How do online payments actually work?
In this article, you’ll learn: how the online payment process works, which parties need to be involved, and how much it will cost to take online payments.
If you want to sell online, it’s useful to know how your customer’s money moves from their bank account to yours. In principle, online payments work in a similar way to face-to-face payments.
The six parties involved when you sell online
There are six ‘parties’ involved when your customer pays online:
1. Your customer. The person who owns the payment card. Also known as the ‘cardholder’.
2. Your company. Also known as the ‘merchant’. You’ll need a website with an integrated online shop, or shopping cart software (more on this later).
3. A payment ‘gateway’. This is a piece of software that sits behind your online shop. The gateway handles the online transaction, and then securely sends your customer’s payment information to your payment processing company.
4. A payments processing company, also known as an ‘acquirer’. They will process payments for you, and supply you with a ‘merchant account’ (more on this later). Note: Some companies, e.g. Barclaycard, can supply both the gateway and payment processing services.
5. Your customer’s payment scheme/system. The payment network which the customer’s card is linked to, e.g. Visa or PayPal. This network creates a link between the acquirer and the issuing bank.
6. Your customer’s bank. The bank that issues your customer’s credit/debit card.
You can see these six parties in action in the example below, showing how the money flows from one party to the next, and how the charges are made up:
The online payment journey
Part 1: Checks (also known as ‘Authorisation’)
1. The customer enters their payment information (e.g. debit card or PayPal details) into an online checkout form, so they can pay for something.
2. The payment gateway securely sends that data to the payment processing company (e.g. Barclaycard).
3. The payment processing company then sends that data to the card scheme (e.g. Visa).
4. The card scheme checks with the customer’s bank to see if they have enough money to make the purchase, and that the card isn’t blocked.
Part 2: Sale
5. If the payment is accepted, the money is taken from the customer’s bank account and held by the merchant’s payment processing company (e.g. Barclaycard).
6. The payment gateway confirms the sale to both the customer and the merchant.
Part 3: Settling up
7. At the end of each trading day, the payment processing company sends the money from all the merchant’s sales to their bank account.
8. The money normally arrives in the merchant’s bank account within 2-3 working days.
9. The payment processing company’s fees for each sale are added to the merchant statement and are billed at the end of the month. The merchant usually pays these fees by Direct Debit.
How much does it cost to take online payments?
On top of costs for setting up your website (e.g. web development, web hosting, shopping cart software and plugins), you’ll also have fees for taking payments online.
The cost of taking payments online depends on several factors, including: the volume of transactions, the kinds of transactions you’ll be processing, gateway fees, and the fees your payment processing company (acquirer) charges.
The fees and considerations generally come under the following categories:
Contract length and type
The length and type of your contract can vary. Make sure you factor in both costs as well as contract length when you’re choosing a gateway supplier.
At Barclaycard, our typical contracts are 12-18 months.
Usually a flat, one-time fee to cover the costs of setting up a new merchant account
Usually a fixed, monthly fee; plus a per-transaction fee, which might be fixed or variable. These come from your gateway provider.
Also known as ‘Merchant Service Charges’, these come from your payment processing company. Each time you take a payment, you get charged a small percentage of the payment’s value. These charges can vary depending on the type of transaction (e.g. debit cards generally cost less to process than credit cards) and the volumes of transactions (higher volumes can get you cheaper rates).
Transaction fees normally cover the ‘interchange fee’ that an acquirer pays for using the payment scheme’s network. You’ll also be charged a transaction fee for each refund.
May include fees for things like: disputed cardholder transactions (also known as a chargeback), security fees, or early cancellation fees and solution modules (such as extra fraud checkers)
Gateway suppliers often quote for just the gateway charges, and may avoid telling you about the extra fees that payment processing companies need to charge.
At Barclaycard, we provide gateway services and payment processing together as one – so you won’t get stung by any surprises later down the line.
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