How Online Payments Work

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The payment process is one of the fundamental aspects of e-commerce. After all, commerce isn’t commerce without the money—right? There are really only two components to consider when it comes to how online payments work. However, there are a number of details within that pair of mechanisms to understand.

Let’s take a look.

Card Authorization

When a customer converts from a shopper to a buyer, they usually give you an account number against which the price of the purchase can be charged. This can take the form of a credit card, a charge card, or an authorization from an online payment service such as PayPal.

In most cases though, it always comes back to some sort of credit card.

The appropriate data is transferred to your payment gateway when the customer provides the payment information. Information sent includes the name on the card, the card type, the card number, the CVV for secondary authorization, the expiration date and the cardholder’s physical address.

Your gateway will forward this information to the customer’s bank, card issuer or whatever other financial institution tasked with processing the customer’s financial transactions. Conformation and authorization of the transaction will be requested. If it is granted, your payment gateway will get an affirming message and your customer will be notified the transaction went through.

Sometimes payment is declined. When this happens, it’s usually because a mistake was made when entering the payment information. There are also times when the buyer doesn’t have the resources to support the transaction. In some cases, the financial institution might also consider the purchase suspicious and refuse payment.

Fees Abound

As you probably learned in Economics 101, in life, there are no free lunches. Thus, each one of these steps typically involves a fee. While it might show up in your monthly statement as one lump sum, the payment gateway, the processor, the card issuer and the bank all get to wet their beaks on each one of your deals.

Now here, it only makes sense to stop and remember what an ecommerce site is. Shopify, one of the foremost providers of online store platforms, defines them as a mechanism used for buying and selling goods on the internet.

Keeping that in mind, it’s important to choose your payment gateway and processor carefully to minimize the fees imposed upon your transactions.

Transaction Settlement

Even though your payment gateway received authorization to allow the transaction and your customer has been notified the sale is approved, you have yet to be paid.

So far, the only entities involved have been your customer, your payment gateway, the customer’s financial institution and you. Now it’s time to bring your payment processor and bank into the mix. In addition to notifying your customer, your payment gateway also sends notice to your payment processor, which in turn, forwards the details of the transaction to your bank.

The frequency with which this occurs varies from system to system. Some processors do it automatically with each transaction, others do it in batches at the end of the day. This is a key detail because some processors impose charges for every instance of communication with your gateway.

Once your bank is notified of the transaction, a request is referred to the card issuer to transfer the cash to your bank to satisfy the deal. This is sent in the form of a credit, which is applied to your merchant account. Upon completion of this step, the customer’s account is debited and the transaction gets posted to their monthly statement.

And, that is how online payments work.