Shopping Carts, Gateways and Payment Processors: Anatomy of an Online Purchase

Years ago, an exchange of cash was all it took for a customer to make a purchase from a merchant. How things have changed! Today, most businesses offer their products or services on the Internet - clearly, they can’t be restricted to cash-on-delivery practices anymore. E-commerce has emerged as a lucrative channel for merchants to boost sales and grow their bottom lines. Many consumers have Internet access both at work and at home, and browsing an online catalog can be faster than browsing the aisles of a physical store - and customers get the added convenience of shopping 24 hours a day, seven days a week.

Merchants should understand the value of operating in multiple channels. For those who haven’t yet incorporated e-commerce into their business but want to, there is much to learn. They must educate themselves on how payment processing works in order to best accommodate their online shoppers and serve the needs of their business. Though paying for an online purchase takes just a few seconds, it involves a complex chain reaction of behind-the-scenes processes.

Merchants can increase revenues and reach more customers by offering an efficient, successful e-commerce solution. This article examines what must be in place in order to complete a transaction that is both secure and offers superior customer service.

What Makes an E-Commerce Solution Possible?

In addition to the range of software and hardware that companies use to support the sale of products and services online, there are three vital components that make online shopping possible: the shopping cart, payment gateway and payment processor. Each is critical to ensuring successful implementation of e-commerce functionality.

• Shopping cart. The shopping cart acts quite literally as a virtual shopping basket. It holds the items customers select from a Web site until they are ready to proceed to the checkout stage, where their credit card information will be processed. The shopping cart:
  • Keeps track of items until they are purchased
  • Automatically totals the amount of a customer’s order, including shipping and tax
  • Allows shoppers to securely enter address and credit card information
• Payment gateway. In order to accept credit cards through the Internet, a payment gateway is critical to transport the credit card information from the shopping cart to the payment processor once the consumer clicks the “Buy” button. In most cases, this transaction happens almost instantaneously. The payment gateway receives encrypted transactions from the merchant’s shopping cart. An encrypted transaction simply means that credit card numbers can’t be read by people who are not supposed to read those numbers. Authentication is then provided and the decrypted payment information is transmitted for authorization. The payment gateway:
  • Fulfills the same function as a point-of-sale (card swipe) terminal at a physical retail location
  • Takes information provided through a shopping cart and transmits it electronically and securely to a payment processor to be routed for authorization of payment
• Payment processor. The payment processor transmits a customer’s credit card information via the Internet to the merchant bank for authorization. It also sends data back to the merchant’s bank to approve payment or the transfer of funds. Specifically, a payment processor:
  • Acts as a link from the merchant to the acquiring bank or merchant bank
  • Receives information from the merchant through the payment gateway and packages the information for delivery to the acquirer, ensuring that all necessary transactional data is present and valid
  • Later transmits information back from the acquirer for delivery to the merchant to settle the transaction

With the shopping cart, payment gateway and payment processor in place, merchants have all they need to offer convenient e-commerce solutions that deliver superior security and service. With a little research and education, merchants can find the best providers to accommodate their business needs and those of their consumers. It just makes sense - with online shopping projected to account for $116 billion, or five percent of all retail sales this year - e-commerce provides merchants an opportunity to make more money and succeed in an increasingly competitive marketplace.

The tenth annual Shop.org report, The State of Retailing Online 2007, conducted by Forrester Research states that e-commerce has come of age and its profitability throughout the channel has stabilized. Eighty-three percent of respondents to the survey reported making more money and 78 percent said they were more profitable than just two years ago. The report found that apparel, accessories and footwear reached $18.3 billion in 2006 for online purchases and is expected to hit $22.1 billion by the end of 2007.

e-onlinedata (EOD) is the nation’s fastest-growing, most trusted provider of online payment solutions. Thousands of Internet, mail order, auction sellers and retail businesses - from start-ups to billion-dollar companies - are choosing EOD every month for affordable, reliable, and easy-to-use credit card processing and Authorize.net payment gateway solutions. For more information on e-onlinedata or to apply for a merchant account, please visit www.e-onlinedata.com/paymentwerx

Merchant Processing 102 is a production of e-onlinedata provided to WebSite Werx, reprinted with permission from e-onlinedata. Content is intended to provide merchants and small business owners with practical information and insight into the world of payment processing.

Please feel free to post a comment to the blog and I will do my best to answer any questions you may have.

Tags: accept credit cards, authorize.net, ecommerce merchant processing, eonlinedata, online merchant account

Thinking about adding electronic processing capabilities? There’s a lot you should know.

There are countless reasons why a business should add credit card and electronic payment processing capabilities - transactional speed, convenience, increased customer satisfaction, improved cash flow, views into sales data and more. But perhaps the most important consideration is the sheer volume of consumers who use non-cash methods as their primary form of payment.

In 2005, credit card and electronic transactions accounted for an overwhelming $3.4 trillion of total U.S. payments, according to The Nilson Report. That’s 50 percent of all transactions nationwide for that year. More recently, Visa USA estimated that nearly 60 percent of U.S. consumers aged 18 to 25 use cards as their primary payment method.

