E-commerce Payment Processing: What is it, how is it done, and what are the best practices? 

E-commerce is an integral part of human life today. Fifteen years ago, shopping meant visiting a brick-and-mortar store, exploring the options, and experiencing the products firsthand before purchasing by paying cash or completing a credit card payment. But today, shopping usually involves browsing products on an e-commerce site, experiencing them virtually, making a digital payment, and completing the purchase online. This transformation has been made possible by the reliability and secure nature of the e-commerce payment process. 

The evolution of e-commerce payment methods has been pivotal in reshaping consumer behavior and propelling the online retail revolution.Secure payment gateways and advanced payment processors brought the integration of diverse payment options, including credit card payments, into the fabric of online transactions. They offered convenience and security, gradually built customers’ trust, drastically improved customer engagement with e-commerce businesses, and transformed the e-commerce landscape. 

Through the years, payment processing has become more reliable, as establishing secure channels for accepting payments and safeguarding customer information through merchant accounts and payment service providers gained priority. The more seamless the payment processors integrated with the e-commerce ecosystem, the easier the transactions became. This symbiotic relationship between cutting-edge payment methods and the e-commerce industry has catalyzed the digital shopping era. 

This article explores the payment process, its steps, the different payment processes, and the best practices in e-commerce payment integration. 

How does e-commerce payment processing work? 

The e-commerce payment processing system involves multiple steps, including: 

1. Product Selection 

The customers browse the online store, sift through numerous options, select the right products that suit their needs and price range, add to the cart, and proceed to checkout. It is the initial phase of the shopping journey. It culminates in navigating to the payment gateway, where the customer completes the online payment.  

2. Input of Payment Information 

The front end of the payment page lets customers enter their payment information, including credit/debit card details or digital wallet credentials, billing address, contact information, and other relevant data, and initiate the checkout process. 

3. Encryption and Security 

The back end takes over the checkout process, and the payment information is encrypted to ensure data security. Without encryption, there is a danger of theft of sensitive personal and financial data. So, this encryption is a critical measure to protect customer details from unauthorized access during transmission. 

4. Payment Gateway Authorization 

The payment gateway integrated with the back end receives the encrypted payment data. The payment gateway is usually a third-party integration offered by financial institutions and digital wallet services. It acts as an intermediary between the e-commerce platform and these financial institutions. It authorizes the transaction by verifying the validity of the payment details and checking if the customer has sufficient funds in the account/wallet. 

5. Communication with Payment Processor 

The payment gateway communicates with the payment processor. The payment processor is usually a financial institution or a third-party service responsible for handling the actual fund transfer. 

6. Authorization from Issuing Bank/Wallet Service 

Once the payment information is verified, the payment processor sends the transaction details to the customer’s credit card issuer/financial institution/digital wallet service provider for authorization. If the payment details are approved, the issuing bank/financial institution/digital wallet service will confirm the availability of funds in the customer’s account for the transaction and return an authorization code. 

7. Transaction Approval 

Upon receiving the authorization code, the payment processor informs the transaction status to the payment gateway. If approved, the payment gateway notifies the e-commerce platform that the transaction is successful, thus completing the transaction. 

8. Completion of Sale 

Completion of the transaction does not automatically mean the completion of the sale. Your e-commerce store receives the transaction authorization status and proceeds to complete the sale. Upon completing the sale, the customer receives an order confirmation, and the order details are generated in the back end for the reference and follow-up of those who manage the e-commerce store. Simultaneously, the fund transfer from the customer’s account to the merchant’s bank account is initiated. 

9. Settlement and Payout 

The payment processor initiates the settlement process, transferring the funds from the merchant’s bank to the merchant’s account. This process completes the financial aspect of the transaction. 

10. Record-keeping and Reporting 

Financial transactions must be reported to the customer and the merchant to confirm if the transaction was successful. Maintaining these reports is vital because some orders might get canceled, and those customers might return the products, necessitating a refund. There could even be disputes between the two parties regarding the payment. During such events, there is a need to reconcile and verify these financial records and take the right action. So, it is imperative to maintain comprehensive records of the transactions. 

