Shoppers easily make e-commerce purchases with a click of a button, but payment processing is much more complicated than that.

In order to choose the right payment processor, merchants need to do comprehensive research so that their company can quickly and securely process payments and get paid. 

Amazon often sets the tone for the e-commerce industry. Since Amazon provides a seamless check-out process, it’s important that other e-commerce companies follow suit.

Payment processors work the same for large enterprise companies as they do for small businesses, so merchants can create a positive payment experience for customers no matter their company size. 

Payment processors sometimes get confused with payment gateways. Payment processors analyze and transmit payment data while payment gateways make sure all the correct information is present and secure, then authorizes or declines transactions. The reason people get these two things mixed up is because payment processing software includes or integrates with payment gateways. 

What is payment processing? 

Payment processing is the software that customers and merchants use to power credit and debit card purchases. When it’s broken down, the most important moment along the path-to-purchase is when a customer clicks “confirm purchase.” If this process is clunky, a merchant’s potential customer will close out. 

Gone are the days where companies get paid with cash or check. E-commerce shops need to adjust to the rise of mobile payments and digital wallets; payment processing systems help with just that. 

Payment processors take payment methods at the time of purchase through a series of payment gateways and approvals, and then either approve or deny the purchase within a matter of seconds. If the payment processor approves the purchase, the money is then transferred into the merchant’s bank account. Payment processing software does all of this for a small fee. 

Who is involved with payment processing?  

There are three key players involved with payment processing. Understanding the role of each player will help you to better understand how payment processing really works. Together the merchant, customer, and technology help each other work toward a common goal of completing a purchase efficiently. 

1. The merchant

Merchants are the e-commerce companies that supply the goods and services in exchange for money. If you’re reading this, you’re most likely the merchant. Since the company is hosted online, you’ll need to determine a process to accept debit and credit card payments. 

To do this, open a merchant bank (also referred to as an acquirer) that accepts payments on your behalf and then deposits the payments into a merchant account the payment processor provides. 

2. The customer 

Customers are needed for merchants to make sales. The only way customers can buy things at an e-commerce shop is if they have money. Customers must be approved by an issuing bank for a credit card or debit card. Once they do this they can go ahead and begin making purchases at e-commerce stores. 

3. The technology 

Without technology the world would have to run on cash. The technology facilitates the transactions between the merchant and the customer. First the credit card or debit card information goes through a payment gateway, then goes through the payment processor to finalize the purchase. 

How does payment processing work? 

Online payment processing functions via a series of digital gateways. If a transaction meets the requirements of each individual payment gateway, it moves on to the next gateway. The last gateway is the merchant’s bank, where the money is deposited.

There’s a lot that goes on behind the scenes within seconds of swiping a credit card. Knowing how payment processing works will help merchants make a better decision about which software is best for their company.

Follow these steps to gain a better understanding of how online payment processing really works. 

1. Customer makes purchase online

Anyone can try to make a purchase, but just because they try doesn’t mean it will be approved. Once a customer swipes their card, their information is taken by the payment processor. 

2. Payment gateway encrypts transaction information

Encrypting people’s information makes it more difficult for someone to steal that information. The payment gateway encrypts the card details, the customer’s name, address and other details provided within the checkout process. 

3. Payment processor verifies transaction details

After the payment gateway encrypts all of the customer’s data, it transfers the information to the payment processor to verify that it is a valid transaction. Once it determines that the request is valid, it transfers the information to the correct credit card company and bank.

4. Customer’s credit card company and bank approve funds 

The credit card company and bank are the true decision-makers in this transaction. They hold the keys to the money. Once the payment processor relays the transaction request to the credit card company and bank, they decide whether to authorize the transaction. 

Typically, if there are no red flags from the payment gateway or the payment processor, they will quickly authorize the transaction. You’re in.

However, if anything seems fishy, like the fact that the shopper doesn’t typically make purchases over a certain amount or from a foreign country, the payment processor can reject the transaction. 

