Understanding Ecommerce Credit Card Processing

You might think you know how credit card processing works for ecommerce, especially if you know how credit card processing works in a brick-and-mortar store. Ecommerce credit card processing is a little bit different—and a little more complex—than its cousins. Here is what you need to know.

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Getting an Account

When ecommerce first started setting up shop, it was fairly difficult to obtain an account. Now, however, most payment processing providers view ecommerce as a low-risk venture, and they are more willing to extend payment processing to merchants.

One of the ways you can get an account for ecommerce credit card processing is through your bank. You apply for a merchant account with your financial institution, which effectually functions like a loan or line of credit.

You will also need a payment gateway account; there are many gateway providers. In some cases, you will be able to sign up with a provider that offers both the internet merchant account and the payment gateway account. Rolling services together is usually a better plan, since it keeps all of the functions of credit card processing in one system.

Know Your Fees

Internet merchant accounts and payment gateways come with fees attached; you will also be charged credit card processing fees. In most cases, you will see both set transaction fees (a charge per transaction) and a percentage fee (a percentage of the dollar amount of each transaction).

Some providers will have other costs as well, such as setup fees. You may also need to pay for services, such as a shopping cart. Some providers also have ongoing service fees. Shop around to get the best price.

Processing the Data

A customer purchases something in your online shop. What happens next?

Your payment processor receives the transaction data—the information the customer inputted into your checkout process—and analyzes it. That data is then sent to the customer’s credit card issuer.

This process is very similar to how things work for a bricks-and-mortar operation: The data is sent to the card issuer, which then analyzes the request and approves or denies it. A denial could occur if the customer is over the card limit or if there has been a hold put on the funds.

What about the Payment Gateway?

This is the confusing part: If your payment processor is receiving and analyzing data, then sending it along to the credit card issuer for approval, what is the payment gateway doing?

The payment gateway authorizes the transfer of funds. The gateway accepts the request, analyzes the data, and encrypts it before sending it to the card issuer for authorization. It then transmits the appropriate response to the customer, and, if the transaction is approved, signals to the merchant that the order needs to be filled.

The payment gateway does not necessarily process the transfer of funds, except in cases where your payment gateway and your internet merchant account are handled by the same payment processing provider.

Clearing and Settling Transactions

You may have heard that some payment gateways will withhold your funds for up to 30 days after a transaction is made. That is one measure that providers take to prevent and reduce fraud and chargebacks on merchant accounts. While it can be frustrating, it can also help protect your business.

Some providers release funds more quickly—but unlike their brick-and-mortar cousins, they do not move funds as soon as the transaction is approved. Rather, with ecommerce credit card processing, you will have to wait until the transaction is “cleared” in order to “settle” the account. Once you have shipped or filled an order, the transaction is cleared. The card issuer then releases funds, and your processing provider moves them to your account, “settling” your transactions.


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Lisa Gibson

Lisa is the Credit Manager of BNA Smart Payment Systems and has over 18 years of experience in diverse roles of credit and credit risk management. She graduated from the financial program at Boreal College and is an expert in personal loans and line of credit, mortgage underwriting, private label commercial credit cards, small business loans, and merchant account underwriting. Lisa is also an avid railfan and HO scale train modeler, and enjoys curling.

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