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Ecommerce payment processing: A guide for businesses

Ecommerce payment processing: A guide for businesses

Aug 24, 2023
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Ecommerce is swallowing up an ever larger portion of global sales. According to Statista, worldwide ecommerce sales exceeded $5.7 trillion in 2022, and online now accounts for 20% of all global retail activity. 

But this thriving commercial force would be nowhere without secure and effective payment processing. 

Ecommerce payment processing involves the cooperation and collaboration of numerous parties, systems, and methods. It’s a massive ecosystem, one which merchants use and play a role in every day, but don’t often have time to consider as a whole. 

But consider they should. Having a thorough understanding of ecommerce payment processing allows you to make informed decisions on the best solutions and payment options for your needs and your customers’ preferences. It also allows you to optimize your setup to give you the best chance of achieving your goals. 

Below we dive into ecommerce payment processing, and explore how it works, different payment methods, and what to look for in a payment processor.   

What is ecommerce?

Ecommerce, a contraction of electronic commerce, refers to any buying and selling of goods or services that take place on the Internet. It includes online transactions, where consumers pay businesses through digital means, but also the entire commerce experience, from browsing to buying and customer service. Ecommerce has transformed the global economy, allowing businesses to reach a worldwide customer base and consumers to shop without leaving their homes.

B2C

Business-to-consumer (B2C) commerce is any type of ecommerce where businesses sell products or services directly to individual consumers. For example, online retail marketplaces, food delivery services, and subscription platforms.

B2B

Business-to-business (B2B) commerce describes when businesses sell products or services to other businesses. For example, sales between manufacturers, wholesalers, and retailers. B2B ecommerce often takes place on platforms that cater to the specific needs of businesses, by facilitating things like bulk ordering and customized pricing, or directly between organizations. 

C2C

Consumer-to-consumer (C2C) includes any type of online commerce that involves individuals selling products or services directly to other individuals. Online marketplaces, like eBay or Amazon, and classified ads platforms, like Craigslist, facilitate C2C transactions by providing the tools for individuals to interact and pay each other.

D2C​​

Direct-to-consumer (D2C) commerce occurs when brands sell their products directly to consumers, bypassing traditional channels like retailers or distributors. D2C ecommerce has been enabled by the rise of online platforms and social media, allowing brands to form direct relationships with their customers and giving them much more control over the customer experience.

C2B

Consumer-to-business (C2B) is an ecommerce model where consumers provide skills, expertise, or products and services to businesses in exchange for payment. It is the opposite of traditional commerce as the consumer is the supplier, creating value for a business that can then drive further growth. Platforms like Upwork and Shutterstock have enabled C2B commerce.

Learn more: Ecommerce for retailers

What is an ecommerce payment?

An ecommerce payment is any financial transaction that takes place between a buyer and a seller in an online purchase. It involves the internet-enabled transfer of funds from the buyer's account to the seller's account. E-commerce payments can be made using an increasingly wide range of methods, including credit cards, debit cards, digital wallets, and bank transfers.

How does ecommerce payment processing work?

Ecommerce payments require the involvement of numerous third-parties, including payment gateways, payment service providers (PSPs), payment rails, merchant account providers, and card networks. 

Once the customer has initiated a payment, the transaction has to go through a number of crucial steps in order to be verified and securely processed. The three main players in any ecommerce payment are the payment gateway, the payment processor, and the merchant account. 

Here’s a simplified account of ecommerce payment processing and how these three providers fit in:

Firstly, the customer initiates the payment by adding a product to their basket and entering their card details and other personal information at checkout. These details are encrypted to ensure secure digital transmission. Now the payment gateway comes into play. 

Payment gateway

A payment gateway acts as an intermediary between the ecommerce merchant, the payment processor, and the customer's bank or card issuer. Once the payment gateway has received encrypted payment details from the merchant’s website, it sends an authorization request to the customer's bank or card issuer. The bank then verifies that the person attempting payment is the cardholder and that they have sufficient funds available for the transaction. They can then decide whether or not to approve or decline the payment. 

Payment processor

The payment processor also plays a key role at this stage of the process. The card details are sent to the PSP via the payment gateway, and it’s the processor that notifies the issuing bank and then communicates the card network’s decision back to the payment gateway, which, in turn, relays it to the merchant. If authorized, the customer will receive confirmation in their browser window and in an email receipt. Now the acquirer plays its part.   

Acquirer

An acquirer allows merchants to accept electronic card payments from their customers. Once the transaction has been approved, the funds are debited from the customer's account and credited to the merchant's bank account via the acquirer. The acquirer can hold funds in the merchant’s account for between one and three days - the settlement period - while all verification and fraud checks are conducted. 

Ecommerce payment processing vs. traditional processing: What are the differences?

