Online payment processing guide for small business owners

As online shopping increases, many businesses are setting up digital shops to accept payments online and capture more sales. But after a customer hits "check out", how does the money get to you?

Whether you’re expanding a brick-and-mortar business to accept payments online or starting a new venture from the ground up, it’s important to understand how online payment processing really works — who's involved, how you get paid, and which processing fees apply. That way, you’ll be prepared with a plan that is suitable for you and your business.

In this guide, we’ll cover the basics of payment processors for websites and e-commerce operations, from how it works to the many benefits.

What is online payment processing?

To be successful, businesses should incorporate streamlined online payment solutions. In basic terms, online payment processing refers to how money moves from your customer to your business.

Though this may sound simple, many moving parts are involved in processing credit and debit card payments, whether online, via phone sales, or even in person. On one end is you, the business owner or merchant account. On the other end is your customer. And in between is a lot of technology that connects the two of you.

The merchant

The main moving part of online payment processing is the merchant — in this case you or your business. However, to accept credit and debit card payments from online customers, you will likely need to partner with one of the many available merchant account providers, including our PayPal merchant account.

This merchant account provider (sometimes called an acquirer) accepts payments on your behalf and deposits them into your business merchant account. For instance, you can accept online payments with PayPal.

The online payment processor

Wondering what is a payment processor? Payment processors (or merchant account services) handle all the heavy lifting in online payment processing — from moving the transaction through the processing network to sending you a billing statement, and then working with your bank to ensure you get paid. In other words, everything it takes to process online payments.

Often, your merchant bank is also your online payment processor, which helps simplify things.

The payment gateway

One of the technologies involved in online payment processing that enable you and your customer to transact is the payment gateway. For us, it’s called the PayPal payment gateway. This is software that links your site's shopping cart to the processing network.

The customer

For your customers to pay for your goods and services, they need a credit or debit card in most cases. The bank that approves the card (and lends them the cash to pay you) is called the issuing bank.

Online payment processing benefits

Online payment systems offer convenient, quick, and secure transactions, leading to improved customer experiences, efficient record-keeping, and helpful integration capabilities.

Adopting these systems can optimise payment processes and contribute to the overall growth and success of a business in the digital age.

Here are some advantages:


Online card processing systems provide a convenient and accessible way for customers to make purchases from the comfort of their homes or on the go. It eliminates the need for physical visits to stores or carrying cash, offering a seamless and hassle-free payment experience.

Expanded customer base

By accepting online payments, businesses can reach a broader customer base beyond their local area. Online platforms enable businesses to cater to customers from different regions and even international markets.

Quick transactions

Online payments are typically processed swiftly, allowing for faster transaction completion compared to traditional payment methods.

Improved security

Online payment systems often employ advanced security measures to protect customer information.

Enhanced customer experience

Online payment systems offer a seamless and user-friendly interface for customers to complete transactions with features like saved payment information, one-click purchases, and automated recurring billing options.

Integration with other business systems

Many online payment processing systems integrate with other business software and systems, such as e-commerce platforms, inventory management, and customer relationship management (CRM) systems.

How does online payment processing work?

As a business owner, it’s helpful to understand exactly what it looks like to process online payments. Or, in other words, how money moves from your customer to your business.

There are two stages to online payment processing: the authorisation (approving the sale), and the settlement (getting the money in your account).

Card authorisation

When it comes to how card processing works, the authorisation process goes roughly like this:

  1. Your customer buys an item on your site with a credit or debit card.
  2. That information goes through the payment gateway, which encrypts the data to keep it private and sends it to the payment processor.
  3. The payment processor sends a request to the customer’s issuing bank to check if they have enough credit to pay for the item.
  4. The issuer responds with a yes (an approval) or a no (a denial).
  5. The payment processor sends the answer back to you. If the sale was approved, it also tells your merchant bank to credit your account.

In terms of online payments, all of the above takes place within one to two seconds in most cases.


The second piece of the online payment system process (where you get paid) is the settlement:

  1. The card issuer sends the funds to your merchant bank, which deposits the money into your account.
  2. The funds are available to you now.

The settlement process can take a few days. Sometimes, your bank lets you access your money before it’s even sent to them. They also may keep a portion in your account that you can’t touch — just in case the customer returns the item later (called a reserve in payments).

Payment processing pricing and fees

We’ve learned about how payments come in, but what about the other side of the coin? What will it cost? As you may have guessed, everyone who touches the transaction wants to get paid, including the issuing bank, the credit card association (Visa, MasterCard, etc.), the merchant bank, and the payment processor.

At its most basic, every time you process a sales transaction, you pay four payment processing fees:

  • A percentage of the transaction amount: The issuer gets paid by taking a percentage of each sale, called the interchange. This fee varies depending on various factors, such as industry, sale amount, and type of card used.
  • Another percentage of the transaction amount: The credit card association (Visa, MasterCard, etc.) also charges a fee, called an assessment.
  • Yet another percentage of the transaction amount: Your merchant bank takes a cut by charging you a percentage fee. The amount here also varies by industry, number of sales, monthly processing volume, etc.
  • A fixed amount for every transaction processed: The payment processor (who might also be your merchant bank) makes money by charging a fee, called an authorisation fee, every time you process a transaction (whether it’s a sale, a decline, or a return). Plus, it can charge fees for setup, monthly usage, and even account cancellation.

Usually, the first three fees (the percentages) are all added together and quoted as a single rate, while the transaction fee is quoted separately, so: x% + [transaction fee in £].

Most pricing structures generally fall into one of three categories:

  • Flat-rate pricing: You pay a fixed percentage for all transaction volumes, no matter what the actual costs are. All the above fees are baked into this single rate. For example, if you were charged a bundled rate of 2.9% of the transaction amount + £0.30 per transaction, this would work out to be £3.20 on a £100 sale.
  • Interchange plus pricing: Your merchant service charges you a fixed fee on top of the interchange. For example, if this was set at 2.0% + £0.10 on top of a 1.8% interchange fee, your fees on a £100 sale would work out to be £3.90.
  • Tiered pricing: The processor takes many different interchange rates and lumps them into three pricing tiers: qualified, mid-qualified, and nonqualified. Setting fixed prices for every tier makes it simpler for you (and them) to understand. However, this also means that the fees you pay on a £100 sale vary depending on whether the processor has classified the transaction as qualified, mid-qualified or nonqualified.

All fees and rates in this article are examples for illustrative purposes only and do not represent actual PayPal pricing. For information on up-to-date PayPal fees for merchants, please visit PayPal pricing.

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