As more and more businesses transition to online sales, e-commerce payments have become an important aspect of their digital strategy. For example, according to a recent report, global e-commerce sales are expected to reach US$5.9 trillion worldwide in 2023. Additionally, out of all global retail sales in 2023, it's expected that 20.8% will come from online purchases. The continued rise of e-commerce raises the bar for businesses and requires them to create a strong e-commerce payments strategy that caters to their customers' needs and preferences.

However, navigating the complex world of e-commerce payments can be daunting. From choosing the right payment methods to ensuring secure payment processing and compliance with industry regulations, there are many factors that businesses need to consider. And with a growing number of payment providers and platforms to choose from, it can be challenging to determine which one is the best fit for your business.

Below, we'll explore the different types of e-commerce payment methods, how e-commerce payment processing works, factors to consider when choosing e-commerce payment methods, and best practices for maintaining and refining your e-commerce payments. Whether you're a brand-new e-commerce business or simply looking to improve your payments strategy to grow and expand into new markets, here's what you need to know about e-commerce payments to help you succeed.

What's in this article?

• What is e-commerce?
  
• What are e-commerce payment methods?
  
• How e-commerce payment processing works
  
• How to choose an e-commerce payments provider
  
• Tips and best practices for e-commerce payments
  

What is e-commerce?

E-commerce – a term derived from "electronic commerce" – refers to the buying and selling of goods and services online. It involves a variety of online transaction types, including online shopping, electronic payments, online auctions and more. E-commerce has become increasingly popular in recent years, with more consumers and businesses turning to online transactions for everything from consumer goods to B2B software subscriptions.

What are e-commerce payment methods?

There are multiple ways that customers can pay for goods and services when shopping online. E-commerce payment methods range from traditional options, such as credit and debit cards, to newer and alternative payment methods, such as digital wallets, mobile payments, Buy Now Pay Later (BNPL) options and cryptocurrency.

Offering a variety of payment options to accommodate your customers' needs and preferences is necessary to create a competitive e-commerce presence that is optimised for conversion. With a growing number of payment providers and platforms available, businesses must carefully consider their options when choosing a suitable e-commerce payment method. For more information about e-commerce payment methods, including tips on how to choose the best payment methods for your business, see our guide.

How e-commerce payment processing works

E-commerce payment processing involves several distinct elements, including payment gateways, payment processors, merchant accounts, security and fraud prevention measures, and regulatory compliance. These elements work together to ensure that online payments are processed securely and efficiently. Businesses can mitigate the complexity of the e-commerce payment process and limit the strain on internal teams by working with a payment processing provider such as Stripe, whose payment solutions consolidate and automate many parts of this process.

The key components of e-commerce payment processing include:

• Payment gateway
  A payment gateway is a software application that connects an online shop's website to a payment processor's system. It allows the customer to enter their payment information securely and facilitates the transfer of payment data to the payment processor.

• Payment processor
  A payment processor is a third-party service provider that facilitates the authorisation, processing and settlement of online payments. It works with the customer's bank or credit card issuer to verify and authorise the payment and settles the payment with the merchant's bank account.

• Merchant account
  A merchant account is a type of bank account that allows businesses to accept credit and debit card payments. Usually, a merchant services provider or bank will provide this account, which is required for businesses that process online payments.

• Security and fraud prevention
  E-commerce payment processing involves sensitive payment data that must be protected against unauthorised access and fraud. As the volume of e-commerce payments rises globally, the need for robust fraud detection and prevention measures only increases. To this end, payment processors typically implement security measures, such as encryption and tokenisation, to protect payment data and prevent fraudulent transactions.

• Compliance
  E-commerce payment processing is subject to various regulatory requirements, such as the Payment Card Industry Data Security Standard (PCI DSS), which sets standards for the handling of payment data. Payment processors must ensure that they comply with these requirements to maintain the security and integrity of online payments.

The components of e-commerce payment processing can work together in different ways, depending on how a business sets them up. For example, one business could choose to work with a combination of third-party providers and home-grown tools to piece together a payment processing system. Other businesses might partner with a comprehensive payments provider such as Stripe, which offers the functionality of a payment gateway, merchant account and payment processor, with built-in fraud detection and prevention.

E-commerce payment processing: step-by-step

E-commerce payment processing involves several parties, including the customer, the online shop, the payment gateway and the payment processor. When first set out, the step-by-step process can seem complicated. However, every part is designed to ensure that payments are authorised, approved and settled securely and as quickly as possible.

Here's a breakdown of the steps involved in e-commerce payment processing:

• Customer places order
  The customer browses an online shop, selects the products that they wish to purchase and then proceeds to check out.

