Payment Processing – All You Need For Your Business
There are many steps involved in starting a small business. And if you wish to get paid, understanding how payment processing works is one of the most vital steps. To offer the best service to your customers, you need to accept payments from a variety of sources. Your payment methods should include e-wallets, credit and debit cards, and even cryptocurrency.
In the past, people would only use VISA and MasterCard, or American Express, but nowadays, people also use payment methods like PayPal or Stripe. The world of payment processing can seem confusing at first, so this guide will help you understand it better. From a debit card or credit card swipe at a point of sale terminal in a brick and mortar store to an online purchase, the steps are similar. But there are many players involved in the payment process.
Payment processing – All the Basics
Over the years, payment processing has evolved greatly. Initially, customers had two choices – to pay with cash or swipe a debit card or credit card at a point of sale terminal. That is not to say that cash or card payments have died out today, they are still the most common payment methods. It’s just that as technology has evolved, so too has the number of ways that people can pay for services. Merchants would still love to get paid by cash as they don’t need a merchant account to receive it.
And a point of sale terminal is fine in a brick-and-mortar store. But when conducting business online, we must consider many alternative payment methods. Payment processing is the art of letting a customer pay by whatever means they prefer. Our payment processing system then converts that into cash in our bank account. But many steps need to take place for that to happen.
Payment processors are one of the most integral parts of online payment processing. In simple terms, they arrange the transfer of funds from a customer’s bank into a seller’s merchant account. To accept payments online, payment processors must follow strict protocols, since credit card companies insist that everything is PCI compliant. This means they must adhere to the Payment Card Industry security standards.
By first running anti-fraud checks, they ensure the correct person is using the card. They will contact the issuing bank to check the card details are valid, and also that the funds exist. Finally, when they verify a transaction can occur, they will then inform the payment gateway. They normally charge a fixed fee per transaction for their services. The payment processor is the conductor that ensures all the players in the process get paid.
The payment gateway handles the communication in the payment process. Its main role is to provide a secure connection that allows information to flow securely. It is also the front end of the checkout experience. It’s like a software cash register that swipes a credit card to accept payments. Once the customer reaches the checkout, the payment gateway offers several payment methods. These can be anything from e-wallets to American Express cards. The payment gateway must then get the customer’s details to the payment processor safely.
Since it needs to be PCI compliant, it encrypts the payment information along with the transaction details. It transfers this data to the payment processor and waits for confirmation whether the transaction was successful or not. The gateway will then let the customer and merchant know the result. The payment gateway is the one that ensures all the data passes around safely. Payment processors and payment gateways work hand in hand.
To be able to accept payments by debit card or credit card, you need a merchant account. This is essentially a safety net for the bank until the transaction is settled. Once the payment processors authenticate the transaction, the seller needs to get paid. But this payment will not go directly into the seller’s bank account. Credit card payments carry risk because banks are essentially paying money upfront. The bank would like to delay the process, so the money goes into a seller’s merchant account.
Merchant accounts are only given to people if the bank is willing to take the risk on their business. The acquiring bank assumes the risk associated with a transaction. But many things can happen, from the buyer returning the product to the merchant running out of stock. Think of merchant accounts as the easiest way to mitigate the risk a little longer. If there’s an issue, they can freeze the account. In reality, payment gateways and payment processors complete a transaction in seconds. But, the funds will not clear in the merchant account for a few days.
Who is involved in payment processing?
Customers: When customers decide what they wish to buy online, they are sent to the payment gateway. This is where they input their debit card or credit card details or other payment information.
The Issuing Bank: This is the bank that gives the customer a debit card or credit card. They supply a card from one of the credit card networks and issue payment to merchant accounts. They take a certain fee for each transaction.
Credit Card Networks: These are the major players in money transfer. They include VISA or MasterCard, and American Express. They supply the communication between processors and banks.
Merchants: Merchants provide the product to the consumer. As a seller in an online store, they need a merchant account to accept credit payment services and other payment methods. They will need a payment gateway and payment processor to facilitate the card transaction.
The Acquiring Bank: This is the bank that houses the merchant account. They receive the funds from the issuing bank when the merchant sells their product.
