Female employee taking electronic payment from customer
Any e-commerce business must offer credit card processing. — Getty Images/ jacoblund

Credit card processing is an essential aspect of any e-commerce business. Your e-commerce credit card processing service allows money to move from your customers’ accounts to yours, quickly and conveniently. Whether they’re shopping for goods or paying an invoice, consumers expect the option to do so electronically.

The ease and speed with which electronic payments happen due to the complex operations behind the scenes. There may not be a need for shoppers and bill payers to understand the process. For the business owner receiving the funds, however, it makes financial sense to have a basic knowledge of how online credit card processing works.

First, it’s important to understand that e-commerce credit card processing requires three main elements: a customer interface, a merchant account or third-party payment service provider to collect funds, and a payment gateway to approve purchases.

You have choices in each area, and the choices you make can affect the fees you pay, the level of customer service you receive and the overall experience your company delivers to customers. That’s why it’s important to understand what goes into e-commerce credit card processing before you start accepting online payments and choose your merchant account or provider.

Your customer interface should make a positive first impression

Whatever your business is, you need a mechanism for interacting with your customers. If you’re selling a product, that mechanism is your website and shopping cart. If you’re a service provider, it’s the electronic invoice you send with a payment link. Either way, this portal helps create an important first impression of your company.

You want your customer interface to be clean, easy-to-navigate and reflect your brand with your company logo and brand colors. You also want it to be secure, so customers feel comfortable entering their payment information on your site.

Merchant accounts make it possible to accept credit card transactions

When a customer makes a purchase, their money must go somewhere. E-commerce credit card payment systems are not tied directly to your existing bank account, so funds won’t go directly into your business bank account. Instead, you’ll need to open a merchant account.

A merchant account is a bank account with a merchant acquiring bank that businesses use in order to accept credit card and other electronic payments. The merchant acquiring bank acts as an intermediary between the business and the credit card company, facilitating the authentication of the payment and other technical aspects. Once the electronic payments are processed and approved, the bank distributes the funds into the merchant account.

Since money is transferred from the merchant account to your business account before the customer has paid their credit card bill, the merchant account covers those charges. Because of this, a merchant account is considered a line of credit.

If a customer requests a chargeback because they were unhappy with the product or service or had issues with their experience, you, as the business owner, are liable for those charges.

Since a merchant account is considered a line of credit, you may want to apply for a merchant account through your current bank or credit union. You might also save on fees — and gain convenience — by having all your business banking needs satisfied through one financial services provider.

Most banks will require some or all of the following information on your merchant account application:

  • Business activities.
  • Banking information.
  • Tax returns.
  • Payment model.

They may also run a business or personal credit check.

Once you’re locked in with a merchant account, you may have to sign a multi-year contract.

Many business owners find that having a merchant account is the less expensive option for accepting credit card payments. The merchant acquiring bank may charge per-month and per-transaction fees, but it may be less expensive than other options.

If you have a brick-and-mortar store in addition to your online presence, a merchant account can allow you to accept point-of-sale credit card payments in addition to allowing customers to complete card-not-present transactions through your website.

Third-party payment processor: a simple solution for accepting online payments

Fortunately, there is a simpler way to begin accepting online payments with credit cards. You can choose a third-party payment service provider such as Square, Stripe or Paypal.

Some of these services have flat-rate monthly fees on top of transaction fees, while others have free plans that only charge transaction fees. Transaction fees typically include a flat rate plus a percentage of each credit card purchase.

You can get started using a third-party payment service without an extensive application process or credit check. It’s quick and easy to choose your e-commerce payment processing provider and get started. Billing is usually month-to-month, so you won’t be locked into a long-term contract.

However, some customers have complained about sudden account holds or even account closures by the company’s fraud prevention team.

Plus, the fees can add up quickly — especially if you are paying a flat-rate monthly fee, a flat fee per transaction and a percentage of each sale. Despite this, the simplicity of these systems leads many business owners to start accepting credit card payments with this model, and possibly switch to a merchant account as their sales volume grows.

Merchant accounts are more time-consuming to set up but will likely end up costing you less down the road, whereas payment service providers and e-commerce sites are easier to set up but come along with higher fees.

E-commerce platform: One-stop sales and e-commerce payment processing

If you use an e-commerce platform such as eBay, Etsy or Shopify for your online business, you don’t have to worry about setting up a merchant account or choosing an e-commerce payment provider system.

These platforms have built-in payment processors and most accept all major credit cards as well as alternative payments like gift cards.

To get started, you’ll create your store and activate your payments. You can choose to either build an e-commerce website from scratch or implement e-commerce capability into your existing website. Regardless, you’ll need your employee identification number (EIN) and banking information for setup.

Most of these sites charge a monthly fee plus transaction fees to cover online payment processing.

Other options to accept online payments

Service providers and contractors often choose to accept or receive payments without using credit cards at all. ACH (automated clearing house) processing allows customers to pay directly through their bank account. This convenient and secure means of accepting payment may carry lower fees than debit or credit card payments, and it’s more convenient and secure than writing a check.

Monitored by the National Automated Clearing House Association, this payment method pulls money directly from your customer’s bank account and puts it into your business bank account after they have provided their bank account number, routing number and authorization.

Permitting ACH payments can help prevent late payments for recurring customers, which helps improve your business’s cash flow, not to mention a predictable stream of recurring revenue.

Similarly, you can establish acceptance of recurring monthly ACH, debit or credit card payments by setting up a subscription billing plan. Some e-commerce payment processors, including Paypal, allow this option through their payment platform.

The payment gateway: How credit card transactions are approved

Whichever type of service you choose, there is yet another element of card-not-present e-commerce credit card transactions you should be aware of, which is the payment gateway.

A payment gateway is a software application that communicates with the credit card company to obtain an authorization or a denial of a transaction. Think of it as a virtual credit card machine, minus the magnetic strip or chip reader. This lower level of security is one reason transaction fees for e-commerce are typically higher than for sales when the card is physically present.

The payment gateway encrypts the customer’s information — one important aspect of the gateway’s functionality — and forwards it to the credit card company. The credit card company checks that the consumer has the credit available, puts a hold on the funds and sends a message back that the sale has been approved. This is what’s happening behind the scenes during few seconds before your customer gets that “thank you for your order” message on their screen.

The funds are now in the merchant account and will be moved to your account on a predetermined schedule, generally once a day. The amount of funds that find their way into your account will be diminished by various fees.

If you are using a payment service provider, you may be able to set the timeframe for transferring funds, or transfer funds to your connected bank account manually whenever you wish.

How to choose your credit card payment mechanism for e-commerce

As you can see, there are pros and cons to each type of payment system. Merchant accounts are more time-consuming to set up but will likely end up costing you less down the road, whereas payment service providers and e-commerce sites are easier to set up but come along with higher fees.

Understanding how credit card transactions work can help you make a more informed decision.

Here are a few questions to research regarding the various choices in e-commerce credit card processing companies and methods. Discovering the answers to these questions can help you find the best e-commerce credit card processing solution for your business.

  • What features does this service offer?
  • How much can I expect to pay in fees based on my volume of transactions?
  • What level of customer support can I expect to receive?

E-commerce credit card processing is complicated, but that shouldn’t keep you from doing business online.

Armed with knowledge about how credit card processing works, you can make a more informed choice about the most affordable, most effective way to accept credit card payments from your online customers and deliver a seamless experience to your shoppers or clients.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published June 16, 2021