eCommerce payment processing: What is it and how does it work?

What is eCommerce payment processing?

eCommerce payment processing is a system that facilitates business transactions between merchants and customer banks. Simply put, the payment processor transmits information from the customer’s credit card, digital wallet, or other payment method to the merchant’s bank and customer’s bank. Key steps include authenticating the buyer's payment information, authorising the transaction, and transferring funds from customer to merchant.

With global retail eCommerce sales projected to reach US$8.1 trillion by 2026 and eCommerce customers preferring convenient, secure payment options with smooth checkout experiences, businesses like yours need a safe and efficient payment processing system to rely on, as it enhances customer satisfaction, boosts conversion rates, and maintains competitiveness.

Read on to find out everything you need to know about eCommerce payment processing, including how it works, different payment processing methods, and the crucial features an eCommerce processing company should have. We’ll also share how Airwallex’s payment processing solutions can simplify cross-border transactions with robust security features and market-leading forex rates.

The key components in eCommerce payment processing

The payments ecosystem can be complex. As a business owner, you can benefit from understanding how eCommerce payment processing works, especially if you’re deciding on a payment solution for your eCommerce business.

eCommerce payment processing falls into three key components, forming the basic framework of what happens during a customer's online purchase.

1. The payment gateway encrypts payment information: The payment gateway bridges the merchant's website and the payment processor. It securely captures and encrypts customer payment info and then routes it for authorisation.

2. The payment processor orchestrates the transaction: The payment processor verifies payment details, authorises transactions, and transfers funds from the customer's bank account to the merchant's bank account.

3. The merchant account receives the funds: A merchant account, or merchant’s bank, allows businesses to receive payments from customers.

Important features of eCommerce payment processors

Payment processors are often embedded with features that let you accept payments securely.

Secure sockets layer (SSL) certificates and Payment Card Industry Data Security Standard (PCI DSS)

An SSL certificate encrypts data between a customer's browser and a website, such as payment details. 

Merchants and payment providers have to adhere to global standards, such as the PCI DSS. Although not legally required, major credit card companies still require organisations that process, store or transmit card information to implement these standards. Non-compliance can result in financial penalties, restrictions on card processing capabilities, and reputational damage.

3D Secure and authentication

3D Secure, also known as 3DS, adds an extra layer of authentication to online payment transactions. By requiring users to verify their identity via a one-time passcode, redirection to the bank's authentication page, or biometric methods, 3D Secure significantly reduces the risk of fraudulent or unauthorised purchases.

How does eCommerce payment processing work?

Here's everything you need to know about eCommerce payment processing, from the initial purchase on an online store to the final transaction settlement.

1. The customer places an order: The process begins when the customer navigates to an online store, selects products or services, and proceeds to checkout to complete the purchase.

2. The customer initiates a payment: The customer enters their payment information, such as credit card details and other relevant information at the point of sale such as an eCommerce website or mobile app.

3. SSL technology encrypts and sends the payment information: The customer's browser transmits data securely to the payment gateway, which bridges the customer, business, and payment processor.

4. The payment processor sends the information to the merchant’s bank: The payment processor receives the transaction details from the payment gateway and validates the information. It then forwards the transaction details to the acquiring bank, or merchant bank.

5. The payment processor requests authorisation from the customer’s bank: The payment processor sends the information to the customer’s bank for authorisation. This step verifies the transaction and the availability of funds.

6. The customer’s bank approves or declines the transaction: Once the customer's issuing bank receives the authorisation request, it decides on whether to approve or decline the transaction based on factors such as funds availability and risk. 

7. The customer’s bank sends its authorisation response: The customer’s issuing bank indicates whether the transaction is approved or declined by sending a response back to the payment processor. The payment processor then relays the response to the payment gateway, which notifies the merchant's website of the transaction's status.

8. The merchant fulfils the order: If the transaction is approved, the merchant processes the order, prepares the products for shipping or delivers digital goods, and notifies the customer of the successful purchase.

9. The payment processor initiates the settlement process and transfers the funds: At the end of the day or a specified period, the payment processor initiates the settlement process. It transfers funds from approved transactions from the customer's bank to the merchant's bank account.

10. The business and customer receive transaction records: Transaction details, including authorisation codes, payment amounts, and customer information, are stored for accounting purposes. Merchants can access these reports and reconcile payments with their sales records. Both the business and customer receive transaction records, such as receipts or account statements.

