Taking the Confusion Out of Online Credit Card Processing

by Beaner

Credit card processing itself is kind of tricky to understand but when we talk about accepting credit cards online, fuhgettaboutit!

In this day and age, many people are seeing the potential of starting online businesses. This article is an attempt to educate potential internet entrepreneurs about how online payments work.

First, How Does Standard Retail Credit Card Processing Work?

When you're checking out at Abercrombie & Finch (and paying way too much for that pair of jeans, by the way), you hand the young thing working at the register your Visa card. The card is swiped into the terminal on the cash register and a series of communications happen.

1. The information about your credit card and purchase are sent to the credit card processing company that A&F uses to process all of their card payments (also known as the merchant's acquiring bank).

2. The acquiring bank takes these details and sends them to the company that issued the credit card.

3. If the issuing company says that the person's card is valid and the purchase amount is within the limit, the transaction is approved and the money is deposited into Abercrombie & Fitch's bank account. If it's declined, the seemingly annoyed cashier will tell you so and ask for another form of payment.

Obviously, it seems as if this happens by way of magic. It's a little more complicated than that but it's the gist.

There's No Place to Swipe My Card on My Computer!

I am not even kidding you, a coworker of mine who takes technical support calls for computers, had a woman call him and ask him where on her computer to swipe her credit card because she was trying to purchase something online.

As funny as that is, it does bring up a good point. When you're buying online, no one is taking a credit card from you and swiping it. So how is that information communicated? Through a payment gateway, which is a necessity of online credit card processing.

Think of a payment gateway as the internet's cash register. When you enter your credit card information into the website where you are making your purchase, the software that power's the website's shopping cart sends the information to a payment gateway. The payment gateway then sends the information to the website's merchant account acquiring bank and the acquiring bank sends the information to the company that issued the card (sound familiar?).

The card issuer sends a response about the transaction to the merchant's acquiring bank (typically yea or nay with a reason for the nay). This information is then sent from the acquiring bank and back to the payment gateway. The payment gateway then alerts the customer that their card has been successfully charged (or not).

Again, this is very simplified but I wanted to demonstrate the role of the payment gateway when dealing with accepting credit cards online.

How to Accept Credit Cards Online

Do I Need Both a Merchant Account and a Payment Gateway?

If you are going to be accepting payments online, the answer is yes. You need both. I know some merchants like to save money and don't like paying fees but there is no other way around it.

Well, I take that back, there is a way around that. You can use a service like PayPal. PayPal is what is called a "third party service" because, in essence, they use their merchant account and gateway to process your transactions. There are plenty of pros and cons to using a third party service but if you're on the fence, I would move forward with getting your own gateway and merchant account.

And yes, PayPal charges fees, too. You didn't think they were going to do it for free, did you? Now go on, get that eCommerce store up and running and be your own boss!

If You're Looking For More Info, Wikipedia Does a Pretty Good Job

A merchant account is a type of bank account that allows businesses to accept payments by debit or credit cards. A merchant account is established under an agreement between an acceptor and a merchant acquiring bank for the settlement of ...
Updated: 02/23/2012, Beaner
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