It may not sound like an exciting topic, but if you have, or are getting ready to start, an e-commerce based business, then understanding how e-commerce payment processing works will be very helpful for you. In this video, our website consultant, Brent Haeseker, speaks with our ProductCart technical consultant, Matt Foster, about the workings of payment processors, payment gateways, 3rd party payment processors and merchant accounts.
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Full Transcription:
Brent: Hi I’m Brent Haeseker, website consultant with NetSource Technologies, and today I am with Matt Foster, he is our technical consultant here at NetSource. We are going to talk about payment processing for an E-commerce website. Before we get started, I am actually going to let Matt, since it’s the first time I’ve talked with him on camera, introduce himself and tell you a little bit about who he is and what he does here at NetSource.
Matt: I started with NetSource back in 2006 actually in the sales department, but now I’ve moved over to become a technical consultant where I primarily work with our E-commerce customers, helping them plan their site and plan workflow for their website, and also working with them on some of the technical details like modifications and things like that for their site. I also work on some of our other business website projects sort of as a go-between between the sales staff, customers, and our programming staff. Most of my work is a little bit more technically oriented and to serve in an advisory role for people who want to build E-commerce websites.
Brent: Matt has always been, speaking of advisory, he has always been a good resource for me because I utilize him frequently on a lot of projects that we do. So Matt, tell us a little bit about E-commerce payments because we have a lot of customers that come to us, it might be their first website they’ve ever done, they’re not familiar with things or it could be the first time they are adding E-commerce to their website. So they don’t really know the whole process of how to get the payments set up on their website so kind of walk us through that process.
Matt: Usually the starting point for customers who are getting into E-commerce for the first time, is to understand exactly how online payments work. A lot of people who don’t have experience in the online environment think maybe that they can use their credit card terminal that they have for their business or something like that or save the credit card numbers on their website and go back and charge those whenever they feel like it. That’s really not the way that payments are supposed to work online. Back in the older days, ten or fifteen years ago when the internet was a little bit safer place and hackers weren’t yet as skilled as they are now, a lot of people did save credit card information on their websites, but that’s really sort of a forbidden process these days. For example, NetSource and ProductCart both with their hosting accounts, will not host a website that keeps any credit card information on it. What the payment model is now, basically is when customers go to your website, you use a system that includes a gateway service, a payment gateway service, and a payment processor. What the payment gateway service does is it captures the customers credit card information, encrypts it, usually to transmits it to the gateway service, it’s never actually resident on your website on your website at any time. It takes that encrypted information, sends it to the gateway processor, they validate that the credit card is actually a real credit card, and then they authorize the payment. The payment processor takes that authorization and actually captures the funds and deposits it in your merchant banking account, which is a little bit different from you ordinary business account. A merchant account works with the credit card processor sort of like a line of credit because when you capture funds from a customer’s credit card, whether that customer is twenty miles away in the next city, or whether they’re in Belgium, the funds don’t automatically move from one bank to another. Banks have schedules for fund transfers just like everybody else. If it’s a foreign bank, it takes longer because it has to process through the different currency types and things like that. So what happens is, your bank account, as a business, still gets credit for that money, that money will move into your bank by the end of the business day, if that’s how you set it up, through that merchant account because essentially, you’re promising that those funds are actually coming into your bank, and in the mean time, that merchant account credits the money to your business bank account, so it’s actually a very short term loan until the money actually transfers from one bank to another.
Brent: That’s interesting so it’s actually a line of credit is how it operates.
Matt: It operates a lot like a rolling line of credit, and that’s why you’ll see some processors or some merchant accounts will have different daily transaction limits on them and things like that is because it’s a line of credit, and it may well depend on your business credit what kind of arrangement you can come to with your bank.
Brent: Okay, so somebody is on your website, they’re checking out, and then you’ve got your merchant account over here that handles the payment processing. You just mentioned something about a payment gateway, is that the bridge then between those two items so you can connect those together?
Matt: Right, the payment gateway is a service really that validates credit cards. Payment gateways work with all the credit card vendors basically on the planet, and run things through huge databases, and over vast networks to verify that when somebody overseas or in Alaska or again next door runs their Visa card on your website, that that is actually a valid Visa card, and there’s credit on the card to cover the transaction. Then it provides an authorization number for that just like a typical point of sale terminal would. Then whenever you actually process your payments whether you batch process at the end of the business day or batch process at four o’clock, or automatically capture the payments at the time of the transaction, it passes that authorization along to the payment processor, and the processor is the one that actually captures the money and moves the money into the merchant account.