Types of eCommerce payment processing methods

As eCommerce expands, so do payment methods. Customer preferences around payment methods can vary in different regions. While credit and debit cards and digital wallets are popular, there are other payment methods growing in popularity. Below is a comprehensive breakdown on the current state of various payment processing methods:

Credit and debit card payments

Credit and debit cards currently helm the global payments landscape. In 2021, card payments reached 157 billion transactions, accounting for 77% of all non-cash payments worldwide. Non-prepaid debit cards saw the largest increase, with 87.8 billion payments.

The credit card transactions market is projected to exceed US$20 trillion by 2029, growing at a 6.46% annual rate. Card payments are still the most widely-used payment method, but it faces increasing competition from digital wallets and other emerging payment technologies.

Digital wallets

Digital wallets are rapidly gaining market share, especially in eCommerce. By 2025,  these are expected to account for 52% of global online payments, up from 44% in 2022. Asia-Pacific leads the world in digital wallet adoption, with a 60% market share. As smartphone penetration continues to rise globally, digital wallet usage will likely grow further in the coming years.

Bank transfers

Credit transfers, a type of bank transfer, have grown strongly in recent years, reaching 3.2 billion transactions globally in 2021. This represents a 10.4% compound annual growth rate since 2018. Bank transfers remain an important payment method, especially for high-value transactions and in regions with less developed card infrastructure. But, they face headwinds from the rise of real-time payment systems and alternative payment methods.

Cryptocurrency payments

Cryptocurrency payments are still a small fraction of overall global payments, but adoption is growing rapidly, especially in emerging markets. Exact figures are hard to pin down, but the total value of cryptocurrency payments is estimated to be in the billions of dollars annually.

Cryptocurrencies offer the promise of fast, cheap, and borderless payments, but volatility and regulatory uncertainty remain challenges to mainstream adoption. As the crypto ecosystem matures, cryptocurrency payments could become more widely used for retail and cross-border transactions.

Buy Now, Pay Later (BNPL) services

By 2025, projections indicate BNPL to account for 5.3% of global e-commerce payments, up from just 2.1% in 2022. Its interest-free instalments offer flexibility and convenience, making BNPL popular for online shopping.

Mobile payments

Mobile wallets are poised to account for one-third of global POS transactions by 2025, up from 29% in 2022. As the mobile payments infrastructure improves globally, mobile wallets will likely continue to take the market share of cash and cards, especially for low-value transactions.

eWallets and prepaid cards

Prepaid debit cards saw the fastest growth among payment cards, with a 9.6% annual increase to 18.1 billion payments in 2021. As financial inclusion grows globally, eWallets and prepaid cards will likely see further adoption.

Invoice-based payments

Comprehensive global data is limited, but invoicing is estimated to account for a significant portion of total B2B payments. According to Gartner's Future of Sales study, by 2025, 80% of sales interactions between B2B suppliers and buyers will occur through digital channels. As online business transactions grow, e-invoicing in particular could become the more common, efficient, and secure B2B payment option.

The key challenges in eCommerce payment processing

Efficient payment processing can be challenging for businesses to achieve, as they often need to address several challenges in eCommerce payment processing:

Cross-border payment challenges

Cross-border payments can be a headache for businesses due to high transaction fees from payment processors, which cut into profits and raise business costs. Businesses also have to cater to customers' preferences for local payment methods across different markets. A global payments platform can simplify cross-border payments and offer various payment options.

Payment security concerns

Securing customer payment data is a challenge, especially as fraudsters become more sophisticated. Prioritise shielding your business and customers from these types of fraud.

Complex integration and maintenance

It can be complex to integrate an eCommerce payment processor with your business. And, maintaining and updating your infrastructure requires constant attention and resources, so it’s important to use a provider who’ll take care of this upkeep for you. 

The importance of eCommerce payment processing for businesses

Payment processing plays a critical role in your online business’ success. Without it, shoppers wouldn’t be able to make purchases through your website. Here’s how eCommerce payment processing can benefit your business:

It expands your business’ global reach

eCommerce payment processing lets you accept payments beyond domestic borders. Customers now expect to be able to make purchases from wherever they are in the world, and eCommerce payment processors facilitate international transactions and help expand your business’ market reach. eCommerce payment processing solutions help online stores offer their global customers their preferred payment method in their currency, enhancing the customer experience.

It enhances payment security

A robust payment processing solution encrypts sensitive customer data, such as credit card details, protecting against cyber threats and the risk of data breaches. Businesses can safeguard their customer’s information by adhering to industry security standards like PCI DSS compliance.