So while the reasons for adding payment processing are clear, understanding all your options and which are right for your business is far more complex. This article will give you the information you need to get started in setting up payment capabilities for your business, and it will provide some of the essential details you need to consider when selecting a provider.

How Payment Processing Works

Some form of the modern credit card has been in use since the late 19^th century, mostly as department store charge cards representing lines of credit. Things have changed and today, the step a merchant needs to take in order to accept credit card payments is to establish a merchant account with a bank or third-party payment provider. Once your account is live, the transaction process generally works as follows:

1. A customer presents a credit card for payment.

2. By swiping the credit card through an electronic point-of-sale (POS) transaction terminal, typically provided by the bank or payment provider, an electronic request is submitted to the processing network for authorization.

3. The processing network receives your electronic request and determines if the cardholder’s account is valid and if the funds are available. If so, a response called an “authorization code” is transmitted, guaranteeing your access to the funds.

4. A receipt is then printed for the customer using the POS terminal or your computer. The customer then signs the receipt and, for their part, the transaction is complete.

5. At the end of the business day, a merchant will electronically submit a final request to the processing network to “capture the funds” for all authorized transactions in a given day. This process is referred to as settlement. Once approved, a response is generated to your electronic terminal or computer.

6. From there, the funds associated with the batch you settled are deposited electronically into your business bank account, usually within 48 to 72 hours. Typically, the rate and any fees paid to your merchant account provider are deducted from your account at the end of the month.

7. At the end of the month, your merchant account provider will send a statement to you, detailing the credit card activity for the month and the associated fees you’ve been charged.

This process describes what happens in a traditional retail, or “bricks and mortar” sales environment. For Internet and e-commerce merchants, the set-up process requires a few additional steps.

Retail Terminals vs. e-Commerce Processing

Because they do not have access to the purchaser’s physical card, Internet and e-commerce merchants rely on specialized software that allows them to capture and process credit card information on their Web sites instead of through a POS terminal. There are two basic software programs needed to enable online commerce:

• Shopping Cart: A secure series of scripts (or coding) that keep track of items a visitor chooses to buy from a site until they proceed to checkout. On the checkout screen, the shopping cart collects the credit card number, billing address, authorization number and expiration date.
• Payment Gateway: When the online shopper is ready to finalize the transaction, the information collected in the shopping cart is transferred to a payment gateway for authorization. It is the equivalent of a physical POS terminal used in a retail setting.

Another situation where a purchaser’s card is not physically present happens with MOTO or Mail Order and Telephone Order. Here, touch-tone processing or an automated response unit (ARU) allows for credit card authorization and processing over the telephone. This type of processing does not require a shopping cart or payment gateway.

Pricing Basics

Now that you know how processing works and what the available options are, you’re probably wondering how much all this will cost. While service fees and rates vary from provider to provider, “bundled” pricing is the most common type of agreement used in determining which per-transaction rate applies to which type of merchant. In the simplest terms, pricing is based on risk: the higher the risk involved in the transaction, the higher the rate the merchant will have to pay:

• Qualified Rate applies primarily to card-present or traditional card-swipe (not key-entered) transactions. This is the lowest possible rate a merchant will incur when accepting a credit card. Telephone and e-commerce transactions cannot receive the qualified rate because they are unable to swipe a customer’s card.
• Mid-Qualified, or partially qualified rate, is the percentage a merchant will be charged if they accept a credit card that does not qualify for the lowest rate. This may happen if a consumer credit card is keyed into a credit card terminal, virtual terminal (online) or via a shopping cart. This is the best rate that a telephone or e-commerce business can receive.
• Non-Qualified is the highest percentage rate a merchant can be charged and applies to those transactions posing the greatest amount of risk. This rate would apply if a special kind of credit card is used like a rewards card or business card or if address verification is not performed, or a merchant does not settle its daily batch within the allotted time.

Again, these rates are used to determine the cost to the merchant on a per-transaction basis. There are additional costs associated with payment processing, including start- up fees, equipment costs, chargeback fees and more. Stay tuned for the next e-newsletter installment for additional processing tips and useful information for merchants and business owners.

e-onlinedata (EOD) is the nation’s fastest-growing, most trusted provider of online payment solutions. Thousands of Internet, mail order, auction sellers and retail businesses - from start-ups to billion-dollar companies - are choosing EOD every month for affordable, reliable, and easy-to-use credit card processing and Authorize.Net payment gateway solutions. For more information on e-onlinedata or to apply for a merchant account, please visit www.e-onlinedata.com/paymentwerx

Merchant Processing 101 is a production of e-onlinedata provided to WebSite Werx, reprinted with permission from e-onlinedata. Content is intended to provide merchants and small business owners with practical information and insight into the world of payment processing.

Questions? Please feel free to post a comment to the blog and I will do my best to answer them.

Tags: accepting credit cards, eonlinedata, merchant accounts, online merchant processing, payment gateway

Chargebacks are a fact of life of doing business online, but it can help to know how to minimize them (and what to do if/when you get them). Here’s a free 30-page report (PDF format) for you on Avoiding Chargebacks (click to view, or right-click to “save as” and download).