E-Commerce 101: Understanding online payment
After deciding on what products to sell online, you need to figure out how your customers are going to pay you. Accepting credit cart transaction is a must, since most of the online sales occur through credit card payment. The question is, how do you swipe your customer’s credit card without the presence of point-of-sale (POS) terminal?
How does online payment work?
If the illustration above is a tad too technical to understand, here’s a simple explanation in words:
- Customer check out the shopping cart, enter personal and financial details.
- Details are transmitted via a secure connection to a payment gateway service.
- The payment gateway service securely routes the information via the relevant financial networks.
- Upon success, the customer’s credit card account is debited and your merchant account is credited.
- Once all funds are cleared, the money is remitted to your business account.
What is payment gateway?
In short, payment gateway works like a virtual POS terminal in cyberspace. Internet payment gateway acts as an intermediary between your shopping cart software and all the financial networks involved with the transaction, which includes the customer’s credit card issuer and your merchant account.
What is merchant account?
Merchant account is a type of bank account that allows you to accept payment by debit or credit card. Payment received via credit card sales are first routed to the merchant account and held there before being remitted to your bank account.
What is third-party processor?
You will be better of with a third-party processor if you are just starting your online business. Third-party processor like PayPal is basically a payment gateway and merchant account rolled into one. You can always switch to a merchant account provider when your transaction volume becomes sizable, in order to enjoy better transaction rates.
How to choose online payment service provider?
Choosing the right online payment service provider is important in launching a e-commerce business. If you aren’t very sure, the rule of thumb is to select those that are well established and reliable. Some of the major considerations including:
- Application or setup fee – This is usually a one-time fee. Competition is stiff now so always opt or ask for the fee to be waived.
- Annual or monthly fee – Could be zero-fee, or charged based on the transaction volume. The higher the volume, the lower the fee.
- Transaction fee – Charged by flat rate per transaction, or more commonly a percentage of the transaction value.
- Remittance – Remittance fee is chargeable whenever you withdraw the fund to your bank account. Do take note on how fast or frequent the remittance is being done, which is important to your business’s cash flow.
- Chargeback – Chargeback happens when a customer disputes a charge on his or her credit card. You are responsible to refund the full amount, and the service provider might also impose a chargeback fee on top of it.
- Supported currencies – It very much depends on your target market, who you want to sell your products to? Check whether the respective currency is supported to increase customer conversion.
- Others – Check whether do you need to fork out extra money for value added service like fraud detection, advanced reporting, technical support etc.
Last but not least, it will be much straight forward if the payment service provider is already integrated with the shopping cart of your choice. WebShaper for example, is supporting most of the major payment service providers like PayPal, 2Checkout, WorldPay, Authorize.Net and Google Checkout, just to name a few.