It improves operational efficiency

An efficient payment processing structure streamlines cross-border transactions, automates tasks, and reduces errors associated with manual data entry. Having a unified payments and financial platform can let you manage multi-currency payments, diverse payment methods, and transaction data. With flexible API and integration capabilities, you could even incorporate and scale existing systems and workflows without complex IT infrastructure. 

The top features to look out for in an eCommerce payment processor

When choosing an eCommerce payment processing provider, consider these features:

Scalability and customisation

If you’re expanding to new markets, look for a scalable payments solution that can accommodate your growth and maintain performance standards no matter where you operate. That means you’ll need a payments processor that offers comprehensive support and can adapt to increased transaction volumes and diverse customer preferences without compromising efficiency.

Customisable payment solutions keeps you relevant in any market, whether it's integrating local payment methods, complying with regional regulations, or offering multi-currency support.

Robust security protocols

As payment fraud can be incredibly expensive,  prioritise payment security to protect your customers’ sensitive information and maintain trust. Look for payment solutions that employ payment security measures and technologies such as encryption, tokenization, and authentication. They should also comply with relevant industry standards such as PCI DSS.

Speed of settlement

Speed directly impacts customer satisfaction and business operations. Faster payment processing leads to improved customer experiences and faster cash flow. Opt for a payment processor that delivers features like instant settlement to local bank accounts, and automated reconciliation to optimise your payment processing speed and efficiency.

Agile integration capabilities

Integration with your existing systems and workflows is a critical aspect when selecting an eCommerce payment provider. Integration itself can take many forms, from custom development to leveraging pre-built plugins and APIs.

Payment service providers that take care of integration can handle the heavy lifting with faster implementation, often requiring minimal technical expertise on your end. They can also reduce risk by shouldering PCI compliance and fraud prevention burdens.

Examples of eCommerce payment service providers

Payment service providers (PSPs) facilitate electronic transactions between customers, businesses, and banks. PSPs may include both payment gateway and payment processing services. They provide businesses with a unified platform to accept different payment methods including credit cards, digital wallets, and bank transfers. Here are some examples:

Airwallex (Aggregator)

Airwallex, a payment solution provider or PSP,  is great if you’re looking to expand your global reach and are looking for seamless integration. The platform supports multiple currencies and offers robust security features for safer transactions and fraud prevention. Airwallex also provides a user-friendly interface and various developer tools for integration into existing systems.

HSBC (Traditional bank)

HSBC, a leading global bank, is an acquirer which offers secure and efficient payment solutions through innovative technologies and digital platforms. With diverse options and a global network, HSBC facilitates both domestic and international transactions while ensuring regulatory compliance.

Clearly Payments Inc (ISO)

Clearly Payments Inc. is an independent sales organisation (ISO) that provides payment processing services to merchants. As an ISO, Clearly Payments operates under the sponsorship of an acquiring bank, maintaining a master merchant account that its customers (submerchants) can use to accept payments.

Why use Airwallex as your eCommerce payment provider?

Our financial platform, Airwallex, can be a great solution for your online business. As a payment service provider, we’ve established partnerships with acquirers and ISOs worldwide to offer a single platform for global payment processing. With Airwallex, merchants and businesses can manage their transactions easily, access different currencies, and obtain or lock competitive exchange rates. 

Here's how Airwallex can support your eCommerce business:

• Accept payments in 180+ currencies with 160+ payment methods

• Offers secure transactions with 3DS risk engine, SOC 1 and SOC 2 certifications, and PCI DSS compliance

• Integrates with major eCommerce platforms like WooCommerce and Shopify

• Offers transparent and competitive pricing

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FAQs

What are the top features for an eCommerce payment process provider?

The top features for an eCommerce payment process provider include robust security protocols, multiple payment options, ease of integration, and exceptional customer support.

How much does an eCommerce payment process cost?

The cost of an eCommerce payment process varies depending on the provider, the supported payment methods, and transaction volumes. Compare pricing structures and transaction fees to identify the most suitable option for your business that aligns with your financial goals and operational needs.

What are the key steps in an eCommerce payment process?

1. The customer initiates the payment.

2. The payment gateway encrypts the data.

3. An authorisation request is sent to the payment processor.

4. The bank or card issuer approves or declines the transaction.

5. The transaction is completed on the merchant's website.

6. Funds are transferred to the merchant's account.