How do Online Payments work?

What you need to know about accepting credit card payments online.

There are many parties involved:

• Your Customer or Cardholder
• Shopping Cart Application
• Payment Gateway
• Payment Processor
• Merchant Account Provider
• You the Merchant

Your Customer wants to pay you on your webpage using a credit card or e-check.

The Shopping Cart Application, powering your webpage, interfaces with your Payment Gateway to process the payment. Shopping Cart Applications are not allowed to communicate (send and receive the transaction information) to Payment Processors directly for security reasons. Tikkl is an example of a Shopping Cart Application.

A Payment Gateway accepts the credit card or e-check information and submits to the Payment Processor. It then lets your webpage know whether the charge was approved by the cardholder’s bank.

A Payment Gateway service company has gone through the extensive and lengthy process of getting approved and pass the requirement to communicate with Payment Processors. A Payment Gateway company acts as the mediator for communicating the transaction information between the Shopping Cart Application and Payment Processors.

The Payment Processor receives transaction information from the Payment Gateway, sends transaction information to the cardholder’s financial institution, receives approval / declined information from cardholder’s financial institution, and sends approval / declined information back to merchant through the Payment Gateway. Upon approval, the Payment Processor settles the transaction with the cardholder’s financial institution and deposits funds into the merchant's Merchant Account

A Merchant Account is your account with a financial institution or bank that allows you to collect proceeds from consumer bank accounts or credit cards. A merchant account provider is the financial institution or bank that underwrites your merchant account after reviewing your application for the risks including risk from cardholder chargebacks as well as the risk that you the merchant might defraud customers.

You may opt for your very own Dedicated Merchant Account and have more control over your money and negotiate rates or for an Aggregate Merchant Account where your money gets dropped in a pool with other merchants using the service. Aggregate merchant accounts are relatively quick and easy to setup. Companies such as Paypal and Stripe provide aggregate merchant accounts. 

A number of  “full stack” merchant services or payments providers such as Paypal and Stripe are a Payment Gateway, Payment Processor, and Merchant Account Provider.

You the Merchant receive the payment proceeds in your Merchant Account and can then move it to your regular bank account usually within a few days.