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This article is a complete introduction to online payments, covering the basics, costs, benefits, different industry use cases, and risk management. Understanding online payments is crucial to taking the next step as a business.
By providing consumers with a convenient way to access products and services, online payments enables merchants to bypass geographical borders and get their business in front of more eyes.
But there’s a lot that goes into online payments, and it can get pretty technical fast. To simplify matters, this introduction to online payments provides a general outline of what to expect when you’re just starting out.
Keep reading to learn everything you need to know about online payments and how to make the most of them as a merchant.
What are online payments?
Online payments refer to transactions carried out over the internet to pay for goods or services, whether purchased online or offline. These payments are processed through secure platforms and can be made using a variety of methods, including:
- Credit or debit card transactions: Payments made by entering card details into an online payment gateway.
- Digital wallets: Services like PayPal, Google Pay, or Apple Pay that allow users to store payment information for quick transactions.
- Bank transfers: Also known as wire transfers, where funds are sent directly between bank accounts.
- Direct debit or ACH payments: Automated recurring payments directly debited from a bank account.
- Buy Now, Pay Later (BNPL) services: Payment options like Klarna or Afterpay let customers pay in installments over time.
Online payments can range from one-time purchases, such as buying a product from an e-commerce site, to recurring payments for subscriptions like streaming services, gym memberships, or SaaS products. They provide a fast, secure, and convenient way to complete transactions, making them an essential part of modern commerce.
How do online payments work? The basics
For an introduction to online payments, let’s start with the basics: who’s involved and how the online payment process works.
Who’s involved in online payments?
These are the leading players in any online payment:
- Merchant: Business owner.
- Cardholder: Individual paying for a product or service online.
- Acquiring bank: Entity that processes credit card payments for merchants. Examples of these are Visa, American Express, Mastercard, and Discover.
- Issuing bank: An entity that provides cardholders or consumers with credit to use through card networks.
- Payment processor: Third party who may work with acquirers to process payments and transfer funds from customer to merchant.
It’s also worth understanding a payment gateway, which is a system used to encrypt and secure sensitive information so that it’s not readily accessible.
These entities work together to create a system of online payments.
Online payment process
Here’s a quick step-by-step breakdown of what the online payment process looks like in action:
Step 1: To get started with the online payment process, the merchant, must establish a relationship with an acquirer, an issuing bank, and a payment processor.
Step 2: When an online payment is accepted through a merchant’s website, the acquirers and processors will direct payments to the card networks. This is done through a gateway, which tokenises (encrypts) any incoming data. Ultimately, this means that sensitive data is never actually visible or accessible through the merchant system for compliance purposes.
Step 3: The acquirer and card networks then process the secure data to determine whether the payment will be accepted or declined.
Step 4: Once the issuing bank has reached a decision, it will be delivered back through the gateway and served on the merchant site as an accepted or declined payment.
While you can select an individual acquirer, processor, and gateway, choosing a single payment provider often makes more sense, as it combines all of these entities into a streamlined system.
This high-level overview outlines the process for single online payments. It doesn’t factor in more complex transactions like recurring purchases, subscriptions, and multiple currencies.
Online payment costs
Online payments generally come with associated costs. The main ones include:
- Interchange fee: This is the amount the bank charges to assume the risk of granting credit to a customer. The interchange fee is based on factors like the kind of card being used, the card's status, the industry, and the monetary amount of the transaction. The payment processor will pay these fees on behalf of the merchant, which can be anywhere between 0.05% + £0.10 and 3.10% + £0.22.
- Assessment fee: The acquiring bank (Visa, Mastercard, etc.…) charges these fees to cover the cost of maintaining infrastructure so that electronic payments can be transmitted. They usually fall between 0.12% and 0.15% but change twice a year, in April and October.
- Payment processing fee: This is the fee that the merchant pays to the payment processor in return for processing transactions. The fee depends on various merchant factors, such as the type of business, what you sell, order value, and more. Each one of these factors can affect the payment processing fee a merchant pays.
- Shopping cart fee: If you’re a merchant selling products or services through a third-party platform or marketplace like Shopify, you can also expect a fee for using their payment processing services.
Additional online payment costs include merchant service charges, payment gateway fees, authorisation fees, terminal fees, and per-transaction fees.
Benefits of online payments
Online payments have far reaching benefits for both the merchant and the customer.
For Businesses
Online payments ushered in a new era of commerce, allowing businesses to reach consumers regardless of their physical location. Online payments have obvious benefits for businesses and additional upsides worth exploring.
This is a quick overview of some significant benefits of online payments on the business side:
- Merchants can accept payments from anywhere, regardless of geographical distance. No more being constrained by country borders. Break into new, global markets across the world.
- Multi-channel capture — businesses can accept payments from mobile and desktops. Because we all know people love to shop from their phones.
- Merchants can accept multiple currencies to acquire overseas customers with local payment methods. Increasing trust one pound (or yen) sign at a time.
Beyond the online payment process itself, choosing the right payment processor can have a tremendously positive effect on a business.
Planet’s online payment processing includes the following benefits for businesses:
- Insert your branding into the payment system for seamless flow and instant recognition during every step of the process.
- Increases conversion rate optimisation by creating a simple, seamless flow from cardholder to merchant
- Payment transaction dashboards simplify bookkeeping for merchants and improve workflows.
