A lot goes on in the background when customers enter their payment information to complete a purchase on your website. Learn how online payments work for internet-based businesses.
Smartphones, increased internet connectivity, and the emergence of digital payment technologies have made online payments safer, faster, and more convenient than in-person payments.
The ability to accept payments online also means businesses can sell to a global clientele, which expands their addressable market.
To optimise the payment experience for your customers and truly harness the benefits online payments offer, it’s crucial to understand how online payment processing works and the players and technologies involved.
This article breaks down how online payments work. It explains where payment gateways, payment processors, card networks, and issuing and acquiring banks fit in the online payment processing ecosystem.
Let’s get into it.
How online payments work.
An online payment is the electronic transfer of money between a buyer and a seller. It is where money is exchanged over the internet to pay for a good or service.
There are different ways you can accept payments online. The three most common are bank transfers, debit and credit cards, and digital wallets. We should also get used to including mobile wallet payments, particularly in Kenya, where the M-Pesa mobile money wallet is deeply embedded in everyday life.
The payment method you choose for accepting customer payments online depends on your type of business and product.
For B2B payments, once-off or recurring payments through a digital payment solution like IntaSend works well. Subscription-based software products and debit or credit cards are a great fit, while mobile money wallets, digital wallets, and debit cards will all work.
So how exactly do online payments work?
The components of an online payment system.
Online payments are a convenient and secure way to purchase from anywhere in the world. They transfer funds from your bank account or debit card to the merchant's account.
The different components of an online payment system are:
The customer.
This is the person or business making the purchase. They can be referred to as the purchase, buyer, or consumer. A customer typically exchanges something of value, usually money, for what you are selling.
The merchant.
This is the person or business selling the product, commodity, or service for profit. Commonly identified as a retailer, a merchant can be a wholesaler, affiliate marketer, or e-commerce store.
The payment gateway.
The payment gateway is the software on a merchant’s website that collects a customer’s payment information, verifies it, and transmits if for processing. The customer’s interface, where they enter their card information, it is the equivalent of a POS terminal in a supermarket.
As well as forwarding the payment request from the merchant’s website, the payment gateway also communicates the payment response from the customer’s bank back to them. This is the ‘success’ or ‘declined’ message the customer sees on the pop-up page after they signal their intention to ‘pay now’.
The payment processor.
This entity facilitates the transfer of funds between the customer and the merchant. It manages the logistics of accepting online payments by communicating customers’ payment information between the merchant and the customer’s banks.
The issuing bank.
Also known as the issuer, this financial institution holds the customer's account. The issuer is the entity that authorises the deduction of the payment amount from the card tendered at checkout. It does this after checking to see that the customer has enough funds in their account to pay for the purchase.
The acquiring bank.
This is the merchant’s bank, where your funds are held and into which customer payments will settle. After authorising payment, the issuing bank will transfer funds to the merchant’s account at the acquiring bank to complete the sales transaction.
The card network.
A card network - also known as a card association, produces the debit and credit cards that banks issue to their customers and provides the technology that regulates who uses those cards and where and how they are used.
Card networks also issue and process gift, pre-paid, and virtual debit cards of behalf of banks. Examples of card networks are Visa, Mastercard, Discover, China UnionPay, and American Express.
The different steps of the online payment process.
When you make an online purchase, the following steps take place:
1. Customer enters their payment information on your website.
The online payment process starts at checkout after the customer has filled their shopping carts and clicked the Pay Now button. They will be given a choice of payment methods to use.
This is when the payment gateway takes over. With IntaSend, the customer will be offered Visa, Mastercard, Bitcoin, and M-Pesa as payment methods. After they choose the one they want to use, they will be asked to enter their payment information for authentication and transmission to the payment processor.
2. The payment gateway sends the customer’s payment information to the payment processor.
The payment processor is the one that communicates with the issuing bank and the acquiring bank. Sometimes the payment request is submitted through the card network, which checks with the issuing bank if the payment can be funded from the customer’s available balance.
There are also payment gateways that handle payment processing. These are known as payment systems. They will usually also provide a merchant account where customer payments are temporarily held after they settle. IntaSend is one such payment gateway.
3. The issuing bank authorises the payment and sends a message to the merchant's website.
The payment will be authorised if the customer’s bank account, mobile wallet, or cryptocurrency wallet has enough funds to pay for the purchase. If there aren’t enough funds, the payment will be declined.
4. The payment gateway returns the payment response.
Success or not, the payment response is communicated to the payment gateway for display to the customer. This also notifies you, the merchant, that checkout has not been successfully completed, which means the shipping sequence cannot be activated.
5. The payment processor sends the funds to the merchant's bank.
After authorising payment, the issuing bank will deduct the payment amount from the customer’s account and send it to the acquiring bank. This is the official transfer of funds that seals the sale.
6. The acquiring bank deposits the funds into the merchant's account.
After receiving the funds from the customer’s bank, the acquiring bank will credit it to the merchant’s account. While the payment authorisation takes seconds, the actual transfer of funds from the customer to the merchant bank account can take days.
Benefits of online payments.
Online payments are a safe and secure way to make purchases. Payment gateways use various security measures to protect your information, including tokenisation, encryption, and fraud detection.
Here are other benefits of online payments:
1. Convenience.
Customers can purchase from anywhere in the world and any time of day or night. Crucially, you don’t have to meet them face to face. They can be at home, at work, or on the move, which removes logistical hassles that may put them off making purchases.
2. Security.
With online payments, customers’ payment information is protected by encryption or tokenisation while it’s being transmitted. These technologies convert payment information and present it in a form that is unintelligible to everyone else but the intended recipients, which prevents theft.
3. Safety.
Online payments save your customers from carrying and handling large amounts of money they can lose to robbers. They can pay from their phone or computer without stepping outside their home, swiping their card, or withdrawing cash from the bank. This removes hesitations and fears that may cause customers to hold off from making purchases.
4. Speed.
Online payments are authorised and processed within a few seconds. Yes, you can usually receive your purchase within a few days of payment, but you are guaranteed to get it as long as the bank has authorised them. This removes the risk of releasing goods before payment is confirmed, like what happens when a customer pays with a cheque.
Expand your market and make shopping easy for customers with online payments.
Retailers and merchants looking to expand their market and grow sales often consider setting up shop online. That, however, is a different kettle of fish to in-person sales, particularly when accepting customer payments.
When you sell your products or services over the internet, you must have a way of accepting customer payments online. The system you use has to be secure, fast, and convenient. It must provide payment methods your customers want to use.
The article you have just read has given you an overview of how online payments work for merchants. If you are ready to set up payments for your online store, IntaSend is the payment gateway to use in Kenya.
IntaSend makes it easy to integrate the payment processing software on your WooCommerce or Shopify store and start accepting card and M-Pesa payments from customers. Sign up here to start accepting customer payments on your website.
