Online payments can be easy and convenient both for you and your customers, but it's important to choose the right methods and set them up in the right way.
Studies show that on e-commerce sites all over the world, customers abandon their carts without completing a purchase at an average rate of almost 70%. In many cases, this is due to an inconvenient checkout process or lack of payment method options. These days, an optimized checkout and payment experience is key to the success of your business.
After consulting many online business owners and even running a couple of successful e-commerce sites of my own, I'm here to share what I've learned. I'll tell you exactly how to set up your payment processes, what to pay special attention to, and what to avoid at all costs.
How Does Online Payment Processing Work?
Whether you’re new to e-commerce or a seasoned online seller, it's important to understand exactly how online payments work in order to provide your customers with the best experience. Let's take a look at some of the basic elements that work behind the scenes to enable payments to be processed.
A payment gateway is the online equivalent of a point of sale (POS) terminal. It’s a software application on your website that enables online payments to be processed. Payment gateways encrypt the credit card data your customers input and send it to payment processors. They also communicate approvals or denials to you and your customers.
A payment processor takes the credit card information it receives from the payment gateway and sends it to the credit card network. The card network then checks for fraud and makes sure the customer has the necessary funds to make the purchase. The processor then sends the approval or denial back to you, the merchant. If approved, the processor communicates with the credit card network to go back to the customer’s bank, collect the transaction and deposit the money into your account.
A merchant account is a business bank account that allows merchants to accept customers' debit and credit card payments. In the past, opening a merchant account was a requirement to accept online payments. Today, it's possible to accept credit and debit card payments without having to apply for a merchant account using a third-party provider known as a payment aggregator.
- A customer chooses an item to purchase and enters their card details on your checkout page.
- This card information is sent to the payment gateway, which transfers the information to the payment processor.
- The payment processor transfers this transaction information to the credit card network to verify the customer’s details are correct.
- The card network then requests authorization to release the funds with the customer’s issuing bank. After checking for sufficient funds in the account and verifying that the transaction isn’t fraudulent, the issuing bank submits a response to the credit card network that indicates whether or not the transaction has been approved.
- This information is then sent to the payment processor, which requests funds from the issuing bank. Funds then get transferred to the merchant account and then onto the business’s bank account by the payment processor.
What are the different types of online payment methods?
The payment ecosystem is getting more fragmented by the day. Achieving higher approval rates and conversions now requires you to do more than just accept credit cards. You’ll also need to offer your customers their preferred local payment methods such as Google Pay, Apple Pay, Klarna, Pay Safe, Skill, or PayPal and have the capacity to add new payment methods as they arise. Here is a list of commonly used payment methods.
Credit and debit cards
According to a European Payments Council study, 86% of customers make online purchases via credit or debit cards. More than 60% consider it their favored payment method when making a purchase. While it's possible to accept credit card payments online without any monthly or initial setup fees, you'll need to pay transaction fees whenever a credit or debit card gets used as payment. Popular credit cards include Visa, Mastercard, American Express and Discover.
Credit cards are a convenient way to pay for things, but they also come with expensive fees. This isn’t the case with eChecks. Paying with an eCheck is like paying with cash. Money is transferred to the merchant when the customer authorizes and delivers their payment to the bank. No credit card interchange fees apply for e Check acceptance, and fees are also generally low.
ACH Payments and e-checks
If you want to offer customers bank-to-bank payments in the US, you may want to consider using Automated Clearing House (ACH) payments. ACH payments are made through the ACH network and allow fund transfers between two accounts. Since ACH payments are not facilitated by the card networks (like Visa or Mastercard), they usually have lower fees associated with them.
The use of mobile devices by consumers to shop has increased dramatically over the last few years, with Google Pay, Apple Pay, and many other mobile wallets leading the way. As people spend a lot more of their time on mobile devices and make more purchases through their mobiles than ever before, it’s never been more important for merchants to accept mobile payments.
A mobile wallet or digital wallet is a software that stores customers’ credit card or bank account information. Customers can then use that information to purchase with less friction. There’s also no need for them to pull out a credit card or search for their bank account routing number and manually enter their payment details. Ultimately, this results in better conversion rates due to lower checkout abandonment. In the US, it’s forecast that approximately 54% of all e-commerce sales will be generated via mobile devices by the end of 2021. With stats like this, merchants have little choice but to accept mobile payments or lose sales!
Recurring payments or billing
Recurring payments, aka recurring billing or automatic payment, are payments processed on an ongoing basis for things like subscriptions and membership fees. Merchants need the proper infrastructure to accept these payments, but this doesn’t have to be a complex process. The right payment provider should provide everything you need to handle the technical processing of payments and the software to help you keep track of billing.
Pros and cons of taking online payments