Online Credit Card Processing

Credit Card Processing

Online credit card processing requires a website where your customers can go to make purchases, and you’ll need a way to process those payments securely.

In general, this involves:

  • building a website of your own or joining an E-marketplace (or both),
  • getting access to a merchant account that can process online credit card payments, and
  • connecting that website with your merchant account through a secure payment gateway.

The website makes it possible for your customers to find your goods or services and make purchases. The payment gateway connects the website to a payment processor and merchant account. And the merchant account facilitates the transfer of the funds that (ultimately) make their way to your business’s bank account.

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Accepting Credit Cards Online


Websites and E-Marketplaces


In the real world, there are brick-and-mortar stores where individual businesses sell stuff and marketplaces where a bunch of businesses (or people) come together to sell stuff. Some of the people selling stuff in marketplaces also have stores from which they sell stuff, and some don’t.

Things are essentially the same in the online world, except the “stores” and “marketplaces” are virtual spaces, and you don’t see your customers or your competition face to face. The “store” is a business’s website, and the marketplace is an electronic marketplace like Etsy or eBay.

  • Business Websites
    If you want an online store devoted entirely to your business, you’ll need to create a business website (often called an “E-Commerce website”). To start an E-Commerce website, you’ll need to choose and register a domain name, produce content to support your services, customize your website’s design and structure (or hire an expert to do it), and choose a website hosting service.You’ll also need to consider the online payment methods your business wants to accept (Apple Pay, Visa, Mastercard, etc.) and sign up for the services needed to support online credit card payments. This means, at the least, that you’ll need a merchant account to process your card payments and a payment gateway to transmit encrypted transaction data from your website to your payment processor.
  • E-Marketplaces
    Electronic marketplaces are already existing websites where your online business can sell its goods and services (think Etsy and Amazon). A major advantage of using an online marketplace is that the website already exists, already functions, ranks in internet search results, and already attracts consumers. It’s also possible for your business to maintain its own website or online store and still operate on electronic marketplaces. You don’t have to choose between the two.Just keep in mind that you’re going to pay for any credit card processing services your business uses, and E-marketplaces are no different. If you’re selling through a business website and an E-marketplace, you’ll pay whatever costs are associated with your website plus the E-marketplace’s listing fees, transaction fees, and payment processing fees.

Is Online Credit Card Processing Only for Online Businesses?


Definitely not! Businesses of all sizes and types have business websites or listings on E-marketplaces (or both!).

If your focus is restaurant credit card processing, for instance, that doesn’t mean you can’t have a website to take orders and process payments online. Accepting online payments is just one more way for every business to get itself out there and attract more customers.

Interested in learning about offline or mobile payment methods instead? Check out our general guide on How to Accept Credit Card Payments for a discussion of these topics and more.


Merchant Accounts


Whether you make sales through a business website or an E-marketplace (or both), you’ll need access to a merchant account to process credit card payments. A merchant account is a pass-through bank account that holds funds from card payments until the banks settle the transactions. Once the transactions are cleared and settled, the bank that funds the merchant account (the “acquiring bank”) subtracts any required fees and then transfers the money from your card payments to your business’s bank account.

To get merchant account access, you’ll need to choose a credit card processor, and you’ll have two basic merchant account options:

  • dedicated merchant account, or
  • an aggregated merchant account.

With a dedicated merchant account, your business “owns” the account, so it will only hold and transfer funds for your business. You can start a dedicated merchant account through a credit card processor that offers that option (such as Worldpay or Elavon), but the merchant account will actually be provided by an acquiring bank.

Aggregated merchant accounts hold and transfer funds for multiple businesses at the same time. This is the typical option when you hire a payment service provider (PSP) or “payment aggregator” like Square or PayPal. In this case, you’re really a “sub-merchant” with regard to the merchant account. The account is actually owned by the credit card processor.


