Click here to get this post in PDF
Online payments are a critical component of many firms’ income streams. Every online payment mode, however, has its pros and cons. What goes well for one business or market may not go well for another.
It is very important. Many companies that accept recurring or subscription payments underrate the strategic significance of what online payment options they offer to their customers. The manner in which you collect money from your consumers has an influence not just on your income but also on the growth of your business.
No one online payment option is ideal in every situation, but this guide will assist you in identifying those that are most suitable for your business.
Online payment definition
Online payments are made over the internet for products or services obtained either online or offline. Common strategies for doing so include:
- Bank Debits through online mandate (a.k.a. Direct Debit – the term we’ll use in this article).
- Interbank transfers (a.k.a. wire transfers).
- Online credit or debit card purchases.
- Payments using a digital wallet (e.g., PayPal).
Payments might be one-time (e.g., e-commerce operations such as clothes purchases) or recurring (e.g., subscriptions to services such as Netflix or Spotify).
Ways of accepting online payments
You may accept online payment for your business either directly or via an intermediate. Each method has benefits and downsides.
According to the payment method, the particular process for taking online payments differs. Typically, the following parties are involved:
- The client.
- The client’s bank (or another business that owns the funds with which they are paying, such as a digital wallet).
- The company (a.k.a. the merchant – we’ll use both names interchangeably in this tutorial).
- The company’s bank.
- Organizations that assist in authorizing and processing transactions that result in payments being moved from client to merchant.
Direct Debit operation
Direct Debit is a payment technique that enables businesses to collect payments owed by their customers without requiring the client (the payer) to initiate the payment. This type of technique is known as a pull-based payment system.
Once a company has decided to accept Direct Debit payments from clients (directly or via an intermediary), the procedure for collecting those payments works like this:
Bank transfer operation
Bank transfer is simply money transferred from one bank account to another. Unlike the other payment options described in this article, bank transfers do not have any additional setup requirements on the part of the business to begin receiving payments from clients.
In general, the procedure is straightforward. The process varies per nation, especially when the two bank accounts engaged in a transfer are in separate countries.
Payments via credit or debit card made online
This procedure involves several parties and several stages. Before we go any further, let’s define a few key terms:
- Merchant account – a certain kind of bank account required for a business to accept customer credit or debit card payments.
- Issuer (issuing bank) – a financial institution that issues credit or debit cards to its customers (consider it as the customer’s bank).
- Card association (card network) – a group of financial institutions that accept credit cards and operate under a set of rules. (e.g., Visa and Mastercard).
- Acquirer (acquiring/merchant bank) – a financial organization that uses information from the provider and the card association to carry out a transaction. They are certified members of card associations and provide merchant accounts to businesses.
- Payment processor – a mechanism used by acquirers to communicate transaction information to the relevant card association.
- Payment gateway – software that enables the transmission of a customer’s credit card details from a business’ website to a payment processor.
Authorization, clearing, and settlement are the two main phases that online credit and debit card payments go through from the time the client completes the checkout procedure until the merchant receives the money in their bank account. A payment solution like a White-label payment gateway is crucial in facilitating these processes, ensuring seamless and secure transactions for both customers and merchants.
Authorization in stages:
Clearing and settlement in stages:
Online payments made with a digital wallet
Companies like PayPal have done something comparable for digital wallets in the same way that the scale of Visa and Mastercard has relatively regulated the card payment experience internationally. However, there may be substantial variances across countries and products.
Here the source of funds is of particular importance. Digital wallets can serve any (or both) of the following functions:
- A payment data storing method (e.g., bank data, credit or debit card data).
- A system for storing actual funds.
Paying with stored payment data
When a consumer makes a purchase with a digital wallet that is just used to store payment credentials for another payment method, the process is essentially identical to making a conventional payment with that method.
If they’re keeping credit or debit card information, they may essentially make a conventional card payment. The main distinction is that the digital wallet issuer may provide the merchant payment service provider services.
If they’re keeping bank information, they might effectively set up a normal Direct Debit mandate if the mandate form is delivered to them electronically.
In each of these cases, the digital wallet is merely operating as an information storage device, similar to a digital brain.
Paying with stored funds
If the customer has money in the digital wallet, they are sent there via various online payment methods, such as bank transfers, credit or debit card payments, or transactions from other digital wallets.
When a consumer needs to use this saved money to make a transaction, the merchant must normally receive them in their digital wallet from the same supplier.
No cash is really transferred behind the scenes; the digital wallet provider merely assigns a virtual debit to the client’s wallet and a matching credit to the seller’s wallet.
The procedure is nearly equivalent to a regular bank transfer if a merchant wishes to transfer monies from their digital wallet to their bank account.
How to select the best payment system
Your online payment solutions are more than simply a cost to your company. Using a suitable solution for your product, service, or marketplace may result in commercial benefits, such as increased customer engagement and loyalty, leads, and income.
The solution you select to take online payments should be thoroughly evaluated and re-evaluated over time as your business expands.
You may also like: Diversifying eCommerce Checkout: Payment Methods You Should Consider Applying
Image source: Unsplash.com