Instead of haggling with acquirers and banks, Planet takes charge of the online payment process to allow merchants to focus on their business. If you would like more information why not get in touch with one of our experts?
For the Customer
Aside from the benefits for businesses, online payments also have upsides for consumers like:
- Multiple payment methods allow cardholders to make purchases in their desired way, such as with digital wallets or through third party payment platforms like Alipay
- Multiple currency options, such as Dynamic currency conversion or DCC, enable cardholders to shop in their local currency, which is easy to understand and provides peace of mind. This, in turn, promotes a higher likelihood of conversion.
- Convenience over everything. Online payments simplify the shopping process for consumers, enabling them to shop where and when they choose.
Introduction to online payments for different business models
Online payments are widely used across various business models, but that doesn’t mean it’s a one-size-fits-all solution. Instead, online payment systems must be tailored to accommodate the nuances of various industries and distribution strategies. Here’s a look at online payments across different sectors.
Retail & hospitality
Retail and hospitality have some of the most straightforward online payment systems since they generally cover single, one-off purchases. A single online transaction is paid for, processed, and returned to the cardholder immediately.
These are your classic online shopping purchases — think buying a new jacket or book from a website or ordering food or groceries online.
To maximise online payments in retail and hospitality, consider using the same payment provider for both online and physical purchases. This reduces touchpoints and the amount of work required to process customer transactions. It also creates familiarity for cardholders who may have already shopped in person and are continuing their purchases online.
Subscriptions
Subscription and Software-as-a-Service (SaaS) models handle online payments differently from one-time purchases. Instead of single transactions, they rely on recurring payments and often include multiple pricing tiers. This complexity can pose challenges for both businesses and customers.
A well-designed online payment system is essential for the growth of subscription-based businesses. For instance, a merchant might begin with a straightforward £10-per-month plan, but as offerings expand, the system must seamlessly accommodate new tiers or features.
Flexibility is key in subscription models. If a customer decides to upgrade or downgrade their plan, the payment system should automatically adjust to reflect the change. The updated amount should then be charged in the next billing cycle, ensuring a smooth and hassle-free experience for both the business and its subscribers.
Third-party platforms
We also have online payments for third-party platforms that collect funds from cardholders and distribute them to the appropriate recipient(s). This includes marketplaces like Etsy and Shopify, which allow individuals to buy and sell goods and services online without their own storefront.
This is where online payments can get tricky. Rather than selling directly to the consumer, a middleman accepts payments on behalf of the merchant. The platform is responsible for paying out one or multiple merchants, often involving heavy verification and fees.
That said, third-party platforms simplify the online payment process by providing merchants with prebuilt infrastructure to sell their products and collect payments. Instead of building a stand-alone online shop and a brand-new system, these platforms have customisable payment solutions that work for most businesses.
Aside from offering multi-channel and multi-currency payments, third-party platforms support various methods of moving money, allowing merchants flexibility and freedom. There are simple one-off purchases, subscription models, split cart options, account debits, and even escrow services.
You will quickly find that these marketplaces approach online payments differently than classic retail, hospitality, and subscription models.
Staying safe with online payments: Risk management
It’s more crucial than ever for merchants to implement risk management systems for online payments to keep sensitive information secure. These risk management measures can be challenging to implement individually, especially if you’re a merchant who hasn’t partnered with a payment processor.
As a vendor, Planet ensures our online payment system upholds the highest standards of safety and compliance. All sensitive data run through our systems is protected by the highest level of PCI certification. This means that merchants never handle sensitive card data, keeping everything much more secure, especially when compared to handing over a physical card for a traditional retail transaction.
By processing consumer information through gateways, sensitive data is stored in a tokenised version so that no details are at risk of release. This added layer of security gives merchants and cardholders peace of mind that data will always be kept secure.
In addition to protecting privileged information, Planet also offers fraud prevention and chargeback solutions for additional risk management.
Tips for making the most of online payments for your business
There’s a lot that goes into online payments for businesses. These final tips will help you implement a system that works for you rather than against you.
- Keep it simple: An easy checkout process leads to a greater checkout completion rate. Walk through your own checkout process to identify any gaps or areas for improvement. The more complex the system, the more likely the customer is to abandon it, so it pays to keep it simple.
- Offer the customer’s preferred payment choice: If a customer isn’t met with their preferred payment choice at checkout, they’re likely to jump ship without completing the purchase. Ensuring multiple payment methods from various card providers to mobile wallets leads to greater conversion rates and customer trust.
- Prioritise PCI compliance: Security is crucial for online payments, so it's paramount to invest in the highest level of PCI compliance (which we offer here at Planet).
Push the boundaries of ecommerce with Planet’s online payment system
Whether you’re a retail shop, a hospitality business, or in the travel sector, Planet offers online payment systems designed to take merchants further.
Planet’s online payment system features:
- Multiple payment solutions from gateway acquiring to currency conversion to PCI compliance.
- Multiple integration methods, through either an API or plugin. We integrate with your current systems.
- Process transactions of any size fast and securely. Even at scale. We’ll never hold you back.
- Conversion rate optimisation through checkout branding, simplified processes and robust reporting dashboards.
- 135+ currencies, available on both mobile and desktop payments.
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