Payment Gateways: These are the software and servers that ensure data passes securely. They basically handle secure communication between the banks. It then connects the merchant account and its payment processor to the issuing bank.
Payment Processor: Payment processors validate the transaction with the card-issuing bank. They perform anti-fraud checks and check for sufficient funds. Their processing services must be PCI compliant and adhere to the standards set by the credit card networks.
Different Methods Of Payment Processing
Before a merchant can get paid, they need to accept payments from the customer. To offer the best experience to customers, they should offer several payment methods. If you sell cheaper items from a land-based store, customers quite often prefer to use cash over cards. With online payment, people will usually use a credit or debit card. VISA and MasterCard are the standard cards, but being able to accept a wider range of cards is good for business.
Also, as technology advances, so too does the variety of ways you can accept payments. In countries like China, people use apps like AliPay for almost everything. Thus, it makes sense to accept as many local payment methods as possible. E-wallets and cryptocurrency are becoming more and more popular. And companies like PayPal and Stripe are dealing with incredible numbers of transactions.
Debit/Credit Card Processing
If you start an online business, there are many payment methods worth considering. But no matter which ones you choose, credit cards should be right at the top of your list if you wish to get paid. VISA and MasterCard are the most widely accepted credit cards worldwide. Being able to process other cards such as American Express is also a big plus. By accepting a credit or debit card, you are opening yourself up to the international market. Every country accepts cards, which makes your store accessible to the entire world.
And the bigger your target audience, the bigger your profits can be. Easy to use and secure, the majority of your customers will likely choose this option. Debit cards are a great way for people to keep their spending in check. Credit cards allow customers a chance to buy on credit and pay back the card when they have the funds. They are the most important of all payment processing methods.
E-wallets are another payment method that should be part of your payment processing. From a customer’s point of view, they are fast, secure, and convenient. From a seller’s viewpoint, using e-wallets can help streamline your pricing. When you make a sale, there are many costs to consider before you get paid. With a credit card, the issuing bank takes a cut for each transaction. The credit card provider is also going to take a cut since you are using their card network.
Finally, the payment processor will also add a transaction charge. Using e-wallets as a payment option, you can often choose a flat-rate pricing scheme. This can be useful for first-time sellers, as it helps to understand your exact costs per transaction. With so many e-wallets to choose from, they should be a high priority in your list of payment methods. Google Wallet, Apple Pay, and Android Pay are becoming more popular all the time. AliPay is China’s leading payment option and can open the door to more online sales.
Local payment methods
Another type of payment method to consider is the local payment method in any country you are selling in. When you first start an online store, you might only sell in one country. But the beauty of online selling is that you are not a brick and mortar store. Instead of bringing customers to your store, you bring your store to your customers. Expanding is simply a matter of advertising your products in another country. This is why it is so easy to scale a successful online store. But opening up a market in another country may involve broader payment processing.
In countries such as China, AliPay is the leading third-party payment option. Without AliPay, you are cutting yourself off from the majority of this market. In fact, AliPay expanded into Europe and Asia so they can cater to Chinese tourists. They are so used to paying by this method that it made sense to bring the method to them when they go on holiday.
It is also worth considering bank transfers to accept online payment. Bank transfers differ from other payment methods as they do not have specific setup requirements. But it is worth noting that bank transfer protocols differ in every country. This can make international transfers difficult and often time-consuming. When a customer elects to pay by bank transfer, they receive the merchant’s bank account details. They will usually receive a transaction code to include in the transfer. The customer then instructs their bank to transfer the funds to this account.
The customer’s bank will transfer the funds along with the transaction code so the receiving bank can identify it. The funds may arrive within a few days, but international transfers can often take a longer time. It depends on the policies of the sending and receiving bank. Some banks allow international wire transfers which can speed up the process immensely. Other banks will only allow transfer in a branch of their bank, which adds more time and hassle.
When considering your payment processing options, it pays to think ahead. While only a small number of people use crypto as a payment method, that number is increasing all the time. Payments are easy from a customer’s perspective, and cryptocurrency is one of the most secure ways to send funds. It is also gaining popularity since it is relatively anonymous. Customers can make payments without revealing any sensitive data about their bank accounts. Another plus, comparing it to credit cards, is that bitcoin payments have much lower fees.
