Accepting online payments is the easiest way for customers to pay for your products and services. But for you - as a merchant, it's also the most precarious. Customers abandon their shopping cart at an average rate of almost 70% due to several reasons, including trust, complexity, and a lack of payment options.
With such a high percentage of sales abandoned at the checkout, understanding and optimizing your payment experience is now critical to your success. This post will help you better understand the fundamentals and explore the different ways and methods to accept payments in 2021.
What is an online payment?
Accepting payments online for goods or services may seem like a straightforward process on the surface, but it’s actually quite complex. For your business to succeed and handle any problems that may arise, it’s essential to understand the basic elements that work behind the scenes to enable payments to be processed.
A payment gateway is like the online equivalent of a point of sale (POS) terminal. It’s a software application on a merchant’s website that enables online payments to be processed. Payment gateways capture and send credit card data to a payment processor and communicate approvals or rejections to you and your customers.
A payment processor takes the credit card information inputted by a customer and sends it to the credit card network. The card network then checks for fraud and to see if the customer has the necessary funds to make the purchase. The processor then sends an approval or denial back to you, the merchant. If approved, the processor communicates with the credit card network to go back to the customer’s bank, collect the transaction and deposit the money into your account.
A merchant account is a business bank account that allows merchants to accept customers' debit and credit card payments. In the past, opening a merchant account was a requirement to accept online payments. Today, it's possible to accept credit and debit card payments without having to apply for a merchant account using a third-party provider known as a payment aggregator.
How do online payments work?
- A customer chooses an item to purchase and enters their card details on your checkout page.
- This card information is sent to the payment gateway, which transfers the information to the payment processor.
- The payment processor transfers this transaction information to the credit card network to verify the customer’s details are correct.
- The card network then requests authorization to release the funds with the customer’s issuing bank. After checking for sufficient funds in the account and verifying that the transaction isn’t fraudulent, the issuing bank submits a response to the credit card network that indicates whether or not the transaction has been approved.
- This information is then sent to the payment processor, which requests funds from the issuing bank. Funds then get transferred to the merchant account and then onto the business’s bank account by the payment processor.
What are the different types of online payment methods?
The payment ecosystem is getting more fragmented by the day. Achieving higher approval rates and conversions now requires you to offer your customers their preferred local payment methods and have the capacity to add new payment methods as they arise. Here is a list of commonly used payment methods.
Credit and debit cards
According to a European Payments Council study, 86% of customers make online purchases via credit or debit cards. More than 60% consider it their favored payment method when making a purchase. While it's possible to accept credit card payments online without any monthly or initial setup fees, you'll need to pay transaction fees whenever a credit or debit card gets used as payment. Popular credit cards include Visa, Mastercard, American Express and Discover.
ACH Processing [e-checks]
Credit cards are a convenient way to pay for things, but they also come with expensive fees. This isn’t the case with eChecks. Paying with an eCheck is like paying with cash. Money is transferred to the merchant when the customer authorizes and delivers their payment to the bank. No credit card interchange fees apply for eCheck acceptance, and fees are also generally low.
A mobile wallet or digital wallet is a software that stores customers’ credit card or bank account information. Customers can then use that information to purchase with less friction. There’s also no need for them to pull out a credit card or search for their bank account routing number and manually enter their payment details. Ultimately, this results in better conversion rates due to lower checkout abandonment. In the US, it’s forecast that approximately 54% of all e-commerce sales will be generated via mobile devices by the end of 2021.
Email invoices help speed up payments and are great for service-based companies. Once an email invoice gets sent to your customers, all it takes is a couple of clicks to make a payment.
Pros and cons of accepting online payments