Other reasons why transactions get declined: 

• Insufficient funds 
• Frozen account status 
• Invalid credit card number or expiration date 
• Transaction limits 
• Your card has been reported lost or stolen 
• The address does not match the card 
• Invalid Card Code Verification (CCV)

5. Payment processor requests transfer of funds 

After the processor tells the payment gateway that the purchase was approved by the credit card and bank, the purchase can go through. Now the money needs to get to the merchant.

The payment processor, the acting switchboard, requests the transfer of funds from the customer’s bank to the merchant’s bank. Since the funds transfer has already been approved, the transfer is made and the vendor receives their payment.

6. Merchant receives funds

Congrats. Something sold! The customer will get an email from the payment gateway saying the sale went through. Since the money is now in the merchant’s bank account, they can begin the process of fulfilling the order. 

How long does it take to process a payment? 

Even though the merchant sold an item and the payment process went quickly, it doesn’t mean that the money is automatically deducted from the shopper’s account.

The length of time it takes for a payment to process depends on the timing and the payment method. If the customer or merchant is looking for the exact number of hours it takes to process a credit card payment, they’ll need to contact the credit card issuer. 

However, it takes an average of one to three business days for an online payment to post in a customer’s account. If the customer calls and says that their payment is still processing, remind them of this average and suggest that they call back if it hasn’t processed after four business days. After four business days, escalate any concerns to the payment processor, and their support team will determine the reason why the payment hasn’t been posted. 

How much does payment processing cost? 

Let’s dive into the other side of things. How do the issuing bank, credit card association, the merchant’s bank, and the payment processor get paid? 

There’s no such thing as a free lunch. All of the technology used to transfer the payment from the customer to the merchant’s bank takes a piece of the pie. 

Payment models vary depending upon each business, but there are four basic fees that are consistent across the industry. 

• Interchange fee: These fees are based on a percentage of each transaction. Merchants must pay the card-issuing bank per transaction because they cover the risk involved with approving a payment. 
• Assessment fee: The credit card association, such as Visa, charges a percent of the transaction amount. 
• Merchant bank fee: The merchant’s bank also takes a percentage of the total transaction amount which varies by industry and company. 
• Authorization fee: No matter the transaction, the payment processor charges a merchant. Meaning, if the card is declined or if someone is returning a product, the merchant still gets charged. Some payment processors also charge for monthly usage, technical support, and account cancellation.  

The interchange fee, merchant bank fee, and the assessment fee are added together to determine the single transaction fee rate. Since the authorization fee is a dollar amount and not a percentage, it is not bundled into that rate. Payment processors quote the authorization fee separately. 

For example: 

Quote: 3.5% + $0.20
This means: (interchange fee + assessment fee + merchant bank fee) + authorization fee 

How credit card processing fees are packaged 

There are the fees and then there are three pricing structures that most payment processors follow with regards to packaging their offerings. 

• Flat-rate: Merchants pay one flat rate per transaction which covers the processing fee and the fixed transaction fee.  
• Interchange plus: The payment processor determines a fixed markup on top of the interchange fee. Instead of bundling it all together, they add the markup separately.  
• Tiered: Merchants can fall into three different buckets that are determined by the processor. They lump these fees based on different factors. 
• Qualified: Transactions that are completed in-person with a standard credit card. These are the lowest-risk payments. 
• Mid-qualified: Transactions where the merchant keys in the card number or over the phone have higher fees since the physical card is not present. Without a card present, there is a higher risk. Rewards cards and business credit cards can also fall into this bucket. 
• Non-qualified: This is the bucket most e-commerce companies fall into, which charges the highest rates. Even if the customers are using a personal credit card, these online payments fall into the non-qualified structure. 

What affects the cost of payment processors? 

It’s difficult to predict what specific fees and pricing models each merchant falls into. The size of the company and the way in which people are paying, such as online or in-person all affect the pricing structure for all merchants. 