What are e-commerce payment methods? 

E-commerce payment methods refer to the ways in which customers can pay for products or services when shopping online. These methods have evolved to offer flexibility and convenience. Some of the most popular e-commerce payment methods include: 

1. Credit Cards 

Credit card payment is one of the most widely used e-commerce payment methods. Customers who choose this payment method can purchase using credit cards like Visa, MasterCard, American Express, or Discover. 

2. Debit Cards 

Debit cards are similar to credit cards. But while credit cards allow customers to purchase on credit and pay later, debit cards deduct funds directly from the customer’s bank account, providing a convenient and immediate payment option. 

3. Digital Wallets 

Digital wallets allow users to store their card information digitally in an app and use it for quick and easy online payments instead of filling in the payment information manually. Many digital wallets let users add digital currency from the cards for easier and more convenient online purchases. They also let users add digital Services like PayPal, Apple Pay, Google Pay, etc. Digital wallets are projected to be the preferred payment method for 51.7% of global e-commerce purchases in 2024. 

4. Bank Transfers 

Customers can initiate payments directly from their bank accounts using online banking services or Automated Clearing House (ACH) transfers. 

5. Cryptocurrencies 

Some e-commerce platforms accept cryptocurrencies like Bitcoin or Ethereum as a form of payment, providing an option for users who prefer decentralized digital currencies. 

6. Cash on Delivery (COD) 

When Cash On Delivery method is selected, the amount is not collected upfront while ordering. Usually, the delivery personnel collect the payment at the time of delivery. This method offers a more traditional and secure payment system. 

It builds mutual trust among the customers and your e-commerce business, as the customers get to see how you promptly deliver the products at their doorsteps even when they have not paid upfront, and you, as an e-commerce business, show enormous faith in the customer to pay upon delivery without fail. This builds mutual understanding and trust. 

7. Buy Now, Pay Later (BNPL)/Installments 

Numerous service providers, including Afterpay, Klarna, Amazon, banks, and other financial institutions, offer BNPL/installment options. These flexible payment options provide users the convenience of paying for the purchases in installments over time. Usually, the customers can choose the payment period and pay the amount in monthly installments with an interest.  

These payment options enable customers to make purchases even when they do not have enough funds to pay the full price of the products upfront. They help customers manage expenses and buy expensive products more easily. 

8. Mobile Payments 

In the mobile payment option, transactions go through mobile apps. During the checkout process, if customers choose the mobile payment option, they will usually get a QR code for the transaction, which they should scan using a mobile payment app from a bank or financial institution. Upon entering a secure passcode, the app will approve the transaction, completing the payment. 

9. Prepaid Cards, Coupon Codes and Gift Vouchers 

The checkout page that allows prepaid cards/coupon codes/gift vouchers has a field to enter a unique code. Entering the code will deduct the value of the coupon/voucher from the total amount. These payment options enable customers to receive gifts and offer a convenient way for customers to purchase online without using traditional credit or debit cards. 

Top 10 Best Practices in E-commerce Payment Processing 

By incorporating the best practices into your e-commerce payment processing strategy, you can enhance security, protect customer data, and build trust, ultimately making your e-commerce business successful. Following are some of the best practices in e-commerce payment processing. 

1. Secure Connections 

Security measures should be built into the e-commerce website and the payment pages. It is imperative to use secure, encrypted connections (SSL/TLS) to protect sensitive customer information during transmission. 

2. PCI DSS Compliance 

Periodically assessing and validating compliance of the e-commerce website to the latest standards is crucial for keeping it secure and updated. You must ensure adherence of the site to the Payment Card Industry Data Security Standard (PCI DSS) to meet security requirements for handling credit card information securely. 

3. Tokenization 

Tokenization is a security measure used to protect sensitive financial information, particularly credit card data. It substitutes sensitive data with a unique identifier called a token, which is a randomized alphanumeric string generated using strong encryption algorithms. It minimizes the risk of data breaches since the token holds no exploitable information. 

