Online Payment Processing: An Overview

Online payment processing

If you’re considering selling anything online—whether it’s gift certificates, retail items, memberships, or appointment and class series—there’s one critical piece of technology you need: online payment processing.

While you’ve probably used online payment processing before (for example, if you’ve ever bought a book on Amazon, purchased a plane ticket, or ordered delivery from a restaurant website), it’s not easy to see exactly how it works. Before you invest in an online payment processor for your business, it’s important to understand the steps involved so you know exactly what you’re paying for. This will ensure that you choose the best system for your needs.

In this article, we’ll walk through online payment processing step by step.

What Is an Online Payment Processor?

An online payment processor is a third-party company you work with to process non-cash payments. These companies handle your credit and debit card transactions, whether they take place online or in your shop. All of the transactions are sent and stored online.

 

How Do I Get an Online Payment Processor?

In order to sign up for an online payment processor, you first submit an application. Once you’re approved, you pay the processor a per-transaction fee; this fee varies depending on the company’s rates and your business’s financial qualifications. Some processors also require a flat-rate or monthly gateway fee in addition to a per-transaction fee.

How Does Online Payment Processing Work?

While an online payment may take only a few seconds to go through, the process actually requires multiple steps. Let’s explore them one at a time.

Step 1: Add Items to Order or Cart

To kick off the online payment process, you need to have a customer who wants to buy something.

  • In person, this happens when a customer comes to the front desk to pay for a service/class or selects a retail item to purchase.
  • On your website, this action happens on a product page where the user clicks a “Buy Now” or “Add to Cart” button.

Step 2: Collect Customer Information

When processing an online transaction, your processor requires the customer to enter some personal information before letting them put in their payment method. This serves a dual purpose: (1) to verify the identity of the shopper and make sure their payment method actually belongs to them, and (2) to provide you with the appropriate contact information you need to confirm their order, ship retail items, and link any electronic subscriptions, such as a membership, to the right customer record.

Usually, payment processors require a name, billing address, shipping address, phone number, and email address during this stage.

While it’s not required that you collect this information in person, it’s highly valuable for you to create new customer profiles using these basics for everyone who makes a purchase at your store. That way, you have the information you need to market to them later, and a way to store their payment method for future purchases.

Step 3: Collect Payment Information

During an in-person transaction, your staff member will select the payment type the customer wants to use (cash, credit, debit, check, membership, series, etc.) and then have the customer swipe their card or provide cash or check.

Online, the customer will select their payment type and enter their card information (for debit/credit transactions) or account information (for PayPal and other online payment providers). Usually, a customer is asked to input their card type, number, CVV code, card expiration date, and cardholder’s name.

Step 4: Verify Payment Method

After a credit or debit payment is made and the information is submitted (either by your staff member in store or by the shopper online), it continues on to the Payment Gateway. This Gateway is the bridge between your business, your customer’s credit card provider, and the bank. During this process, the Payment Gateway:

  • Validates the card number.
  • Validates the card CVV.
  • Validates cardholder’s name and address.

If the payment is rejected, the card will be declined in your POS system or on your website. If it’s verified, the payment will go through.

Step 5: Merchant Account Fund Transfer

Once a payment is accepted, the Payment Gateway transfer funds from the credit card company to a Merchant Account—essentially, a holding pen for money transferred from your customer’s credit card to your account.

Step 6: Receipts and Reporting

During this step, you can give the customer their receipt (printed or emailed), and the transaction information is stored in your POS system so you can report on it later.

Step 7: Get Paid

The funds sitting in your Merchant Account will be transferred to your business bank account within a couple of days.

The Bottom Line

Online payments are convenient for your business and your customers. Now that you understand how online payment processing works, you can make sure to pick the right processor to help you sell in person and online.

About the Author

Ashley Taylor Anderson

Ashley Taylor Anderson is a content developer and marketer who's spent her career knee-deep in the B2B technology space. In previous professional lives, she worked as a science textbook editor, media producer, and pastry chef.

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