Payment Gateways


Probably the biggest difference in the credit card payment process between accepting in-store credit card payments and accepting credit cards online is the need for a payment gateway. A payment gateway is software that allows websites to process credit card payments.

Payment gateways are essentially the virtual equivalent of traditional credit card payment terminals, in the sense that they transmit transaction data from an online store (a website) to a payment processor. This process includes encrypting and securely transmitting the account number, expiration date, and CVV code that appears on your customer’s card.


Is a payment gateway the same as a payment processor?


No. The terms “payment gateway” and “payment processor” look similar and are often confused, but they described two different things. Payment processors relay transaction data back and forth between credit card networks and acquiring banks, but online credit card processing data has to be encrypted and sent through a secure payment gateway before it reaches the merchant’s payment processor.

By contrast, credit card payments made through a traditional credit card payment terminal in a physical setting don’t require a payment gateway, so the payment gateway is a unique feature of online payments. (Brick-and-mortar stores that use virtual terminals, however, require a payment gateway because credit card payments made through virtual terminals are really online transactions.)


Types of Payment Gateways


Every online credit card payment travels through a payment gateway, but there are two types of payment gateways to choose from: integrated payment gateways and hosted payment gateways.

  • Integrated Payment Gateways
    Integrated payment gateways allow customers to make credit card purchases without ever leaving a business’s website. This is possible because the payment gateway integrates (through an API) with your website’s checkout system. This creates a consistent user-experience throughout the online payment process, which can generally lead to higher conversions. Some online customers, after all, will leave if they get shuttled to an offsite payment page.The trouble with integrated payment gateways, though, is that they typically require some technical expertise to set up, and your business might find itself responsible for storing and securing your customers’ data. Fortunately, many modern integrated payment gateways are so sophisticated that they can handle the lion’s-share of your security needs without sacrificing the seamless purchasing experience your business needs.
  • Hosted Payment Gateways
    Hosted payment gateways take a customer to a third-party website (the “host page”) to make purchases and send customers back to the website when the purchase is complete. Hosted payment gateways generally handle transaction security, a definite plus if your goal is to start accepting credit cards at your small business but lack the requisite technical expertise.One basic drawback to hosted gateways, however, is that you’ll lose control of your customer’s user experience when they leave your website to make a payment. Not only can this lead to some customers leaving when they get sent to the host checkout page, you’ll also have less access to the user-data you need to determine how your customers’ checkout experiences influence their behavior at the point of sale. The hosted checkout page, after all, isn’t part of your website.


Online Payment Processing Fees


As an online business, you’ll typically pay higher credit card processing fees than you would if you only accepted credit cards at a brick-and-mortar location. This is partly because all online card transactions qualify as “card-not-present” transactions, and card-not-present transactions generally carry higher fees than card-present transactions. It’s as if every transaction that takes place online is a virtual version of a manually keyed-in transaction in a brick-and-mortar store.

Why should that matter? The story, anyway, is that card-not-present transactions have higher incidences of fraud than card-present transactions (you know, because everyone checks IDs in face-to-face transactions, right?), and the card payment industry milks that story for all it’s worth.

For example, a credit card transaction that carries, say, an interchange rate of 1.51% + $0.10 for a swiped or “card-present” transaction might have a 1.80% + $0.10 interchange rate if it’s done online. The extra money helps your cardholder’s issuing bank guard against the higher likelihood that the card is being used by someone other than the person to whom they issued that card. After all, a fraudster doesn’t need to have a credit card in hand to make a payment with that card online.

And the additional fees don’t stop there. The interchange fee goes to your customer’s card issuing bank, but additional transaction fees and service fees get charged by the credit card networks (called “assessments”), your payment processor (called “markups”), and your payment gateway provider. Depending on your payment processor, you might see these fees marked directly on your monthly processing statement, or they might be “bundled” into apparently simple “flat-rates” or payment “tiers.” In any case, one way or another, you’ll pay these fees.


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