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Key Takeaways

Digital Wallet Domination: By 2026, digital wallets will surpass credit cards, making over 50% of payments in ecommerce, signaling a major shift in consumer payment preferences.

Payment Processing Mystery: Many ecommerce business owners lack a deep understanding of how payment processing really works, which can be a barrier to expanding payment options.

Tech to the Rescue: Despite the complexities of payment processing, modern software solutions exist to manage this, freeing business owners from needing to grasp every technical detail.

Customer Journey Essentials: Understanding the basic journey of a customer's payment process is crucial for business owners, even if they don't get into the technical weeds of payment processing.

By 2026, digital wallets will account for over 50% of payments, yet many ecommerce brands still only accept credit card payments.

The truth is that many business owners don’t fully understand how payment processing even works. 

Luckily, you don’t need to understand all the technicalities of payment processing, because software will handle that for you.

But it's important that you know the basic customer journey for making a payment, and how it's processed. 

In this guide, we'll go through exactly what payment processing is, how it works, and some great tips for how you can build a great payment processing system for your ecommerce business.

So let’s dive in!

What is Ecommerce Payment Processing?

Ecommerce payment processing encompasses everything that happens from when a customer enters their details up to the payment confirmation, leading to the product shipping.

It includes every step from entering the payment details, submitting the payment, synchronizing the payment with the bank, fraud detection, secure payment being taken, and confirmation sent to the store.

There are three main types of payments that ecommerce brands will typically process:

  1. Credit card or debit card payments - Card payments are processed by taking money directly from the customer's bank account or credit account.
  2. Digital wallets - Payments taken via a third party, such as PayPal. These payments can be taken via an indirect card payment or through money that sits in that digital wallet.
  3. Bank transfer - This payment comes directly from the customers' bank account, and is used mostly for very big online transactions, or recurring payments such as subscriptions.

Processing all these payments is called authorization, verification, and settlement by banks and card providers.

All online payments—whether via a payment gateway, ACH bank transfer, or digital wallet—will go through this process. It protects customers by stopping fraud and protects businesses by ensuring transactions are verified and secure.

Why Does Ecommerce Payment Processing Matter?

Ecommerce payment processing matters for both the customer and the seller. 

Customers expect to have a smooth journey. Part of that is good communication for processed or failed payments.

Plus, they want the payment and card data to be secure, with their card details shared anonymously and encrypted to avoid fraud. Convenience and ease of use are also key, so they can choose which payment method they prefer.

On the other side, brands expect payments to be processed fast and safe. They need funds transferred securely and available in their accounting and analysis system as quickly as possible.

Their payment processing also needs to integrate with their other systems such as order management systems and enterprise resource planning (ERP) software.

How Does Ecommerce Payment Processing Work? 

Payment processing has a few different processes in between the order being placed and the store receiving the money.

This includes a payment gateway and a payment processor, two seemingly similar but very different functions.

These are the steps involved in payment processing:

how does ecommerce payment processing work featured image
  1. Your customer submits their order.
  2. Their payment details are sent from your store to the payment gateway.
  3. The payment gateway confirms payment with the payment processor.
  4. Payment is settled with the bank.
  5. Funds are transferred to the merchant account.
  6. During the previous two steps, a response is sent back to the customer to confirm payment.

What does the payment processor do?

The payment processor speaks to the bank or credit provider, authorizing or rejecting the customer’s payment.

The processor's main role is to make sure that the customer's funds are sent to the business. The payment processor is an entirely back-end function happening without customer input.

Payment processors also help the bank to carry out their fraud checks, which make sure payment is secure. 

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What is a merchant account?

Merchant accounts are a type of issuing bank account set up specifically for accepting and returning customer payments.

Small businesses often have a business bank account for accepting payments. But, larger businesses will have a specific merchant account.

Usually, merchant accounts will keep customer funds for a set time (usually 72 hours) so that refunds can be easily processed.

Some payment gateways such as Stripe offer a merchant account if you need it, or they integrate with your current systems.

