Blog Posts, eCommerce

Credit Card Processing 101 For eCommerce Companies



Credit Card Processing 101 For eCommerce Companies

Ali Ladha, CPA, CA / May 13, 2023

Credit Card Processing 101 For eCommerce Companies

As our lives become increasingly digital, so does our shopping. We can buy anything from groceries to luxury items online with just a few clicks. While it’s easy for customers , have you ever wondered what goes on behind the scenes for e-commerce companies to process these transactions? 

This is where credit card processing comes in. 

Understanding the ins and outs of credit card processing can be daunting. 

In this article, we’ll break down how credit card processing works for eCommerce companies. From fees and security measures to chargebacks and fraud prevention, we’ll cover everything you need to know to ensure smooth and secure online transactions.

How Does Credit Card Processing Work For eCommerce Businesses?

As an e-commerce business owner, you know the importance of a seamless and efficient online payment process. With credit cards being the most popular payment method for online transactions, it’s critical to understand how credit card processing works and how it can affect your business.

Here’s what goes on behind the scenes of credit card processing for e-commerce companies:

  1. Customers who decide to purchase on your website enter their credit card information into your system. This information is sent to a payment gateway, a service that encrypts and sends the information to the credit card company for approval. 
  2. The credit card company will then check to make sure the card is valid and that the customer has enough funds in their account to cover the purchase. If everything checks out, the credit card company will approve the transaction and send a message back to the payment gateway. 
  3. The payment gateway confirms the transaction with your e-commerce platform and notifies you that the payment has been accepted. At this point, the funds are transferred from the customer’s account to your merchant account, essentially a virtual bank account allowing you to accept credit card payments. 
  4. Once the transaction is complete, you’ll receive the funds in your merchant account within a few days, depending on the payment gateway and processing bank you use. 

One thing to remember is that credit card processing fees can add up, so choosing a payment gateway that offers competitive rates is important. Also, check with your e-commerce platform to see if they charge any fees for using specific payment gateways. 

Different eCommerce Credit Card Payment Options

E-Commerce business owners can accept credit card payments through different options as described below. 

  • Merchant Account Providers 

E-commerce companies can get a merchant account through a bank or third-party provider. This account can allow your business to accept credit card payments directly, and the funds are deposited into the account. Merchant account providers charge a fee for their service, typically a percentage of each transaction.

  • Payment Gateways 

A payment gateway is another service that handles the authorization and transfer of funds between the customer’s credit card account and the e-commerce site’s merchant account. Payment gateways require a merchant account to function. The gateway is an intermediary between the customer’s credit card company and the merchant’s bank. Payment gateway providers charge transaction fees and a monthly fee.

  • Payment Processors

Payment processors are services that allow e-commerce sites to accept payments without a merchant account. Payment processors act as a middleman between the e-commerce site and the customer’s credit card company. The payment processor charges a fee for each transaction, and payment processing companies typically offer additional services such as fraud detection and chargeback prevention.

  • Third-Party Payment Services

E-commerce sites can accept credit card payments through third-party payment services like PayPal, Stripe, or Apple Pay. These services act as a payment gateway and payment processor combined into one service. They charge a fee for each transaction and offer additional services such as fraud detection and chargeback prevention.

  • Direct Debit

Some e-commerce companies offer direct debit as a form of payment, allowing customers to pay directly from their bank account. Direct debit is typically processed through a third-party provider that charges a fee for the service. Direct debit is not as widely used as credit card payments, as customers may hesitate to provide access to their bank account information.

You should note that credit card processing fees are typically associated with each option and can vary depending on the issuing bank, card type, and transaction volume. Additionally, it’s important to take safety measures to ensure that your customers’ payment and financial information are secure.

If you’re not sure how to set your credit card processing system up, then consult a trusted financial expert.

Final Thoughts

Credit card processing is an essential component of any e-commerce business. By understanding how it works, you can ensure that you’re using a reliable and competitive payment gateway to handle transactions securely and efficiently for your e-commerce business. 

Be sure to consult a financial expert to oversee the process so you don’t make costly mistakes. 

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The accounting and tax information provided in this post does not constitute advice and is meant to be for general information purposes only. The information is current as at the date of this post and does not reflect any changes in accounting and/or tax legislation thereafter. Moreover, the information has been prepared without considering your company or personal financial/tax circumstances and/or objectives.

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