process online payments using a domestic case. Now, when it comes to international payments, the processing stages are further complexified.
Currency conversion, foreign transaction fees, and working with an exchange rate are all necessary for international purchases. The money is ushered through these routes by a financial structure.
Every time there is a cross-border exchange, banks and a variety of domestic organisations collaborate to move money. When a transaction is made, the "respondent bank," which stands in for the entity purchasing the item, communicates with the "correspondent bank," or the entity asking for the money.
Every bank has a counterpart in a different location in each of the main cities around the world. Therefore, in order to prepare for remittance, funds will first depart the buyer's bank and travel to that bank's equivalent in the merchant's nation. The transferred funds will then be received by the merchant's bank and deposited into the merchant's account.
Banks frequently collaborate with other financial institutions to transfer funds via networks such as SEPA and SWIFT. This often entails working with more than three different financial institutions, exchanging different currencies, paying various taxes, and deducting transaction costs. International payment processing can take a significant period of time because there are many parties involved in a single transaction.
However, sending and receiving payments internationally has become faster with the help of specialised wire transfer services that use fewer middlemen and, hence, shorter networks. Examples of them are Wise, TransferGo, Paysend, Xe, TorFX, and WorldRemit. So, consumers across the world now have a variety of fast and cheap options for sending money online to different destinations, including Nigeria, China, Canada, and the USA.
How to Accept Online Payments
As a business owner, you want to give your clients a straightforward, user-friendly purchasing experience while also instilling in them a sense of security regarding the storage of their personal information. Additionally, you want to be sure that you will get paid promptly and effectively.
If you are starting up your online store for the first time, this may seem daunting, but there is no need to freak out. For your website to safely take payments, you do not need any prior technological knowledge. If you follow the advice in this guide, the procedure can be easy and hassle-free.
Accepting online payments begins with deciding which settlement methods you want to support on your website. These could include credit and debit cards, digital wallets, SEPA, SWIFT, ACH payments, and direct debit. In addition, you should estimate the fees you want to charge and transparently communicate them to your potential customers on your website. Next, get a reputable and affordable payment processor to help you set up your online payment methods on your website.
Examples of the best online payment processors to choose from for domestic and international transactions are named below. Click on any of them to learn more about how they operate and their services and fees.
What are the Benefits of Using Online Payment Processors?
Depending on the design of your online payment processing system, there are several benefits it can bring to your business. Firstly, it will provide a convenient checkout experience for your customers and encourage them to become loyal to your brand. Secondly, through the use of highly automated processes, your transactions will be processed at a greater speed so that your money gets to you just in time. Thirdly, an additional layer of protection is added to your transactions when you use a payment processor that is PCI DSS certified. It allows you to set transaction limits and receive alerts about fraudulent activities so that the right decisions can be made without delays. Fourthly, payment processors help you keep accurate records of your transactions from multiple sources, enabling you to easily manage your contacts and set recurring payments.
What are the Fees for Online Payment Processing?
The ease and protection that payment processors provide, among other benefits, come at a price. Every party involved in the transaction—banks, credit card firms, and the payment processor—takes a share of your payment. Listed below are some of the costs to watch out for when using online payment processing:
- Monthly fees: Some payment processing companies charge monthly or annual fees for their services.
- Interchange fees: These fees are paid to the banks or card issuers in the form of a percentage of the transaction.
- Assessment fees: These fees are paid to card networks like Mastercard and Visa.
- Processor fees: These fees are charged by the online payment processing company you are using for your business.
A payment gateway is an online application that is connected to your e-commerce website so that your customers can enter their card or bank details to pay for their purchases. For maximum security, it usually encrypts the data it collects before sending it to your payment processor.
A payment processor is a specialist that helps you connect your payment gateway to a merchant account so that your transactions can be settled in a timely, safe, secure, and reliable way. It helps to streamline and integrate all the processes involved in accepting online payments.
A merchant account is a business account for receiving payments via multiple methods, including credit and debit cards. You can open this account with a traditional bank, a neobank, or a third-party payment service provider.
We have shown you that accepting online payments does not have to be a difficult decision. You can simplify your online payments and provide customers with a seamless experience if you work with the right payment processing service provider.
Now that you are aware of the fundamentals of online payment processing, you must remember that it is important to use a payment processor that is a good fit for your company. Always consider the unique needs of your business before choosing an online payment processor.