Are you a seller who's ready to go online? For many new online merchants it's a very cumbersome and difficult process to understand ecommerce. They often fail to understand the basics of ecommerce and consequently face problems in setting up their online businesses.
The core items you'll need to configure (or find) as an ecommerce professional include the following:
- A domain registration (such as xyzbusiness.com)
- A quality ecommerce website developer or platform (like Shopify or Bigcommerce)
- Quality (not just the cheapest) web hosting (Hosting is included with platforms like Shopify, but not with systems likeWordPress and Magento)
- A shopping cart
- A way to accept your payments – AKA the combination between a merchant account, payment processor and payment gateway (detailed below)
In this article, I discuss one of the most important aspects of ecommerce: The way you're going to accept payments.
It sounds simple at first, but there are actually three elements that come into play for taking those payments from customers and getting them into your own account:
- A merchant account
- A payment processor
- A payment gateway
Now you might be wondering, what's the difference between a payment gateway, payment processor and a merchant account?
That's what we're here to discuss. All three of these elements work together to transfer money from the customer to the merchant, but it helps to understand what each of them do throughout the process.
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What's a Payment Gateway?
A payment gateway is your doorway to making sales online. A payment gateway will allow you to charge your customer's credit/debit card with the purchase he/she makes online.
Just like a physical point of sales terminal at your brick and mortar retail store, the Payment Gateway authorizes you to take card payments directly from your website. The payment gateway acts as a mediator between the transactions that take place on your website and the payment processor. This is needed because it is prohibited, due to security reasons, to transmit transaction information directly from your website to a payment processor. Most online merchant accounts come with a payment gateway included, like PayPal.
What's a Payment Processor?
Payment processors are the financial institutions that work in the background to provide all the payment processing services used by an online merchant. These companies usually have partnerships with other companies that directly deal with consumers or merchants.
The payment processor connects to both the merchant account and payment gateway, quickly passing information back and forth, keeping it secure and almost instantaneous for the end user.
Payment processors make reselling agreements with payment gateways or merchant account providers in order to provide their services directly to internet merchants. Some payment processors do provide direct merchant services, but most companies focus on processing payments only.
What's a Merchant Account?
Merchant accounts are the types of bank accounts that authorize merchants to accept credit or debit cards payments online. These accounts are required if you want to use a payment gateway to process transactions from your website.
It's worth noting that merchant accounts are often called MIDs (or merchant IDs).
Many payment processing and payment gateway companies provide merchant accounts. These accounts can also be opened with some large banks that provide such services.
In most cases, Independent sales organizations (ISOs) or Member Service Providers (MSPs) provide these accounts. These organizations have agreements with payment processors. In addition to this, independent contractors or Agents of ISOs also provide Merchant accounts.
In all cases, to acquire a merchant account, one must have some sort of arrangement with a payment processor to charge a customer's credit/debit card.
There are a variety of payment gateways and payment processors out there. They vary in the monthly fees and transaction costs. It is vital to choose the right company for your merchant account if you plan to run a profitable online business.
How Do Merchant Accounts, Payment Processors and Payment Gateways Work Together?
Now that we've explained the difference between each payment element, it's time to put it all together. I'm going to walk through a standard transaction on your hypothetical ecommerce website. Then I'll explain every detail of the payment process, while also expanding on where the money goes and which individuals/organizations are involved.
1. A Customer (Let's Call Him Mark) Purchases an Item
Mark stops by your ecommerce website, finds the perfect gift to buy a friend and punches in his credit card information. He clicks the Buy button and waits a few seconds. As those seconds pass, the following steps are rapidly occurring.
2. Mark's Transaction Details are Sent to the Payment Gateway
Mark's personal and credit card information are sent over to the payment gateway. This gateway is kind of like the guard, or middle man, between the customer's information and the banks. The transaction details are securely passed from the gateway through the payment processor, referencing the merchant's ID number and passing along the transaction details to the merchant account.
As you can see, all three (Gateway, Payment Processor and Merchant Account) are utilized in this step.
3. The Merchant's (Your) Payment Processor Also Gets the Transaction Details
Besides sending the transaction details to the Merchant Account, the Payment Processors also has the job of contacting the issuing bank of the credit card used. So, Mark's bank would be sent a quick message to see if he hasn't gone over his limit and to see if it's a legitimate card.
To be more exact, there's actually a Credit Card Network that serves as an intermediary between the Payment Processor and the issuing bank. The Credit Card Network is what locates the bank needed.
4. Mark's Card Issuing Bank Accepts or Declines the Purchase
Regardless of whether the payment is accepted or denied, this information goes back through the Credit Card Network and to the Payment Processor.
5. The Merchant's Payment Processor Sends the Results Back to the Payment Gateway
Let's say Mark's transaction was approved. The payment processor relays that information to the payment gateway, which then stores the results so that the merchant's website can complete the transaction.
6. If Mark is Approved, The Sale Can Move On
Once the merchant finds out about the approval, they can ship out products.
7. The Merchant Gets Paid
The bank that issued Mark's card releases funds to the merchant's bank. After a short settlement period, the merchant's bank drops that money into the merchant account.
Understanding the differences between payment processors, payment gateways and merchant accounts is not the simplest task. However, the visuals and outlines above should give you a decent idea as to how the whole process works.
If you're still confused, or would like to express your own opinion on the matter, let us know in the comments section below.
Feature image curtsey of Justin Harrell