Businesses are increasingly turning to online payment processing to meet growing customer demand. One study found that revenue from global online shopping is projected to exceed $8.9 trillion by 2030. As the revenue opportunity around online payments grows, so do customer expectations around what online payments should look like. This is why online payment processing is such a complex, high-priority concern for businesses.

In addition to offering customers a convenient way to pay, online payment processing also offers businesses several major benefits. For example, it can streamline accounting and reporting processes while reducing the risk of fraud and chargebacks. With the right online payment processing provider, businesses can also enjoy lower transaction fees and faster access to funds.

Below is a comprehensive guide to online payments, including the components and parties involved, common payment methods, how online payments work, and practical tips on how businesses can choose the best online payment processing provider for their needs.

What’s in this article?

• How do online payments work?
  
• The components of online payments
  
• How does online payment processing work?
  
• Online payment methods
  
• How to choose an online payment processing provider
  

How do online payments work?

Online payments refers to when businesses accept electronic payments for goods or services purchased over the internet. When a customer initiates a payment on a website or app, they enter their payment details and the business’s payment system begins a sequence of steps to transfer funds from the customer’s bank account to the business’s bank account.

There are different types of online payments, including debit and credit card payments, bank transfers, and digital wallets. Typically, the payment is processed through a payment gateway and payment processor, which authorize online payments by encrypting and transferring payment information securely. Online payments enable customers to make purchases from anywhere in the world at any time, which businesses can receive quickly and securely.

The components of online payments

Online payments involve several components that work together to securely accept payments from customers over the internet. The exact structure of a payment processing system can vary depending on how a business approaches payments and whether or not they work with a third-party payment processing provider, such as Stripe. Understanding how these components work together is important for businesses that want to incorporate online payment processing into their operations. The components of online payments usually include:

• Payment gateway: A payment gateway is a service that authorizes online payments by encrypting and transferring payment information securely between the business’s website and the customer’s bank or card issuer.

• Merchant account: A merchant account is a bank account used specifically to hold funds from a customer transaction before the funds are deposited into the business’s bank account. A merchant account is the first place the funds land after the transaction is processed.

• Payment processor: A payment processor is a company that handles the transaction between the customer’s bank or card issuer, the business’s acquiring bank (which maintains their merchant account), and the business’s primary bank account.

• Customer information: This includes the customer’s payment information, such as debit or credit card details, bank account information, and digital wallet information.

• Fraud detection and prevention: Fraud detection and prevention tools help prevent fraudulent transactions and protect the business and the customer from financial losses.

• Settlement and funding: Settlement involves the transfer of funds from the customer’s account to the merchant account, while funding involves transferring the funds from the merchant account to the business’s bank account. These processes can take several days, depending on the payment processing provider.

How does online payment processing work?

While the specific steps involved in accepting and processing online payments can vary depending on the payment method and the business’s payments infrastructure, most online payment processing depends on the following parties:

• Customer
  The customer initiates the payment by selecting the desired product or service on the business’s website and entering their payment details. Sometimes, the customer is asked to authenticate their identity.

• Business
  The business receives the customer’s payment information and securely sends it to the payment gateway for processing.

• Payment gateway
  The payment gateway transmits the payment information to the payment processor for authorization.

• Payment processor
  The payment processor contacts the customer’s bank or card issuer to verify that the payment information is accurate and that the customer has sufficient funds to cover the transaction.

• Issuing bank or card network
  The issuing bank or card network approves or declines the transaction and sends a response back to the payment processor.

• Payment processor
  The payment processor receives the response from the issuing bank or card network and sends it back to the payment gateway.

• Payment gateway
  The payment gateway receives the response from the payment processor and sends it back to the business’s website, informing the business whether or not the payment was successful.

• Settlement and funding
  The settlement process involves transferring the funds from the customer’s account to the merchant account, while the funding process involves transferring the funds from the merchant account to the business’s bank account.

For most online payments, the entire process takes only a few seconds.

Online payment methods

There are many types of online payment methods, and some work better for certain types of businesses and transactions. The most common types of online payment methods include:

• Credit and debit cards
  Credit and debit card payments are the most common form of online payment processing. To make a purchase, customers enter their credit or debit card information into a payment gateway.

• Bank transfers
  This method involves the transfer of funds directly from the customer’s bank account to the business’s bank account. Bank transfers can be completed using online banking or mobile banking apps, or they can be initiated and authorized through a retailer’s payment function on their website or app.

• Digital wallets
  Digital wallets, which allow customers to store their payment information securely and make online payments quickly and easily, have become a popular form of online payment processing in recent years. Popular digital wallets include PayPal, Apple Pay, and Google Wallet.

• Direct debit
  This is a recurring payment method where the customer gives permission to the business to withdraw a specific amount from their bank account at regular intervals.

• Prepaid cards
  This is a payment method where the customer purchases a prepaid card that contains a specific amount of money, which can be used to make purchases online.

• Cryptocurrency
  Cryptocurrency, such as Bitcoin, is a digital currency that can be used to make online payments. It operates on a decentralized system and offers fast and secure transactions. Regulations around cryptocurrency are evolving, and can differ from country to country.

How to choose an online payment processing provider

Here are some factors to consider when choosing an online payment processing provider:

• Security
  Look for providers that offer advanced security features such as fraud detection and prevention, data encryption, and compliance with PCI DSS (Payment Card Industry Data Security Standards) regulations.

• Omnichannel solutions
  A unified commerce strategy is ideal for businesses that want to improve their online payment processing efforts while aligning all points of customer and payment data to generate actionable insights. Look for a payment processing provider like Stripe that offers comprehensive payment support on all channels.

• Cost
  Consider the costs associated with the payment processing provider, including transaction fees, setup fees, monthly fees, and chargeback fees. Compare the costs of different providers to find the most cost-effective option for your business.

• Payment methods
  Consider the payment methods that the provider supports, including credit and debit card payments, bank transfers, digital wallets, and other payment options. Make sure the provider supports the payment methods that your customers prefer to use.

• Integration
  Check if the payment processing provider can be easily integrated into your website or ecommerce platform. Look for providers that offer simple integration options, such as API (Application Programming Interface) or hosted payment pages. For instance, Stripe Checkout offers simple integrations that adapt to your customer’s device and location to increase conversion, while also supporting coupons, tax rates, and more.

• Customer support
  Consider the level of customer support that the payment processing provider offers. Look for providers that offer 24/7 customer support and multiple support channels, such as phone, email, and live chat.

• International support
  If your business operates internationally, consider a payment processing provider that supports multiple currencies and languages. Make sure the provider can process payments from customers in different countries and regions. For example, Stripe supports more than 135 currencies and dozens of payment methods, which means businesses can easily launch new markets and increase conversion among international customers.

For businesses, choosing the right online payment processing provider is key to accepting online payments. By evaluating these factors and selecting a provider that meets their specific needs, businesses can offer their customers a secure and seamless payment experience. Learn more about how Stripe can support these goals.