Consumers expect an electronic payment option.
Any e-commerce business must offer credit card processing. — Getty Images/max-kegfire

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

The ease and speed with which electronic payment happens belies the complex operations behind the scenes. For shoppers and bill payers, there may not be a need to understand much about the process. For the business owner receiving the funds, it makes financial sense to have a basic knowledge of how credit card processing works.

There are three main components to e-commerce credit card processing and they come with fees and security issues. You can deal with each one separately or choose a solution that bundles them for you.

Customer interface

Whatever your business, you need a mechanism for interacting with your customers. If you’re selling a product, it’s your website and shopping cart. If you’re a service provider, it’s the electronic invoice you send with a payment link. Either way, the first step is to provide the means for people to pay online.

[Read: 3 Ways to Accept Credit Card Payments]

The ease and speed with which electronic payment happens belies the complex operations behind the scenes.

Merchant account

When your money starts coming in, it needs a place to land. Credit card receipts cannot be deposited directly into your bank account. Instead, funds are forwarded to a merchant account, which you will need to open before you can accept credit card payments. If you already have a banking relationship, that’s a good place to start. Because money is transferred from the merchant account to your business account before the customer has actually paid their bill—opening the door for chargebacks—a merchant account is considered to be a line of credit. This application process is a good reason to work with your own bank—and people you know—if at all possible.

You can also get a merchant account online or through a third-party vendor such as PayPal. The fees involved will vary, with some being front-end loaded. Through your bank, you may pay application and set-up fees but have lower transaction fees going forward. There may also be a time commitment and transaction limits—per day and per transaction. While these issues may not seem important at first, possible future implications should be considered when setting up a merchant account.

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—an 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 in the two to 10 seconds it takes 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.

[Read: Understanding Credit Card Processing Fees and Chargebacks]

E-commerce credit card processing is complicated, but that shouldn’t keep you from doing business online. There are online financial service companies to help service providers with billing and collecting. For sellers, online marketplaces such as eBay and Etsy will take care of a lot of the collection details, as will comprehensive hosting platforms like Weebly, Wix and Shopify.

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 February 13, 2020