4. Two-Factor Authentication (2FA) 

Two-factor authentication adds an extra layer of security to your payment processing accounts by mandating the use of a One-Time Password sent to the registered mobile number, reducing the risk of unauthorized access. In addition, you can keep unique and strong passwords for your payment processing accounts to keep them secure. 

5. Periodic Security Audits: 

Conducting regular security audits of your payment processing systems helps you identify and address vulnerabilities proactively. 

6. Responsive Design 

Make your e-commerce site and payment pages responsive and mobile-friendly to accommodate users on various devices. 

7. Address Verification System (AVS) 

You can prevent fraudulent transactions with Address Verification System. It verifies that the billing address provided by the customer matches the one on file with the financial institution, thus reducing the risk of fraudulent transactions. 

8. Regular Software Updates 

 Keep your software systems, including the e-commerce platform, payment gateway, and related software up-to-date with the latest security patches to address vulnerabilities. 

9. Secure Checkout and Transaction Monitoring 

Streamline the checkout process, highlight the security measures in place to give reassurance, and collect only the essential information. Implement real-time transaction monitoring to detect and prevent unusual or suspicious activities. These security measures help build customer trust.  

10. Data Backups 

Regularly backing up customer and transaction data is indispensable to mitigate the impact of potential data loss due to system failures and crashes.     

10 Things to check before you choose your  E-commerce payment processing option  

Integrating the right e-commerce payment processing option is crucial for a seamless and secure online shopping experience. So, it is imperative to research and read reviews and feedback from other merchants about the payment processor to gauge its reputation, reliability, customer service, and overall satisfaction. You can consider the following factors when making your decision: 

1. Prioritize a payment processor with robust security measures to protect sensitive customer data and compliance with industry standards, including data protection laws, financial regulations, and other applicable requirements. 

2. Find a payment processor that supports multiple payment methods, including credit cards, debit cards, digital wallets, and other popular options, catering to diverse customer preferences. 

3. The payment processing solution should seamlessly integrate with your e-commerce platform, ensuring smooth transactions and simplifying the overall management of your online store. 

4. A payment processing solution with a simple, intuitive, and user-friendly checkout process can improve conversion rates and enhance the overall shopping experience. 

5. Evaluate the fee structure of different payment processors and check if it comes with additional costs, such as monthly fees or chargeback fees, in addition to the usual transaction fees. Find a solution that balances these costs with the value it offers. 

6. If you plan to sell internationally, the payment processor must support transactions in various currencies and work seamlessly for customers worldwide. 

7. Select a payment processor that provides timely and efficient support for resolving any issues that may arise during transactions. 

8. Ensure that the payment solution accommodates a higher volume of transactions without any loss in performance when your business grows. 

9. Choose a mobile-friendly payment processing option that supports various devices and operating systems. 

10. The payment processing solution must be customizable, enabling you to tailor the checkout experience to align with your brand and meet specific business needs. 

FAQs 

1. What is the payment order process in e-commerce? 

The payment order process in e-commerce involves customers entering payment information and completing payments for the products they had selected/added to the cart. The transaction occurs with the approval of a payment processor, often a payment gateway or service provider. The system ensures seamless fund transfer from the customer’s preferred payment method to the vendor’s account, thus completing the online purchase. 

2. What are the steps in payment processing? 

The three steps involved in payment processing are initiation, authorization, and settlement. The customer selects a payment method, enters payment information, and initiates an online payment. The payment gateway authorizes the transaction securely. The specified amount is transferred from the payment method to the seller’s account, completing the settlement. This comprehensive process ensures the smooth and secure flow of card payments and other digital payment methods for e-commerce businesses. 

3. What is payment processing? 

Payment processing is the secure and systematic handling of financial transactions in e-commerce. It involves initiating online payments, authorizing the transaction through a secure payment gateway, and settling the funds. It ensures that credit card payments in the e-commerce business are processed securely and efficiently, providing a seamless experience for customers.