When a customer makes a payment, a bitcoin payment service uses the exact exchange rate at that time. The payment service converts that amount into the currency of the merchant’s choosing. The payment service then updates the relevant details to the blockchain. This authenticates the transaction and records it on the public ledger. The miners who verify the transaction receive payment for their work. This is usually a flat fee and is much lower compared to the costs of credit card processing.
An eCheck is like a paper check in digital form. As payment methods go, paper checks are almost obsolete these days. But the concept of a check is still useful, hence the emergence of eChecks. The whole point of providing several payment options for your customer is to close the sale. Many carts get abandoned at checkout if the customer does not find a method they like. The more payment methods you offer the customer, the less likely they are to abandon the cart. eChecks are easier to process than paper checks.
Since they are digital, the process is fast and convenient. But the biggest advantage to eChecks comes when you look at transaction fees. Credit card transactions have many interchange fees, and these costs can add up. On the other hand, eChecks can have a fee of around $0.10 per transaction, making them a great choice for payments. They are especially good for recurring payments. If you allow payments in installments, the customer can pay with an eCheck and save on fees.
How to find the best payment processor for your business
As you can see, it is important to consider which payment methods to offer your customers. In fact, choosing the right payment processing company is one of the most critical steps. Online shopping is booming, and likely to continue to grow. However, with online payments comes more opportunity for fraud. This is why PCI compliance is such an important aspect of online payment processing.
If there is one thing you cannot afford to do, it is to have your online store’s data compromised. So when choosing the best payment processor for your business, this is one time when cost should not be a factor. The payment processor does all the heavy lifting in payment processing. Thus, we need a reliable and secure payment processor that provides convenient online payment options to our customers. Cheaper is not always better.
Transparency – Features, fees, and contractual terms
Payment processors typically use the interchange-plus pricing model. This comprises the interchange fee set by the card network plus the transaction fee set by the credit card processor. This is a fair and transparent way to handle pricing for merchants. Interchange fees vary depending on the card that the customer uses. For example, 2% + $0.20 means you will pay 2% of the item cost + 20 cents per transaction.
This is much more transparent than tiered pricing, which can be tricky to work out. Different tiered rates make it hard to know the costs for your payment processing. The other type of contract is fixed pricing, and it is the easiest to understand. You pay one single fee for all your transactions, regardless of the card type. Interchange pricing may seem the hardest to calculate, but it is usually the cheapest.
We live in a world of convenience. We have become accustomed to getting things fast and easy. When a customer arrives at the checkout, we want it to be as convenient as possible for them to pay. The more choices a customer has, the less likely they are to abandon a cart. So as a merchant, you need to find a payment processor that offers you all the right payment methods.
While most websites take credit cards, what about the other methods that people want to use? If a customer expects to use PayPal and you don’t offer it as a payment method, you might have lost a sale. You have done all the hard work in getting the customer to your store, and what’s more, you have got them to the checkout. It would be a shame to lose them because you don’t include enough payment options.
Reliable and Secure
If a customer does not feel 100% safe at your checkout, they will likely abort the transaction. For the same reason, you need to feel secure with your payment processing company. Since they will handle card data and customer details, you need to know that they handle it properly. PCI compliance is something that a payment processing company must adhere to. While it may be their responsibility to take care of it, it’s your reputation that’s at stake too.
So check what their approach to PCI compliance is. And in the event of a problem, it’s good to know that your chosen company is available to assist you. Be sure to find out what customer support they offer. While email support is fine for general questions, it might not be enough. If you prefer talking to people, then look for a company that offers live technical support.
Simple reporting and easy implementation
Integrating a payment gateway into your website is usually very straightforward. Most of the popular payment service providers provide detailed instructions to help you. But it depends on your technical level and computer know-how. For instance, if you need it to integrate with your existing software, then you need to know if it is compatible. So if you are not comfortable making changes to your website, it might be best to find a company that will help you in the integration process.
And as a merchant, you also need to track your costs. Most companies offer powerful reporting options for merchants. Having accurate insights into your sales and your costs is vital to your business growth. While you may start on one business plan, it helps to be able to see if changing to another plan will save you money. Look for a company that offers you simple reports where you can check how much you’re paying each month.