• Customer enters payment information
  At checkout, the customer enters their payment information, such as credit or debit card details, into the payment gateway provided by the online shop.

• Payment authorisation
  The payment gateway sends the payment information to the payment processor, which verifies the information with the customer's bank or credit card issuer to ensure that the payment can be authorised.

• Payment approval
  If the payment information is verified and authorised, the payment processor sends an approval message to the payment gateway, which then notifies the online shop that the payment has been approved.

• Order confirmation
  Once the payment has been approved, the online shop confirms the customer's order and sends a confirmation message to the customer.

• Settlement
  The payment processor settles the payment with the merchant's bank account, usually within a few working days.

• Payment reconciliation
  The online shop reconciles the payment with the order and ensures that the payment matches the order amount.

How to choose an e-commerce payments provider

When choosing the right e-commerce payments provider for your business, make sure that you take your time when it comes to considering all the options, as these payment features are essential to ensuring a smooth and secure checkout experience for your customers.

We have a comprehensive guide available on how to choose an e-commerce payments provider, but here are a few factors to consider:

• Identify your payment needs
  Consider what payment methods you need to offer, whether you need to support recurring payments or subscriptions, and whether you need to accept payments in multiple currencies.

• Consider all the markets that you currently operate in – and where you want to grow
  Businesses that operate in just one country might have simpler payment needs than a larger e-commerce company that conducts business on a global scale. From currencies and local payment methods to international compliance considerations, you'll need to make sure that you work with a payments provider that can accommodate your needs in every market.

• Check for security and compliance
  Businesses that accept credit card payments must comply with PCI DSS to protect customer payment data from fraud and theft. This means using encryption and other security measures to protect customer data. Working with a payments provider, such as Stripe, ensures that your e-commerce platform remains PCI compliant and may help you to avoid penalties or fines.

• Evaluate ease of integration
  From billing support to hosted payment pages and embedded checkouts, make sure that you understand how to onboard and integrate your new e-commerce solutions into your current digital storefront. A provider such as Stripe offers customisable integrations and flexible APIs to give you the most tailored experience possible.

• Consider customer support
  It's important to work with a payments provider that offers responsive customer support via phone, email or chat – or all three.

Tips and best practices for e-commerce payments

For e-commerce businesses, every strategy should focus on the same thing: how to increase conversion and sales. In addition to choosing the right payments processing provider, there are certain tips and best practices that businesses can follow to provide an intuitive, secure and conversion-friendly payments experience for their customers, while minimising the risk of fraud and chargebacks.

Here are some tips and best practices for businesses to follow when it comes to e-commerce payments:

• Offer a variety of payment options
  To cater to the diverse needs and preferences of your customers, it's important to offer a variety of payment options – and to leverage your historical payments data and customer research to ensure that you're offering the right payment methods. For example, if you sell furniture at a higher price point, buy now pay later might be a necessary payment method for your customers.

• Use a reliable payment gateway and merchant account
  The viability of any e-commerce business depends on having a payment gateway and merchant account that is reliable, secure and easy to use.

• Optimise the checkout process
  The checkout process is an important moment in the e-commerce experience. A complicated or lengthy checkout process can lead to basket abandonment and lost sales. Refine the checkout process by minimising the number of steps and fields, offering a guest checkout option and providing clear instructions and feedback.

• Clearly communicate payment policies
  To avoid confusion or disputes, it's important to clearly communicate your payment policies to customers. This can include information on accepted payment methods, payment processing times, refunds and returns policies, and any fees or charges associated with payments. Offering clear refund and return policies, as well as a customer service team that's easy to get in touch with, also offer powerful ways to minimise chargebacks.

• Monitor for fraud and chargebacks
  Monitoring chargebacks should be an active part of your internal payment practices. Fraudulent transactions and chargebacks can be costly for businesses, so it's important to monitor any suspicious activity and take proactive steps to prevent fraud. Implement fraud detection tools, use address verification and card security code checks, and respond promptly to any chargeback disputes. It's also helpful to track trends in fraud and chargebacks: Do you notice spikes in certain seasons? Are there certain channels where sales are generating a higher frequency of chargebacks? Identifying these trends can help you better understand where you might need to take additional action.

• Continuously improve the payment experience
  Finally, it's important to continuously evaluate and improve the payments experience for customers. Solicit feedback from customers, track key metrics – such as conversion rates and transaction times – and implement improvements based on customer feedback and data insights.

To learn more about how Stripe powers payments for e-commerce businesses, from startups to global platforms, take a look here.