Fully integrated payment systems like Stripe are called Payment Services Providers (PSPs), a more convenient option for smaller businesses.

Key Features Of Effective Ecommerce Payment Processing Systems 

Apart from the main features of a payment processor, there are some other key features you might want to consider before you decide on the best system for you. 

Security measures

Security is the most important feature of any payment processing system.

Any mistakes in the data security process can give your business a bad reputation, obviously.

Plus, some payment processing services may even charge you higher fees or stop working with you.

You must ensure your site has up-to-date SSL Certificates, and that any system you choose is compliant with PCI DSS standards.

These standards ensure you are protecting customer data and payment information. They also include more practical rules such as training staff and controlling who has access to customer information.

Payment gateway integration

Most major payment gateways will integrate with your payment processing system.

Nevertheless it's important to make sure that's true for your system and the rules of your country. 

More important is checking whether your payment gateway integrates with your ecommerce platform and other systems.

The biggest ecommerce platforms such as Shopify and WooCommerce make this very straightforward. If you have a custom-built system, check that payment gateway requirements are included in your planning.

Once you have chosen a payment gateway, you need to test the payment processing system to make sure the APIs work and funds are appearing in your merchant account.

Payment gateway features to think about

When choosing a payment gateway, there are some features you need to consider:

  • Credit card transaction fees. Payment gateways charge a credit and debit card transaction fee. The fee can change based on the number or volume of transactions you do. 
  • Payment methods. Make sure you know how your customer makes credit card payments. Different industries and banks have different requirements, such as card types, multiple payments, and multiple currencies. Check if you should accept different card issuers (Visa, Discover, Mastercard, American Express, or any international card payments).
  • Customizable UX. Do you want a plug-and-play payment gateway, or do you need to change the design and UX to suit your brand?
  • Customizable messaging. You might want to update the messaging so it is more on-brand to give a great customer experience. 
  • Support. Some payment gateways include 24-7 support for you and your customers. This is important for customers so they can check on the progress of an order.
  • Fraud notifications. You want to know right away if fraudulent activity has happened to keep your systems secure and customers informed. Too many fraud problems can cause chargebacks, which impact your rating with payment processors, affecting your fees.

Multi-currency and international transactions

If you only sell your products in one country, global transactions aren't all that important.

However, if you sell, or plan on selling, globally then you need a payment gateway that supports global payments and transactions.

If you are selling in multiple countries, consider how you'll manage international currency payments. Some bank accounts and merchant accounts have high interchange fees for currency conversions. 

For example, Amazon US pay out in $USD, which made it quite expensive for me to convert the money back into £GB. I opened a Payoneer bank account to accept international payments in $USD with lower fees and a good interchange rate. 

Make sure that the payment gateway you choose is affordable for the countries you want to trade in.

There are some excellent payment processing software solutions that work out of the box, and some that are more customizable.

You can look at the details for each in the link above, but here's our shortlist of the top 10 payment processors for ecommerce brands:

Here's a few more top options and why they're so great.

PayPal

PayPal is one of the most famous payment processors out there.

It comes with a high level of customer trust and integrates with almost all ecommerce platforms and payment gateways.

One of the big benefits of PayPal is that the customer can pay without entering their payment details, so transactions are very easy for the customer. 

Another benefit of PayPal is it has an option for customers to buy now and pay later (BNPL). This can increase your conversion rates, especially for more expensive items.

Usually, ecommerce businesses offer PayPal payments alongside other payment options, as their fees can often be higher than more traditional payment processors.

Stripe

Stripe is a traditional payment processor that integrates with all major ecommerce platforms, as well as most back-end and accounting software.

It's one of the most popular processors as it offers a highly customizable payment gateway and a drag-and-drop service.

Their customer support is excellent, and they are available 24/7 with a quick response time. 

Stripe also has a POS system that integrates with your overall system, so if you have both brick-and-mortar and online sales, you can see reports for all income in one place.

Square 

Square is a similar service to Stripe, and it has a very easy-to-use interface.