Accepts Multiple Credit and Debit Cards
Online payments currently account for over 20% of all retail sales. Credit and debit cards account for 50% of those online sales. Choose an online payment provider that gives your customer enough choices. Whether they want to use VISA, American Express cards, or local cards specific to a country, you should be able to comply. The more cards you can accept, the more likely your customer is to complete the purchase.
And make sure to think about further down the line. While you may start selling in one country, you may expand into other countries later. Look for a provider that supports local credit card networks in the countries that you intend to sell in. Accepting multiple credit and debit cards directly increases your chance to convert a sale.
Top payment service providers
Finding the best company to handle payment services involves many factors. The good news is that once you understand the features you need, there are hundreds to choose from. It’s a fine balance to have the best user experience coupled with the best payment options. And with so many varying costs and payment plans, it can seem daunting at first. But there are so many quality options out there, that good research will pay off for you in the end. Here is our list of the top 5 payment service providers in 2021.
PayPal has been one of the industry’s biggest names since it started operating in 1998. With so many countries accepting them, they are a great choice for a business that may expand. You can track your payments with their account management dashboard to generate reports. Their flat-rate pricing structure makes it easy to cost your products. They have a payment protection plan for customers which offers great security. And as a merchant, you don’t store any credit card information so you do not have to worry about a data breach.
- Costs: 2.9% + $0.30 per online transaction
- Operates in more than 200 countries
- Handles more than 25 currencies
- Better for low volume merchants
Stripe is best known for having developers in mind. It is a customizable payment solution that allows developers to alter the API. This means you can create a product to suit your needs exactly on your website. And you can also then create your own customizable transaction reports. There is a machine-learning fraud detection system for added security. It offers many free services and makes it easy for merchants to make updates to their platform. With so many customizable features, it suits people with coding experience.
- Costs: 2.9% + $0.30 per online transaction
- Accepts credit card, debit card and bitcoin payments
- Handles payments on your website
- No fees returned with refunds
With no monthly contract fee, Square is a good option for new online businesses. They offer a lot of add-on tools and have low setup costs. There is a free mobile card reader that plugs into a phone or tablet. They have a lower fee for swiping cards as the process is safer. Swiping a card reduces the fees to 2.6% + $0.10 per transaction. It is fully customizable so is an excellent choice for people with coding experience. But the setup is super-easy, making it a great choice for anyone starting up a business.
- Costs: 2.9% + $0.30 per online transaction
- Free mobile card reader
- No fees for setup or PCI compliance
- High risk businesses might not be accepted
Apple Pay has been growing steadily since its launch in 2014. Customers link their cards to their Apple account and then pay for purchases with an Apple device. This is very convenient, since they only need their phone and can use touch ID to process a payment. Apple is famous for its high level of security, so it is a popular payment option among fans of the brand. Online transactions are seamless and it works with most cards. It is definitely worth having as a payment gateway simply because of the number of Apple users.
- Costs: No extra fees charged on top of normal credit transaction fees
- Apple is famous for its security
- Fast checkout process
- Requires an Apple device
Adyen is a merchant bank that began in 2006.
it has a long list of clients that use its services including Netflix, eBay, and Airbnb. Their mission statement is to connect any customer, with any seller, anywhere in the world. As a full-stack payment processor, it acts as the payment gateway and the processor. Reports are dynamic and include the reasons why a card is accepted or declined. This can help merchants fix issues for customers quicker. It is a great choice if you will accept a lot of international payments. It is best suited for high-volume stores.
- Costs: Base rate of 3.95% plus $0.12
- Offers many developer tools
- Payouts in all major currencies and effortless reconciliation
- Requires a minimum invoice of $120/month
Payment processing is one of the biggest considerations for any small business. Having a point of sale terminal was a necessity for land-based stores in the past. But now, more and more businesses accept online payments. Thus, finding the best payment processor is more critical than ever. Merchants want to get paid in the easiest way possible. Customers want a fast and easy way to complete a purchase.
And both want security and convenience. Luckily there are many different payment processors that you can use. The key is to decide on the features you wish to offer your customers upon checkout. Once you have a plan in place, there are countless payment providers to choose from. The beauty of online business is that it is so easy to expand. Bear this in mind when you choose the best payment processor for your business.