A complete guide to online payment processing

With the ongoing technological advances in the global market, online payments are becoming the go-to way to transact money.

Even though the online payment processing system is complex and requires many different elements to work together, the flexibility and easy use are transformative to business operations. If you’re an entrepreneur, understanding the various features of receiving and processing online payments is therefore crucial.

In this article, we’ll cover the meaning and forms of online processing, a step-by-step process on how it works, how to set up online payment processing for your website and web payment costs and best practices.

What is online payment processing? 

Also known as a digital payment gateway, online payment processing is a transacting asset and integrated electronic processor that allows buyers and sellers to pay for goods and services online. The mobile system is also defined as a means of transaction that uses advanced data-protecting measures to ensure online payment safety.

For decades now, the online means of making payments has been a solution for thousands of businesses including retailers. In fact, the latest evaluation by the US market shows online payments will grow to $607.9 billion by 2030. Therefore, as a business owner, you should have a clear understanding of the system’s basics. If not, the following information below will provide some clarification.

The basics of payment processing for small businesses

As a small business owner, understanding the basic concepts of business payment processing can help you handle efficient services with your customers. For example, your customer purchases a good and decides to use the payment gateway—be it a debit card, credit card or other means. Instead of handling the cash manually, the processor will securely transfer the card details to the bank for approval.

Once the payment is approved, the funds will seamlessly be transferred from the customer’s account to your merchant account. Since this is such an effective tool for business owners, knowing how it works plays a crucial role in supporting business growth and enabling stress-free transactions. 

Now that you’ve seen the basics, let’s dive into how it works. 

How does online payment processing work?

Understanding how online payment processing works is essential to achieving effective online transactions. Although the payment processing system typically involves six different parties, its operation may vary depending on the mode of payment or business infrastructure. However, the information below shares a rough guide to the parties and steps involved.

A step-by-step overview of the payment process

Here’s a step-by-step guide on how the payment gateway works: 

1. 1. Initiating payment: The customer initiates the payment with a click after selecting a product or service on the site and heading to the checkout.
2. 2. Entering payment details: The customer then enters the necessary payment information on the merchant’s online payment platform (the business account) and authorises the transaction.
3. 3. Encrypting payment information: Following the payment authorisation, the processing system uses encrypted protocols such as TLS, IPsec, or SSH to hide the payment details. 
4. 4. Verification process: Once authorised and encrypted, the payment is sent from the client’s browser to the issuer via the payment gateway. Following this transfer, requirements such as credit limit, available funds and so forth are verified for payment approval.
5. 5. Authorisation request: After the verification payment process is completed, the information is further transferred to the customer’s bank via the same payment gateway for approval.
6. 6. Payment authorisation: Next, the customer’s bank or card issuer reviews the request and either approves or declines the payment based on the account status.
7. 7. Transaction processing: If the transaction is approved, the online processor sends the customer an authorisation code that allows them to proceed and immediately deducts the purchase price. If declined, the payment does not proceed.
8. 8. Confirming payment: Once the transaction is successful, the online payment gateway sends a confirmation alert to the merchant’s bank. However, if the payment is declined, the processor will send a decline message.

Once you’ve read the above steps, you should now be able to identify the six parties (in italics above) involved. Let’s now take a look at the various forms of online payment processing we have.

Types of online payment methods 

Nowadays, there are several types of online processing techniques for making payments. Though each of these techniques is primarily designed for certain businesses, they can still be classified into three main methods outlined below:

• Online bank payment methods
• Card payment methods
• Digital wallet technique

Now that we have pinpointed these main techniques, let’s examine them in detail, one by one. 

1. Processing bank payments online 

The act of transferring money directly from your end to someone via the use of mobile bank apps or bank transfer systems is referred to as an online bank payment. It’s a type of digital payment whereby both parties require verified account details (bank accounts). With these account details—account number and routing number—the customer can make a payment by using the bank website or visiting a branch.

On most occasions, bank online payment processing systems also make use of a reliable payment provider to send money quickly and for free. Even though it involves a lengthy time frame compared to other main types of online payment, its level of security stands out above others. Furthermore, this method offers options like wire transfer, ACH transfer, and direct bank transfer.

