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Payment Processors: Unraveling the Mystery

Part 1 of a series about electronic payment providers and what merchants should look for

If you do business online, the term “payment service provider” is most likely familiar to you, but knowing which payment provider to use can be a bit tricky.

Merchants who search for potential payment processors can find a large number of choices to sort through, and the task can seem daunting.

Here, we try to unravel some of the mystery behind the options available to you.

Payment processing terms to know

Before entering this rocky terrain, it’s important to have at least a surface knowledge of how payment services work, starting with some terminology.

Gateway: A payment gateway is the facilitator for passing payment information between merchant and banks. If you were at a brick-and-mortar store, the gateway might be likened to the point-of-sale terminal retailers use to swipe your card. It does all the legwork, so to speak. It also encrypts sensitive information to provide security for all parties involved in the process. Gateways might screen for fraud detection and provide other services as well.

Payment processor: While the gateway facilitates the communication aspect, the payment processor submits the information to your customer’s card-issuing bank. A payment processor is sometimes referred to as a merchant bank processor or merchant account.

Online merchants can purchase a shopping cart service, but some payment processors may already provide the cart in their service package

In short, a payment processing service gives merchants the ability to accept credit card payments online.

Third-party payers: There are also third-party payers, which can act as digital wallets, or e-wallets. These store a member’s payment information so they can pay through their wallet account rather than with a direct bank card number. PayPal is an example of an e-wallet.

Third-party payers are something of a middleman. Basically, they have their own merchant account (or several) and they resell the service to you. While it’s usually an affordable option for small startups, these payers can create their own terms of service that have more control over their customer accounts.

Shopping cart: The shopping cart is necessary for processing orders. A basic shopping cart simply lets customers purchase a product or service, though shipping and payment options may be limited. More advanced features for managing discounts and promotions, product merchandising, store management and multiple payment options will usually require a more fully featured shopping cart. Online merchants can purchase a shopping cart service, but some payment processors may already provide the cart in their service package.

The journey of an electronic payment

In general, when your customer makes an online purchase with a credit card, his information is sent through the gateway via the Internet to your payment processor. This processor then passes the request on to the credit card association (e.g., Mastercard, Visa, etc.) and the card association forwards the information to the bank that issued the card.

Here, it is determined if the customer has enough funds to cover his purchase. Once approved (or declined), an authorization code is sent back to the card association, which passes the response to your payment processor and through the gateway to your business.

If, on the other hand, your customer wants to purchase with his e-wallet, he could only do so if your business offers that option. Instead of entering his bank card and shipping information, all he has to do is enter into his wallet account and that third-party payer will complete the transaction.

Shopping for a payment processor

If you sell online, you’re making your business available to customers across the globe, which means you’re essentially open at all hours

When you’re in the market for a payment processing service, you should first do your homework and be prepared with a few key elements that define your business needs.

Sales volume: It’s important to have an idea of your sales volume so you can choose a payment processor whose fees most appropriately fit your sales and budget.

Costs: Be prepared to decide if you’re willing to pay startup or monthly fees for payment processing—which might indicate more security—or if you prefer fees-per-transaction only.

Security: Security will be a priority for both you and your customers. You’ll want to be sure that your payment processor offers a solid encryption service that will scramble account information during its travels through the Internet.

Secure Sockets Layer, known as SSL, is the encryption technology commonly used for online data. There are SSL certificates that range from 56-bit to 256-bit encryption. The higher the number, the more secure it is, and the more it could factor into your provider’s fees as well. You may need to purchase an SSL certificate if your provider doesn’t offer one.

Customer service: If you sell online, you’re making your business available to customers across the globe, which means you’re essentially open at all hours. With this in mind, it’s good to have a payment processor with support representatives your customers can count on if they run into a technical problem.

Once you’ve become familiar with these terms, you’re well on your way to making an informed decision about which payment services are right for your business.

In the next part of this series, we’ll take a look at the most popular merchant gateway options, and a few emerging mobile payment services.

About the author

Sarah Brown
Sarah Brown is a freelance writer who writes about e-commerce and small businesses. She recently graduated from Chico State with a journalism degree and is also a budding online entrepreneur, having launched two Web businesses and her own line of handmade products. Opinions expressed here may not be shared by The Online Seller and/or its principals.



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