How do online payment systems work?
In today’s digital age, the ability to accept payments online is crucial for businesses looking to thrive in the e-commerce landscape. It’s nearly impossible to succeed without it! With consumers increasingly turning to the internet to make purchases, with 2.71 billion people expected to shop online in 2024 compared to 2.37 billion in 2020, having a seamless online payment system is essential.
But what exactly is an online payment system, and how does it work? In this guide, we’ll explore everything you need to know about online payment systems, including the types available, how to set them up and the benefits they offer to merchants.
What’s in this article?
- What is an online payment system?
- How do online payment systems work?
- Types of online payment systems
- How to set up an online payment system
What is an online payment system?
An online payment system is a digital platform that facilitates the transfer of funds between a buyer and a seller over the internet. It allows customers to make payments for goods or services securely and conveniently without the need for physical cash or cheques. These systems leverage various technologies, such as encryption and authentication to ensure online transactions remain secure.
How do online payment systems work?
You would think that with the amount of technologies and systems involved in an online payment system that it would be a long and frustrating process. But in fact, it takes only a matter of seconds, if that.
Here’s a step-by-step guide to how the online payments process works.
- Initiating the transaction: The process begins when a customer initiates a purchase on the merchant’s website or e-commerce platform by selecting products or services and proceeding to the checkout page.
- Entering payment information: The customer enters their payment information, such as credit card details or digital wallet credentials, into the online payment form provided by the merchant.
- Encryption of payment data: The payment information is encrypted using secure encryption protocols, such as SSL (Secure Sockets Layer), to keep the customer’s details secure.
- Verification and authorisation: The encrypted payment data is transmitted securely from the customer’s browser via the payment gateway to the payment processor or acquiring bank. The financial institution will then verify the customer’s payment details. It also checks for available funds in the customer’s account or credit limit.
- Authorisation request: Once the payment details are verified, the information is transferred, again via the payment gateway, to the customer’s bank or card issuer to request approval to process the transaction.
- Approval or decline: The customer’s bank or card issuer reviews the authorisation request and either approves or declines the transaction based on various factors, including available funds, account status and fraud risk.
- Transaction processing: If the transaction is approved, the customer’s bank or card issuer sends an authorisation code via the payment gateway back to the payment processor, indicating that the transaction can proceed. The transaction is then processed, deducting the purchase amount from the customer’s account and transferring it to the merchant’s account.
- Confirmation: Once the transaction is successfully processed, the payment gateway sends a confirmation message to the merchant’s website, indicating that the payment has been received and the order can be fulfilled. Alternatively, the gateway will send a declined message.
What are the benefits of an online payment system?
We’ve already mentioned that an online payment system is crucial to the success of an e-commerce business, but why? Let’s take a look at the numerous advantages of an online payment system and why you need one:
- Increased sales: By offering customers a convenient way to pay for their purchases online, you can attract more customers. More customers = more sales.
- Enhanced security: Online payment systems employ advanced security measures, such as encryption and fraud detection, to protect sensitive customer information and reduce the risk of fraud.
- Global reach: With an online payment system, you can reach customers beyond your local market and cater to a global audience, expanding your business opportunities on an international scale.
- Reduced administrative burden: Automating the payment process with an online payment system can streamline your administrative tasks, saving you time and resources, so you focus your efforts in other areas of your business.
Have we convinced you to invest in an online payment system yet?
How to set up an online payment system with Total Processing
Setting up an online payment system for your business involves several steps, including integrating a payment form into your checkout, adding alternative payment options, choosing a scalable and secure payment gateway, utilising e-commerce plugins and joining a reliable payment processor to bring it all together. However, if you focus on finding an ideal payment processor first, like Total Processing, we will do all the leg work for you.
For a step-by-step guide of how to integrate all of the above with Total Processing, check out our blog on how to integrate a payment gateway.
It’s safe to say that implementing an online payment system is essential for merchants looking to stay competitive in today’s digital marketplace. By understanding how online payment systems work and leveraging the right technology, you can enhance the shopping experience for your customers, increase sales and grow your business.
