How Does Online Payment Processing Work?

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The eCommerce industry is colossal. The global eCommerce market is currently worth $2.8 trillion and that’s expected to grow to $5 billion by 2021!

With so much money changing hands, you might well wonder how it all works. How does a customer in Ohio click the check out button and pay a company in Australia?

The good news is that I’ve worked in the finance industry for years so I’m the perfect person to answer that question. Let’s get started.

How can you pay?

The term online payment covers any form of payment made online. As you might have guessed, that’s a very wide range.

You’ve got things like eWallets, online bank transfers, mobile payments, cryptocurrency and, of course, credit/debit card transactions. While the first few do account for a big chunk of the online payment market, it’s the credit and debit cards that make up the bulk of the money changing hands.

So for this blog, I’m going to concentrate on just online debit and credit card payments. If it’s wildly successful, I might come back and revisit some of the other payment methods too!

What parties are involved?

For each online payment, there are a few big players you need to think about. In this section, I’ll give you a short introduction to each and then we’ll learn about how they all interact with each other to power a transaction.

eCommerce Platform

An eCommerce platform is the piece of software behind an online business, which handles everything from the website to the shopping cart. Think of services like Shopify, WooCommerce and Magento.

Payment Gateway

A payment gateway is a service that integrates with your eCommerce platform and coordinates the actual payment.

Merchant Account

A merchant account is a special category of bank account that allows businesses to accept payments via debit and credit cards.

Acquiring Bank

The acquiring bank is the institution that provides your merchant account.

Issuing Bank

The issuing bank is the institution that issued the credit or debit card to the customer.

Card Scheme

The card scheme is the network that bridges the gap between the acquirer and issuer. Think Visa, MasterCard, American Express and so on.

Now you know the six key players (seven if you include the customer), we can move on to the nitty-gritty of payment processing. How does a single click result in these seven players moving money from one account to another?

How is my payment actually processed?

While online payments are intensely complicated at a technical level, they’re actually quite simple to explain in a more general sense.

In fact, I can explain how an online payment works using just eight steps. Here they are.

1. A customer adds a product to his or her bag and clicks check out on your eCommerce platform.
2. The eCommerce platform processes the order and sends the transaction details to the payment gateway.
3. The customer enters their payment information into the payment gateway.
4. The payment gateway encrypts that information and securely transmits it to the acquiring bank.
5. The acquiring bank then forwards the information to issuing bank via the card scheme.
6. The issuing bank compares the customer’s payment information to its own records. If the information matches, the transaction is approved. And if it doesn’t, the transaction is rejected.
7. The issuing bank reports the success or failure back down the chain to the payment gateway, which in turn informs the eCommerce platform.
8. If the transaction was successful, the eCommerce platform finalises the order. If it was rejected, the platform will usually alert the user and allow them to try paying again.

What’s most impressive is that all of that happens in just a couple of seconds! So next time you’re shopping online, try and think about all the parts whirring around behind the scenes.

You may also like: All You Need To Know About eCommerce Giant: Ebay.com

About the Author

Hi! My name is Will Cunningham and I recently left the world of print media for the open expanse of digital. Recently, I’ve been helping Cardswitcher educate the world about merchant services, payment technology and all sort of other things.