2. Processing card payments  

When talking about digital payment solutions, we can’t not mention the card processing method. It’s a common technique offering different options such as credit card payments and prepaid cards etc. While being operated by the above six bodies, the system also requires three important elements such as the payment processor, merchant account and payment gateway to function properly. 

On average, card online payment processing methods provide several advantages including instant and easy payments, emergency funds and many other services. But as a downside, the cards are susceptible to fraudulent activities or accumulation of debt if not handled with care.

3 Using digital wallets for payments

Digital wallets (E-wallets) are becoming more and more popular among certain businesses, particularly B2C and crypto spaces. Similar to a contract, the system requires both customer and merchant registration to open an account that must be linked to a bank account. Following the account opening, funds can be received from any source without having to enter any card details from time to time.

As digital wallets are limited by target market and traffic volume, evaluating one’s business scale is important. Even if it possesses a minimal fraud risk, it doesn’t eliminate technical issues or restrictions.

Now that we’ve identified some key points, lets take a look at how to set up online payments.

Setting up online payment processing on your website  

Even though creating a standard online processing website doesn’t require complex processes, it’s important to carefully follow proper procedures when choosing your payment solution provider.

Here’s a detailed step-by-step guide to setting up the best online payment processing platform for your business.

1. Know your business needs  

The first step you need to take is knowing your audience and identifying what your business requires. While doing so, you must decide whether you require a one-time payment system, a recurring subscription, or both. 

In fact, to better understand your business and the type of online payment processing service to use, it’s essential to address questions such as, “How does your business operate?”, “Are split payments between multiple recipients necessary?” and “Will your business need support in different currencies?” (and so on).

2. Choose the right provider for your needs

After defining your business requirements, the next step is to choose the right online payment provider. Having the best payment provider that aligns with your business requirements will make your service more effective. With it, you can create a business processing system offering a payment option every potential customer can use.

When choosing the right payment gateway, you must also consider certain factors such as security precautions, transaction fees and supported payment options.

If you’re looking for a provider with all of this and more, consider using TransferGo.

3. Create a payment provider account

With the right payment provider at hand, the next course of action is to open an account with them. As a means of registration, you might be asked to fill out a form or provide certain information about your business. Within the form, you may also be required to share some personal details, legal licenses and other essential financial protocols to get verified. 

While opening the account, it’s important to take note of all the information tendered or given. Sometimes, the information given or provided such as pin code, account type and routing number may be needed even while using the account.

4. Payment gateway integration

After creating an account, you may need to integrate a payment gateway into your system. At times, the method for doing this may differ due to the type of website being used. Take for instance, if you’re using an e-commerce platform such as Spotify, WordPress or Bigcommerce, you won’t be in need of an external operator. All you need to do is activate the API with a click.

On the contrary, if you’re using a custom website, you may need to integrate a gateway service (Stripe or PayPal) in order to proceed. Though incorporating this provider isn’t too difficult, it’s best to seek the assistance of an expert to keep things simple. 

5. Set up your payment settings 

Following the integration of the gateway provider, make sure you set aside enough time to configure the site to your standards. Be sure to adjust the currency and payment method in order to avoid unforeseen issues. While designing the site to present only the necessary information, make sure to include a navigable checkout page for easy correction and an SSL certificate to create trust. 

6. Test and launch your payment system

Once you’ve finished setting up your online payment processing options, test and double-check everything before roll-out. To do this, you can use the processor’s testing mode to simulate transactions in order to know if all is working well. Nevertheless, if you encounter any issues while running the test, it’s advisable to fix them before going live.

7. Managing transactions

To bring this to a close, always check your transactions on a regular basis to avoid any complications. As you perform this check, you can also put an eye on your sales performance, while settling disputes and resolving any pending chargebacks. All of this can be done with the aid of the dashboards or analytical tools that come along with your payment processing system.

With the steps outlined above, you should now understand how to set up website payments. Without further ado, let’s check out the costs associated with creating the system.