The main differences between ecommerce payment processing and in-person payment processing are:

  • Card/customer presence - traditional payment processing typically involves a face-to-face interaction between the customer and the merchant in a brick-and-mortar retail environment. These transactions are classed as card-present, because the customer is physically present at the point-of-sale (POS) and swipes, inserts, or taps their card at the card terminal. In contrast, ecommerce payments are typically classed as card-not-present (CNP) transactions because the card is not physically present and the details are captured by an online payment processor or gateway 
  • Technology and equipment - traditional payment processing requires the merchant to have a physical card terminal in order to take payments. For ecommerce payment processing, the merchant needs an online checkout or hosted payment page, and a payment processor
  • Security - traditional payment processing is considered to be more secure than E-commerce payment processing. That’s because it’s easier to verify the customer and their card when they’re physically present. Ecommerce payment processing gives hackers more opportunities to steal card details and commit fraud. However, online transactions are protected by robust security measures like multi-factor authentication, tokenization and encryption  
  • Costs - both traditional payment processing and ecommerce processing incur transaction fees. However, interchange fees, which make up a significant percentage of your processing costs, are higher for CNP transactions to account for the increased risk of fraud. That said, you also need to factor card terminal rental or purchasing fees into the cost of traditional payment processing

What types of ecommerce payment method should businesses accept?

There has never been a greater variety of Ecommerce payment methods available to merchants and customers, offering choice and convenience, and meeting the diverse needs of consumers around the world. 

Here are the main types of payment methods:

Credit card

One of the most common types of ecommerce payment methods, credit cards allow consumers to make payments at online checkouts by using a line of credit from a provider. They then settle the total sum of all their transactions processed in a given period. Major credit card brands like Visa, Mastercard, American Express, and Discover are widely accepted around the world. 

Debit card

Debit cards are another extremely popular payment method and allow customers to make payments directly from their bank accounts. The funds are deducted immediately from the customer's account when the payment is authorized. Both credit and debit card payments are expected to decline between now and 2026, declining to account for just 16% and 10% of all payment methods used worldwide.

Digital wallet

Digital wallets – such as PayPal, Apple Pay, Google Pay, and Amazon Pay - allow customers to securely store the payment details for a number of cards on their digital devices. They can then make payments without needing to enter their card details every time. Digital wallets are already surpassing cards in popularity, and are set to grow from a 49% market share last year to a 54% market share by 2026. 

Mobile payments

​​A mobile payment is any method that uses a smartphone or other mobile devices to facilitate transactions. These include digital wallet payments (as above), in-app payments and purchases, payment platforms that enable customers to make payments by scanning QR codes, NFC (Near Field Communication) technology, and sending money via messaging apps.

Bank transfers

Bank transfers, also known as electronic funds transfers (EFT), allow customers to transfer funds directly from their bank accounts to the merchant's bank account. Consumers need online banking or a mobile banking app to initiate a bank transfer. 

Buy now, pay later

​​Buy now, pay later (BNPL) services are becoming an ever more popular form of ecommerce payment. They allow customers to make a purchase, defer the payment, and then pay it off in installments over time, with the merchant paying fees to a provider in order to offer the service. BNPL services provide flexibility and convenience for customers who might not be able to afford goods upfront, and give businesses a way to access untapped revenue and drive customer loyalty. BNPL is currently used by about 5% of consumers worldwide, which is expected to grow slightly to 6% by 2026. 

Prepaid cards

Prepaid cards are loaded with a specific amount of funds in advance and can be used for online purchases. Customers can purchase prepaid cards and use them to make payments without the need for a bank account or credit card. They are available in various forms, including gift cards or reloadable cards.

What is the best payment method for ecommerce?

When it comes to ecommerce, there’s no one-size-fits-all solution. Different methods are suited to different industries, regions, and consumer preferences. If a method isn’t practical or economical, don’t invest in it. That said, all businesses stand to benefit from offering a range of methods to their customers, which maximizes the chance of a successful sale and drives loyalty. 

Here are the most popular payment methods by sector:

  • Retail - online retailers should maximize their chances of making conversions by offering as many different payment methods as possible. As we’ve seen, digital wallets have grown to become one of the world’s most popular options, though credit and debit card payments still hold their own, and are used widely in nearly every region of the world. Retailers should also ensure they accept mobile payments and emerging methods like BNPL
  • B2B - businesses have different needs to consumers, and frequently need to make a higher volume of high value transactions. In the US, ACH payments are widely used for B2B transfers, while wire transfers, bank transfer and cards also have a place
  • Food delivery platforms - mobile and app-enabled payments are essential for food delivery platforms, as consumers most commonly order through their phones. However, Deliveroo recently partnered with Klarna to allow users to defer paying for orders or to pay in installments, so there’s a clearly a place for emerging methods as well
  • Gaming - credit and debit cards linked to online accounts are the most popular payment method in the gaming world, while digital wallets, mobile payments and even cryptocurrencies are also used by gamers
  • Travel - card payments facilitated by online gateways are still the most popular method for travel booking. However, BNPL is also finding a foothold, allowing consumers to spread out and defer the large sums involved in paying for travel
  • Subscription services - as subscription services need to collect recurring payments from customers, a payment gateway that makes it easy to collect repeat payments is a must, whether that’s via card or digital wallet 

How to choose the right ecommerce payment processing option

It’s simple. The right ecommerce payment processing option for you is the one that provides everything you need to meet your goals, drive growth, remain compliant, and keep your customers happy. 