Be aware that there are differences between each model, and choose a payment processing system that best aligns with business needs. Don’t try to cheap out on this because if the merchant’s payment processing software isn’t providing a seamless path-to-purchase, then the merchant will have to spend more money finding a new payment processor. 

The payment processing industry 

The dynamics of the payment processing industry change by day. Within a decade, society has shifted from using cash and credit cards to storing card information with payment processors for easy checkout or even just paying via mobile. 

As e-commerce shops become more mobile friendly, people are steering away from traditional brick-and-mortar models because of the convenience phones have to offer. This type of mobile success is drawing more business into the payment processing industry, creating a fight for market share. 

Whereas non-card payment methods like Mastercard and Visa used to dominate the payment processing industry, now tech giants like Amazon and Apple have entered the payment processing industry. 

What are the top payment processing companies? 

There are a wide variety of payment processing providers out there. Each company provides a different experience for a merchant depending on the merchant’s needs. Some integrate the payment gateways, and some are faster than others.

Here’s a look at the top ten payment processing companies from G2's Winter 2020 Grid® Report.

1. Venmo for Business

Venmo for Business gives customers a seamless payment option by giving customers to use their own Venmo account at checkout. Since Venmo has millions of users, merchants can provide a familiar experience. 

What users say: 

“Previously I had to take manual payments for services from customers. One of them actually turned me onto Venmo. Now I'm able to take electronic payments via the app, have immediate access to that money and use the stored funds for payments or transfers it to my bank accounts.” 

Venmo for Business review by Dan J.

2. Amazon Pay 

Amazon Pay gives shoppers a familiar buying experience since they have hundreds of millions of customers around the globe. This payment processor helps e-commerce stores increase customer reach and reduce cart abandonments.  

What users say: 

“Having to log in to multiple sites in order to pay for a purchase online is like having to stand in line at the checkout counter behind 10 people with full carts. Amazon Pay makes it simple. Customers simply make purchases using their Amazon logins and it is absolutely hassle-free. Easy for sellers, and easy for consumers.” 

Amazon Pay review by Nicole M.

3. Stripe Payments

Stripe Payments processes online payments for internet businesses. It’s built for companies of any size. Stripe gives back to their customers through development, patches and sponsorships. Additionally they work with financial institutions so their customers don’t have to.

What users say: 

“Stripe has allowed us to easily take online payments not only for our customers, but made it very easy for our developers to incorporate into our website and other platforms. Our customers love how easy and efficient the entire process is as due our developers when working with the platform. Overall this system has been a game changer for us.”

Stripe Payments review by Nathan B.

4. Square Payments 

Square payments helps e-commerce shops accept every payment quickly, easily, and securely. Square has no long-term contracts or early termination fees, setup or startup fees, refund fees, or chargeback fees. They also have next-day transfer and free dispute management. 

What users say: 

“I love that I can easily and quickly accept payments for my business. It’s affordable with no monthly fees. I also like that I can save clients credit card info to reserve appointments.”

Square Payments review by Jessica B.

5. CyberSource Payment Management Platform  

CyberSource is a cloud-based platform that allows merchants to securely accept payment worldwide. It also provides a centralized view of all transit activity so businesses can keep track of payments.

What users say: 

“The most helpful thing about CyberSource is, it gives me the ability to actually see what happens when authorizations fail for customers. Cyber source allows me to identify the problem and fix it with customers expeditiously.” 

CyberSource Payment Management Platform review by Lauryn W.

6. EPX

EPX provides a simplified, streamlined consumer shopping experience that has increased data security measures which allows for fewer potential points of failure. This payment processor is customizable to suit merchants’ needs. 

What users say: 

“We have been partnering with EPX for quite a few years and I must say that they have been our payment processor of choice for a number of reasons. They have always provided excellent support if our clients had any issues surrounding payments. EPX offers an excellent reporting platform allowing our clients to simplify their reconciliation process.” 

EPX review by Ken B.

