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 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 processing fees. That way, you’ll be prepared with a plan that works best for you and your business.
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.
When accepting payment online, the merchant is considered 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 (sometimes called an acquirer) accepts payments on your behalf and deposits them into a business merchant account they provide. For instance, you can accept online payments with PayPal.
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. Often, your merchant bank is also your payment processor, which helps simplify things.
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.
For your customer to pay for your goods and services, she needs a credit or debit card. The bank that approves her for the card (and lends her the cash to pay you) is called the issuing bank.
As a business owner, it’s helpful to understand exactly how money moves from your customer to your business. There are two stages to online payment processing: the authorization (approving the sale) and the settlement (getting the money in your account).
The authorization process goes roughly like this:
In terms of online payments, all of the above takes place within one to two seconds.
The second piece of the online payment system process (where you get paid!) is the settlement:
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 speak). Check out our step-by-step guide to PayPal payment processing.
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:
Usually, the first three fees (the percentages) are all added together and quoted as a single rate, while the transaction fee is quoted separately (e.g., 2.9% + $0.30).
Most pricing structures generally fall into one of three categories:
For more information, visit PayPal pricing.
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