Brent: Okay so then you need both of those obviously for taking payments online, but are there any other options besides doing the payment gateway and the merchant account?
Matt: The payment gateway, processor, merchant account arrangement is the more traditional method for accepting online payments, but a method that is gaining popularity over the past five or six years is using third party payment processors and those are companies like PayPal, which has expanded into actually allowing you to take credit cards online through PayPal as well as the more old-fashioned PayPal account payments. Companies like Stripe that work as payment aggregators, what they do is, there’s still a gateway involved, there’s still a payment processor involved, but it all uses a single account which belongs to that payment processor, so that money is all moved into the same bank account essentially. The transaction details are then used to disperse the funds to the various merchants that use those services. So when a customers uses their credit card say through PayPal or Stripe, that money is captured, it’s put in PayPal’s account or Stripe’s account, but the transaction details then let them understand which merchant who has an account with them gets those funds, and those funds are then put into an internal account for those businesses. Typically they don’t have an automatic transfer process like a merchant account would. You have to go into your PayPal account and say I want to move $600 into my business account. So it’s a little bit slower process, and a little bit less automated, but it is a simpler setup, and it typically is oriented towards businesses with a little bit lower dollar volume than you would see with some of the higher end merchant solutions.
Brent: Okay so then with the two different options that you could go with, is there some that are more tailored towards maybe a small business versus a larger business?
Matt: Really the third party processors are the ones that are tailored towards smaller businesses. Typically you will see them have lower daily and monthly dollar volumes that are allowed on the account.
Brent: So there’s a cap on how many transactions they can actually do?
Matt: Right, and the cap usually depends the level of account you have with that service. Sometimes it will be influenced by your business credit, but typically the dollar volumes are in a range from $2,000 to $5,000 a day or a month if you have a lower tier account. It just depends on how much money you want to spend on the account, what kind of payment processing fees you want to put with, and the dollar volume that you estimate that you would be doing. If it’s a small business and you’re not necessarily dependent on money automatically moving into your business banking account to make your daily budget for your business then that might be a good solution to use is third party processors. Traditional payments, gateways, and that model, that money moves quickly into your banking account so companies that have to take a bottom line at then end of every day and probably entirely depend upon e-commerce for their income, those traditional accounts are a little bit more oriented towards that type of business.
Brent: So there’s no real right or wrong answer, it’s just whatever works for your business.
Matt: Right, there’s no right or wrong, and sometimes you’ll see even large e-commerce sites and large organizations use both types of payment processing on their website, it’s not uncommon at all for us to have customers who use a traditional payment gateway for credit cards and also use a third party processor like PayPal or Amazon Payments to supplement that. Those services also essentially take credit cards, but some people find that a little bit more convenient because they could just enter their PayPal account information and skip the idea of having to re-enter their credit card and all that stuff every time they go through a transaction.
Brent: I don’t know if you mentioned it, fraud how does that play into the equation for all the options out there.
Matt: That’s an interesting point. Every kind of payment processor has some sort of fraud prevention program in place. Typically, you’ll see the higher end payment gateway systems like authorize.net, our own NetSource payment gateway that we have through network merchants, those systems typically have a stronger suite of antifraud tools, and also have paid levels of enhanced fraud protection that are available. Where third party processors have other safeguards in place for some fraud prevention, but typically the breakdown you’ll see is that the higher end gateways are a little bit more friendly toward the business itself. In other words, you get a little bit extra protection, but sometimes it makes things like customers doing charge backs or returns a little bit more difficult. Whereas in a third party payment processor, typically those are more consumer friendly where if somebody files a grievance with PayPal, the first thing that happens is they freeze the money from that transaction in your account, whereas through a traditional processor, it’s a little more of a process before it gets to the charge back stage.
Brent: Okay, great, good information. Then really to get started, if you’ve got any questions beyond what Matt just shared with you, feel free to give us a call. As you know, NetSource, you may or may not know, we are really big on the e-commerce side of things. We own ProductCart which is a leading shopping cart program so we are very well-versed on e-commerce. We deal with it day-in and day-out so feel free to give us a call if you have any further questions on it. You can reach us at 1(800)709-3240. again, I’m Brent, website consultant here at NetSource, and this is Matt Foster, our technical consultant. We appreciate you watching today, thank you.