What is payment processing?

Payment processing is the transfer of information concerning financial transactions between two parties. A payment processor takes orders and passes them to a payment system for processing under instructions from the merchant. The payment system itself consists of a network, or more likely a combination of networks, that processes online payments. All card payments are routed through at least one third-party payment processor. Payment processing can also refer to the process of companies receiving money for products or services sold either online or offline.

How does it work?

Online merchants can use a third-party payment processor like PayPal, Amazon Payments, Discover Card Services (now known as JAL), eWay eCommerce, GoCoin, Stripe, Shopify Payments, Balanced, Braintree and Stripe. Each payment processor will either charge a flat fee or a percentage of each transaction whichever is greater.

Merchants sign up with the payment processor and provide information about themselves and their businesses such as: contact details; business banking account(s); and credit card merchant account(s).

Merchants can choose whether to keep customer information such as email addresses, names and transaction details. Some payment processors only allow merchants to make limited use of customer data; others do not restrict how merchants use the data at all.

Payment processors provide online shopping carts which allow clients to make purchases by entering their name, address and credit card details in a secure environment. All payment processors have a security seal which merchants can display on their websites to help reassure customers about shopping online with them.

Some payment processors also provide other e-commerce services such as: fraud screening; direct debits or alternative credit card payments; recurring billing; split payments (where the customer’s card is charged on the merchant’s behalf); tax calculation; and currency conversion.

The payment processor then sends all transaction information back to the merchant, who then deposits the money into their bank account. If the purchase was made by credit card, the seller will also receive an automated clearing house (ACH) file which transfers money from the buyer’s bank account into the merchant’s account.

How secure is it?

Merchants are required to abide by security standards issued by payment processors, which include manuals for setting up a secure online merchant website and using encryption technology. Merchants must also provide Secure Sockets Layer (SSL) certificates on their websites. SSL provides encrypted links between a web server and a browser. This makes it harder for hackers to intercept transaction details as they pass between the website and payment processor’s security system.

All transactions are protected by at least 128-bit SSL encryption, which is the highest level of security commercially available for online purchases. It means all data passed between customers and merchants is encrypted to prevent it being viewed by hackers.

Merchants are responsible for keeping customer details secure themselves, which means merchants must use the same level of security when processing customers’ payments as they do in storing their data. Merchants who handle large numbers of transactions will usually store payment information securely, often on dedicated servers not directly connected to the internet.

What are the benefits?

The key benefit to e-commerce merchants is access to millions of potential customers worldwide. The more companies accept online payments, the more attractive their products and services will appear to potential customers who want a safe method of paying for goods or services on the internet. Customers are also likely to be attracted by the array of retailers who accept payments online. This makes it easier for customers to compare prices and make purchases at the retailer whose products or services best suit their needs.

The cost of setting up an e-commerce site is relatively low, while the potential returns are high compared with traditional bricks and mortar businesses. Customers can buy goods without leaving home (saving time and gas), while merchants can reach customers that would ordinarily be out of their physical reach.

The growth of e-commerce has also contributed to the rise in popularity of credit cards, which can be used anywhere in the world where they are accepted. The use of credit cards over the internet is preferable for consumers because it reduces the risk of their financial details being stolen. However, this also means that consumers can end up paying more for goods because they are not physically present to haggle with a seller or negotiate a price.

What are the drawbacks?

The main drawback of online shopping is the lack of impulse buy opportunities for customers, as many would have experienced buying a product in a shop and then finding something they like even more and purchasing it.

Another drawback is that products can sometimes be delivered later than expected, or not at all, because of problems with the postal system, weather conditions (large items such as furniture) or bad luck (accidents and acts of terrorism). Customers also take greater responsibility for delivery when they shop online, because the products are not being delivered to their home address. This means that customers must provide a postal address where someone is in during the day and there is no requirement for a signature on receipt.