A Guide to Internet Credit Card Processing
When a new e-commerce merchant has a great product, a solid business plan, and a dazzling website, there's only one thing missing: a way to accept payments from their customers. While there are some alternative payment schemes worth looking into, card payments dominate the e-commerce transaction landscape.
Any merchant who sells online needs a way to take credit card payments, but getting set up to do so for the first time can be a daunting experience for the unfamiliar. How does internet credit card processing work, and what should merchants take under consideration when they’re trying to pick the right solution?
Credit and debit cards are by far the most widely-used payment methods for e-commerce. Nearly half of all online transactions—47%—involve payment cards, with digital wallets in a distant second place at 28%.
Finding a card acceptance solution is basically non-negotiable, but card-not-present merchants have a somewhat different experience with it than their card-present cousins.
There’s no requirement for e-commerce merchants to use card-reading terminals hooked up to proprietary payment processing networks, which gives them some flexibility about what type of payment solution they want to use and how comprehensive they want the services it provides to be.
Most importantly, merchants need payment solutions that provide the support and resources they actually need. Merchants have different challenges, different customer bases, and tremendous divergence of experience depending on their size, industry, region, and many other factors. Your choice of payment provider can also have a major influence on how your business is affected by chargebacks. The company (or companies) that handle your card payments will be among your most important vendor relationships, so you’ll want to make a careful and informed decision.
How Does Internet Credit Card Processing Work?
The card payment process starts with a cardholder who wishes to make a purchase and pay for it with their card. They provide their payment credentials (the account number and other required information, such as their name and address) to the merchant, who uses those credentials to request that the issuing bank (the bank that provided the payment card to the cardholder) authorize it.
If the transaction is authorized, the merchant can finalize it and submit it to their acquiring bank (the bank that provides their merchant account) for clearing.
In the clearing step, the acquirer works through the card network to retrieve funds from the issuer. The acquirer then deducts any applicable fees and deposits the funds into the merchant account.
To process card payments, merchants need three things:
- A merchant account, a special bank account that can receive funds from credit card transactions
- A payment gateway, which allows cardholders to securely enter and transmit their payment credentials
- A payment processor, which handles communications between the merchant and the banks
It’s not uncommon for a merchant to have an acquiring bank that provides their merchant account and a different vendor that provides gateway and processing services. Some companies, such as PayPal, offer comprehensive all-in-one platforms.
A company that provides more than one service may be known as a Merchant Service Provider or MSP. Because these services tend to overlap, it’s not uncommon to see acquirers and payment processors referred to interchangeably, or to encounter confusion between the concepts of payment gateways vs. payment processors.
What Do Merchants Need to Know About Choosing a Payment Solution?
There are some qualities that merchants should want to see in any MSP they deal with: high uptime and reliability, excellent customer service, and reasonable rates, to name the obvious. Other criteria must be determined based on the merchant’s individual needs.
Small, low-volume merchants, for example, might find it most cost-effective to use an all-in-one platform. A high-volume merchant, on the other hand, might find that such solutions come with a lack of flexibility and higher fees, and might be served better by selecting their acquirer, processor, and gateway solutions à la carte.
Some all-in-one platforms shield merchants from chargebacks because the card networks consider any dispute to be between the cardholder and the platform, not the merchant. However, these platforms will usually pass on the cost of chargebacks to merchants and may not offer satisfactory avenues to appeal the dispute
These platforms may also increase checkout friction, as they often have to send customers to their own portal instead of allowing the entire checkout to occur natively within the merchant’s own website.
Merchants in high-risk industries, or who have a history of attracting high rates of fraud or chargebacks, may find that they will only be offered accounts by high-risk payment processors, which tend to charge much higher fees and may not be as reliable as mainstream providers. A “normal” fee structure will look something like this, with typical rates provided:
- Gateway fees
- Transaction fee: 5-15¢ per transaction
- Service fee: $15-20 per month
- Processor fees
- Discount rate: 1-3% of each transaction
- Transaction fee: 25-35¢ per transaction
- Statement fee: $10-15 per month
This list does not include the card network’s interchange fee or any of the many other add-on fees (like chargeback fees) that may be applied under certain circumstances.
Merchants who have concerns about PCI DSS compliance and other regulations may find it helpful to seek out a provider that specializes in helping merchants adhere to strict data regulations.
Merchants have a lot of options when it comes to internet credit card processing. There are full-service providers that will manage every step of it if merchants are willing to accept some costs and limitations, and there are banks, gateways, and processors that merchants can mix and match to form their ideal stack of payment handling technology. It all comes down to what you need, what your customers want, and what you’re willing to pay for.
When your chargeback ratio gets too high, you can get dropped by your acquirer or processor and put on an industry blacklist. If that happens, you’ll only be able to work with high-risk providers, which often provide substandard service at higher-than-average prices. To protect your business and your ability to choose the best provider to serve it, it is vital to implement a strong chargeback defense strategy.