7. Chargent 

Chargent is a payment solution on the Salesforce AppExchange that puts businesses in control of payments by managing everything in Salesforce so that they can save time. This payment processor helps companies collect cash faster, without the hassle of data entry. 

What users say: 

“We love Chargent's ability to integrate with Salesforce, which is our main cloud computing software. It offers a variety of automation and information that paints a clear picture for our users.”

Chargent review by Shahid H.

8. Pin Payments 

Pin Payments doesn’t require a merchant account for small business owners. It is a flexible platform that is a simple and secure way to get paid. 

What users say: 

“I needed a solution to be able to charge credit cards from around the world, at any time. I was taking credit card numbers over the phone and setting this up while abroad was a nightmare. Then I found Pin. Good pricing, simple interface, and the customer service is really that good.”

Pin Payment review by Patrick S.

9. Braintree Direct 

Braintree Direct’s platform has everything you need to sell online to customers. From its global reach to its mobile and web optimization, Braintree Direct offers industry-leading tools to help streamline and protect payments. 

What users say: 

“I have been using Braintree for around 4 years now. The experience has been great. I have never had to spend too much time integrating it on my projects. It fits super well with any Ruby stack. And their API is extremely well done. They also have good customer support and the response is always super fast.” 

Braintree Direct review by Esteban A.

10. Sage Payment Solutions  

Sage Payment Solutions accepts digital payments on all devices and increases conversion rates for merchants. This quick, efficient, and all-in-one solution is both secure and adaptable for different stores. 

What users say: 

“I do my credit cards in half the time! Sage makes it easy only needing a customer client number and everything is pulled up, client name, billing address all that. I will never switch to anything else unless the owner decides to drop Sage software entirely.”

Sage Payment Solutions review by Alana G.

The future of payment processing 

The future of payment processing is bright because e-commerce has had steady growth year-over-year. Customers are at the center of all payment processing innovation. There’s a desire among consumers for convenient and meaningful experiences with brands as you can see with these trends. 

Digital wallets 

Credit cards aren’t going away just yet, but in-store mobile payments are on the rise.

Digital wallets are a more secure method to pay because of the authentication process for customers to access their own digital wallet. Not only do you need a password to get into a digital wallet, but you also need biometric authentication, like your fingerprint or your face. 

Digital wallets can be stored on desktops as well. Any e-commerce store that accepts payments from Google Pay, Amazon Pay, PayPal, or Venmo, is taking payments from digital wallets. 

Expect this trend to keep growing as less people will carry around credit cards, and instead have all the necessary information securely stored on their phone. 

Gen Z 

Gen Z, aka digital natives, will make up 40 percent of all US consumers in 2020. This segment of the popular values experiences and brands that give them some sort of meaning.

Gen Zers haven’t lived in a world without Amazon, so technology isn’t a novelty to these consumers. Instead, they’re looking for brands that align with their values. Payment processing shouldn’t get in the way of this. 

For example, cruelty-free beauty products or a t-shirt company that donates a percentage of profits to an important cause per swipe would attract Gen Zers. Another way e-commerce professionals are going to influence Gen Z is by providing one-of-a-kind experiences, such as Amazon’s Treasure Truck where customers don’t even have to bring a physical wallet.  

Voice commerce 

This is something that has just begun with Amazon’s Alexa having buying power through AI. Voice commerce creates a seamless shopping experience by meeting the needs of shoppers in the exact moment they want or need something. Shoppers can order, check order status, and add things to a wishlist all by using voice commerce. 

Payment processors that integrate with voice commerce technology will be ahead of the curve and see success sooner because of the barriers it removes. 

Pay your way 

Payment processing is an integral part of the retail experience. E-commerce shops need to provide a positive user experience so that customers keep coming back. Knowing the inner workings of payment processors will help merchants purchase the right software for their business’ needs. 

Still getting familiar with the nuts and bolts of e-commerce? Discover the ways drop shipping can positively impact the supply chain.