Online Payment Processing: Costs and fees

As cars require fuel and oil to function, payment processing systems incur certain fees to execute seamless operations. Most of the time, the business payment processing fee is the charge most businesses incur while processing any transactions. 

With this in mind, here are the three main categories of online payment processing fees. 

1. Processing and setup charges

Starting the whole process, the first and one-off cost you’re going to pay is the setup fee. This fee is usually an amount of money a business pays to the online payment service in order to create an account. In most cases, this fee also covers the initial configuration and integration of the merchant payment service.

After this fee, another fee a business has to pay (per percentage of transaction) to the payment processor for the use of their payment gateway is the processing cost. Just like a service charge, the fee includes the cost of technology, security measures and other known expenses.

2. Assessment and interchange fee

Unlike the costs above mentioned, assessment (card brand/NABU) fees and interchange rates are the costs that merchants pay to their issuer through the acquirer. The former, sometimes known as card association fees, are crucial charges imposed by card networks in order to finance their operational expenses. 

Interchange fees are essential components of the card payment network that are frequently associated with card processing. On most occasions, the network uses the fee to finance bad debt risks and approved but unpaid transactions. Additionally, both fees may vary in price and period depending on the card network and other policies.

3. Transaction fees, monthly costs and more

Over the course of using the mobile payment processing on your website, certain fees may be required for your payment gateway.

Some of these charges include transaction fees, chargeback fees, refund charges or PCI compliance costs. The costs (as their name implies) help in maintaining the various processing activities performed by the payment gateways.

Minimising processing costs

By carefully choosing the right payment gateway provider and creating strategic business negotiations, you can minimise most of the online payment processing costs. In fact, you can further cut down most of the costs by leveraging volume discounts or negotiation.

You can also implement a strong anti-fraud plan, optimise transaction types or reduce international transactions to lower your processing costs.

At this point, take a moment to settle in as we walk through some of the best practices for online payment systems together.

Online payment processing: Best practices

Scaling through mobile payment processing, there are some best practices to put into action in order to obtain optimal results. The key guidelines are as follows:

1. Ensuring security and compliance

Handling sensitive payment data requires a high level of security standard. Starting with your gateway provider, to your day-to-day merchant payment service, you must always exercise extreme caution and follow laid-down regulations.

Furthermore, in order to strengthen your security measures, you can implement certain controls such as MFA, two-factor authorisation, biometric authentication, TLS and end-to-end encryption.

2. Monitoring and auditing payment transactions

How often do you monitor your payment process? Is it once in a while or as the situation arises? You must have a routine check period—at least twice a month depending on your business scale.

Keeping an eye on your payment statements and auditing them on a regular basis will help you prevent unexpected fraudulent acts and overpaying fees. 

3. Staying up-to-date and being transparent

Operating a business payment processing service requires being transparent with policies while using up-to-date systems.

As the world of technology continues to undergo drastic changes, not having the latest security patches can make your system more vulnerable to security breaches. Without it, you can even make your customers frustrated due to the slow processes. 

4. Optimising payment success rates

Another important practice you need to carry out while using your online payment processing is to improve your payment success rate. To do this, you have to make sure your system is glitch-free, fast, user-friendly and secure.

Providing active customer service or a generative AI contact centre that mainlines customers to easily contact you can also help to optimise these rates.

5. Consulting an online payments expert

No one is an island of knowledge, especially when it comes to tech and website payment solutions. Therefore, whenever things go wrong or look confusing, try to always seek the guidance of a payment expert.

With expert assistance, problems around costs, setups and even system malfunctions that may take years or sessions to crack can be solved in the blink of an eye.

Go live with TransferGo

Making payments online offers a wide range of opportunities especially when the mobile processing system is created by an expert.

With that in mind, consider TransferGo for all of your money transfers and international business payments needs. With 8 million+ customers and counting and an average Trustpilot score of 4.7/5, we offer secure and reliable money transfers to 160+ countries around the world with high speeds, low fees and no hassle.

Sign up to TransferGo Business today for no-nonsense transfers with competitive rates.