There are no flat rate monthly fees and the per-transaction fees and pricing are low, so Square is particularly good for small businesses.

They also have point-of-sale systems (POS systems) that are easy to use and integrate with iPhones and Android devices, so you can take payment in-store or even at events or pop-ups. 

Amazon Pay

Amazon Pay uses Amazon’s network, so there's high level of customer trust.

This is why Amazon gets great conversion rates. A huge majority of US shoppers have an Amazon Prime account, so they trust that their payment will be secure. 

Amazon Pay works like a digital wallet, by using the saved payment methods in your Amazon account. Like PayPal, ecommerce businesses usually offer Amazon Pay alongside more traditional payment methods.

Apple Pay

Apple Pay works by taking mobile payments directly from Apple mobile devices.

The benefit of Apple Pay is the ease of payment, plus the added bonus of trust from Apple’s face recognition.

Apple Pay has been shown to increase conversion rates on mobile websites, so it's definitely worth having Apple payment options on your mobile site.

The downside to Apple Pay is their fees tend to be higher than other payment methods, so offer it alongside other payment methods.

Google Pay

Google Pay is very similar to Apple Pay, but for Android devices.

Android makes up a larger portion of the mobile market in most countries, so if you sell globally, you should definitely consider adding Google Pay. 

Buy Now Pay Later

Another type of payment processor is buy now pay later services, such as Klarna and Afterpay.

These processors are a credit agreement between the payment provider and the customer, so the payment provider takes the risk.

This is great for larger purchases, as customers can split their payments into three or four parts.

The payment provider pays your business in full, and then takes on the remaining payments from the customer. 

The downside to buy-now-pay-later is the fees tend to be higher, and you don't control the payment process. This means if the customer has a bad payment experience with the lender, then you may still get the blame. 

Grow Your Revenue With The Right Payments Process

Payment processing includes everything involved in taking a payment from a customer to you receiving the money in your bank account.

When choosing how to take payments, you need to consider the requirements of your business, such as international payments and different card types. 

You should also think about whether you need a fully customizable system or whether a payment services provider will work best for your business.

Unless you are a big enterprise business, you may find that an out-of-the-box solution is by far the most convenient, and it will probably even save you money.

Keep up with other ecommerce software reviews, news, and tips by subscribing to The Ecomm Manager newsletter.

Payment Processing FAQs

OK, you know a thing or two now, but you’ve certainly got other questions. Let’s see if I’ve guessed what they are.

What is a chargeback and how can I prevent it?

Think of a chargeback as a financial tug-of-war: it’s when a customer disputes a charge, and their credit card company demands you return the money. To keep your cash where it belongs, focus on crystal-clear communication, top-notch customer service, and ironclad transaction security.

Can payment processing systems handle refunds?

You bet! Most modern payment systems come fully equipped to handle both partial and full refunds. They’re designed to make returning funds a breeze, ensuring your customers get their money back quickly and hassle-free.

What are the costs associated with payment processing?

Payment processing isn’t free, but it doesn’t have to break the bank. You’re looking at potential setup fees, transaction fees on each sale, monthly service fees, and occasional chargeback fees. The key? Compare providers carefully to find the best fit for your business and budget. A little research can go a long way in keeping more money in your pocket.

How do alternative payment methods like cryptocurrencies fit into payment processing?

Cryptocurrencies are shaking things up in the payment world. Forward-thinking processors now offer support for digital currencies like Bitcoin, opening new doors for tech-savvy merchants. Keep in mind, though, that accepting crypto often involves extra steps to convert digital coins into traditional currency. It’s cutting-edge, but not without its complexities.

Teddy Smith
By Teddy Smith

Teddy Smith is an ecommerce brand founder and a former Senior Ecommerce Consultant for Accenture. He is also an independent ecommerce consultant, specializing in selling on Amazon and marketplaces. Teddy has 13 years of experience working with both enterprise and small scale ecommerce brands, and has provided over 3,000 hours of independent ecommerce consulting sessions.