How Do Online Payments Actually Work?

No other technological advancement has revolutionised an industry more than the internet has altered finance. The financial world we live in today is so unbelievably different to the world of even twenty years ago.

The online shopping sector, which barely existed twenty years ago, is now worth $2.8 trillion worldwide.

With so much money changing hands, it’s only natural to wonder how the whole system works. How does a customer click a button on their mouse and send a payment to a company hundred or thousands of miles away.

In this article, I’m going to explain how it all works.

What Are The Payment Options?

The term online payment covers any form of payment made online. As you might have guessed, that’s a very wide range.

You’ve got things like eWallets, online bank transfers, mobile payments, cryptocurrency and, of course, credit/debit card transactions. While the first four (and other alternative payment methods) do account for a big chunk of the online payment market, it’s still credit and debit cards that make up the bulk of the money changing hands.

So for this blog, I’m going to concentrate on just online debit and credit card payments. If it’s wildly successful, I might come back and revisit some of the other payment methods too!

Meet the Players in Online Payment

To process each payment, there are several players you need to think about. In this section, I’ll give you a short introduction to each of them.

  • Customer:The individual or business attempting to purchase something from you.
  • eCommerce Platform: An eCommerce platform is the piece of software behind an online business. It usually handles everything from the website to the shopping cart. Think of services like Shopify, WooCommerce and Magento.
  • Payment Gateway: A payment gateway is a service that integrates with your eCommerce platform to coordinate the actual payment.
  • Merchant Account: A merchant account is a special category of bank account that can accept payments via debit and credit cards.
  • Acquiring Bank: The acquiring bank (or simply the acquirer) is the institution that provides your merchant account.
  • Issuing Bank: The issuing bank (or simply the issuer) is the financial institution that issued the credit or debit card to the customer.
  • Card Scheme: The card scheme is the network that bridges the gap between the acquirer and issuer. Think Visa, MasterCard, American Express and so on.

Now you know the seven key players, we can move on to the nitty-gritty of payment processing. How does a single click result in these seven players moving money from one account to another?

How Do Online Payments Work?

While online payments are intensely complicated at a technical level, they’re actually quite simple to explain in a more general sense.

In fact, I can explain how an online payment works using just eight steps. Here they are.

  • Step #1: A customeradds a product to his or her bag and clicks check out on your eCommerce platform.
  • Step #2: The eCommerce platformprocesses the order and sends the transaction details to the payment gateway.
  • Step #3: The customerenters their payment information — name, address, card number, security code — into the payment gateway.
  • Step #4: The payment gatewayencrypts that information and securely transmits it to the acquiring bank.
  • Step #5: The acquiring bankthen forwards the information to issuing bank via the card scheme.
  • Step #6: The issuing bankcompares the customer’s payment information to its own records. If the information matches, the transaction is approved. And if it doesn’t, the transaction is rejected.
  • Step #7: The issuing bankreports the success or failure back down the chain to the payment gateway, which in turn informs the eCommerce platform.
  • Step #8: If the transaction was successful, the eCommerce platformfinalises the order. If it was rejected, the platform will usually alert the user and allow them to try paying again.

What’s most impressive is that all of that happens in just a couple of seconds! So next time you’re shopping online, try and think about all the parts whirring around behind the scenes.

About Will Cunningham

Hi! My name is Will and I recently left the world of print media for the open expanse of digital. Recently, I’ve been helping Cardswitcher educate the world about merchant services, payment technology and all sort of other things.

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