Here are the main factors to consider when choosing your payment processing provider:

PCI compliance

You and your ecommerce payment provider must be PCI compliant, which means you’ll need to adhere to regulations set by the payment card industry that safeguard online payment security. This includes ensuring your systems are secure against breaches through the use of firewalls and password protection, using encryption when transmitting customer data, maintaining anti-virus software, keeping all systems properly updated, and testing for vulnerabilities. It is mandatory for merchants and payment processors accepting online payments to meet these standards.

Tokenization

Tokenization involves replacing sensitive credit or debit card information, such as the Primary Account Number (PAN), with a completely unique token that is unable to be exploited by criminals. When a customer wants to make a payment, the token replaces the card data in the transaction, ensuring vulnerable information is never exposed to fraudsters. This, of course, helps to reduce fraud but also improves the customer payment experience because the card network takes on the responsibility of keeping the token updated with current details, even when the card is replaced. This means less effort on the customer’s part, and increases acceptance rates by ensuring there’s always a valid card on file. It’s also great for subscription businesses as it makes repeat payments more convenient.  

Security

Success in ecommerce payments is absolutely dependent on meeting rigorous security standards. 

To process payments safely on your website, you need a secure sockets layer (SSL) certificate. This certificate adds a layer of security by encrypting customer information during online communication and transactions and protecting sensitive data from unauthorized access.

Making use of advanced authentication procedures will also help to protect your business and your customers. Solutions like 3D Secure (3DS) use Strong Customer Authentication (SCA), Risk-based Authentication (RBA), and Transaction Risk Analysis (TRA) to keep payments safe. SCA requires businesses to use a combination multiple factors like basic login details, biometrics, One Time Passwords (OTPs), and more to verify cardholders. 

Fraud Detection

Fraud detection capabilities are a must in the modern economy, especially where emerging technologies are concerned, which haven’t always developed the robust security protocols of their more established peers. The fact is that the soaring value of the digital marketplace has created something of a gold rush for criminals. Luckily, a decent payment processing provider should provide all the tools you need to effectively fight fraud. A system that utilizes machine learning and flexible rules can take on a lot of the burden of fraud detection for merchants, and learns to spot changing trends in payment fraud to stay one step ahead of the criminals. 

Customer preferences 

Meeting your customers’ preferences is essential and an emerging payment trend for driving loyalty and maximizing conversions. The best way to do that is to work with a payment processor that allows you to offer as many different options as possible in order to meet varying needs around the world. That includes offering the most popular payment methods in each region, as well as shipping methods that cater to different requirements. 

Top tips for processing ecommerce payments

As an online merchant, you should look at ecommerce payment processing as an ongoing process of optimization and refinement. You can’t just sit back and expect consistently high sales to roll in - there will be challenges, but there will also be opportunities. When it comes to payment processing marketplaces can offer competitive advantages as well.

Here are our top tips for processing ecommerce payments:

  • Offer a range of options - the more options your customers have at checkout, the more likely they are to complete a purchase. As well as payment methods, you need to be able to transact and settle in multiple currencies and to offer a range of shipping options
  • Make use of your data - ecommerce payment processing generates tonnes of data that, provided you have a sophisticated reporting function, can be transformed into useful insights. These insights can inform optimization, help you identify areas for improvement, and flag suspicious activity 
  • Optimize your customer journey - optimized ecommerce payment processing starts before your customer clicks ‘buy’. Make your customer journey and checkout experience as frictionless and streamlined as possible to limit cart abandonment. That means reducing the number of steps and the amount of information required to complete a purchase, offering guest checkout, and, if possible, keeping everything on one page 
  • Choose a scalable payment processing solution - circumstances change, especially if you’re a rapidly growing ecommerce business. You need to partner with a payment processor than can adapt to a growing volume of sales and an increased fraud threat

Explore ecommerce with Checkout.com

Checkout.com is the only payment processing solution you’ll ever need. Our integrated platform provides advanced tools for everything from authentication and data analysis to compliance and fraud detection. 

Process payments quickly, cut your processing costs in more than 150 countries, and offer all the most popular local payment methods to drive your global growth. And with granular data and actionable insights at your fingertips, you’re empowered to continually optimize your payment experience. 

Find out more about ecommerce payment processing with Checkout.com.

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August 24, 2023 11:43
August 24, 2023 11:43