Introduction to online payments

Introduction to online payments

Introduction

This guide covers the basics of online payments and explains the differences for common business models: online retailers, SaaS and subscription companies, and platforms and marketplaces. Start by reading about payment fundamentals and what all businesses need to know about online payments, and then go directly to the section about your business model. We've also put together a list of the most common industry terms and their definitions, so if you're unfamiliar with any phrases in this guide, refer to the glossary.

If you want to start accepting online payments right away, read our docs to get started.

Payments fundamentals

Before diving into payment details for different business models, it's helpful to have a high-level understanding of how payments work: how money moves from a customer to your business, how banks facilitate these payments, and the costs involved in the system. Learning about these fundamental building blocks of online payments will help you better understand the nuances of the payments setup for your own business model.

Online payments flow

There are four major players involved in each online transaction:

1 Cardholder: The person who owns a credit card

2 Merchant: The business owner

3 Acquirer: A bank that processes credit card payments on behalf of the merchant and routes them through the card networks (such as Visa or Mastercard) to the issuing bank. Sometimes acquirers may also partner with a third party to help process payments.

4 Issuing bank: The bank that extends credit and issues cards to consumers.

To accept online card payments, you need to work with each one of these players (either via a single payments provider or by building your own integrations).

First, you'll need to set up a business bank account and establish a relationship with an acquirer or payment processor. Acquirers and processors help route payments from your website to card networks, such as Visa and Mastercard. Depending on your setup, you may have a separate

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acquirer (often a bank that maintains network relationships) and processor (which partners with the acquirer to facilitate transactions), or a single relationship that includes both services.

In order to securely capture payment details, you may also need a gateway, which helps properly secure information. Gateways frequently use tokenization to anonymize payment details and keep sensitive data out of your systems, helping you meet industry-wide security guidelines called PCI standards.

A single provider can offer gateway, processing, and acquiring services, which can help streamline your online payments. Sometimes, the payments provider will build direct integrations with the card networks, helping to reduce third-party dependencies.

When you accept a payment online, the gateway will securely encrypt the data to be sent to the acquirer, and then to the card networks. The card networks then communicate with the issuing bank, which either confirms or denies the payment (bank rules or regulatory requirements may sometimes require additional card authentication, like 3D Secure, before accepting a payment). The issuing bank will relay the message back to the gateway or acquirer so you can confirm the payment with the customer (by displaying a "payment accepted" or "payment declined" message on your site, for example).

CARDHOLDER

Online payment flow

MERCHANT

PAYMENT GATEWAY

ACQUIRER

CARD NETWORK

ISSUING BANK

This describes the online payment flow for one-time payments using U.S. dollars in the U.S. If you want to expand internationally, you may need to find a bank partner and set up relationships locally. Or, if you introduce a new product and want to start charging customers on a recurring basis, you would need to not only accept the credit card number, but also accurately initiate and collect payments at a set time interval. You would also need to build logic to accommodate different pricing models, figure out how to recover failed payments, manage prorations when customers switch plans, and more.

Costs involved in online payments

There are a variety of fees that accompany each transaction processed through this four-party system. Visa, Mastercard and other card networks set the fees, referred to as interchange and scheme fees.

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INTERCHANGE FEE

A fee paid to the issuing bank

Online payment fees

SCHEME FEE Fees collected by the card network

NETWORK COSTS

The total of interchange and scheme fees

Interchange typically represents the bulk of the costs involved in a transaction. This amount is given to the issuing bank because it takes on the greatest amount of risk by extending credit or banking services to the cardholder.

Scheme fees are collected by the card networks themselves and can include additional authorization and cross-border transaction fees. Fees can also be assessed for refunds and other network services.

Together, these fees make up the network costs. These vary depending on the card type, transaction location, channel (in-person or online), and Merchant Category Code (MCC). For example, a transaction made with a rewards credit card would incur higher network fees than a transaction with a non-rewards card since banks often use these fees to subsidize the cost of the rewards program.

Stripe's standard pay-as-you-go pricing offers a single, transparent rate for all card payments, helping give you more predictability over your payment costs. Learn more.

For all businesses accepting online payments

This section covers two important topics for all businesses accepting payments: how the online payments funnel can increase your conversion, and how adding the right payment methods can expand your pool of potential customers.

Online payments funnel

Transactions go through three steps to make a purchase: checkout completion, fraud protection, and network acceptance. Conversion happens when a transaction is successfully completed.

Through each stage of the funnel, your pool of potential customers can gradually shrink. If you have a long or complicated checkout process, a fraction of customers will fall off. Then, when you factor in fraud and average transaction acceptance rates, the pool shrinks even more.

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CHECKOUT COMPLETION

The conversion equation

FRAUD PROTECTION

NETWORK A C C E P TA N C E

CONVERSION

Understanding the interaction between these steps is important to optimizing your entire funnel. This is especially true for businesses that have separate teams owning checkout, fraud, and network acceptance, with each one optimizing for their own metrics. For example, if the team working on checkout completion solely focuses on reducing cart abandonment rates, they may ask for less customer information to reduce friction. However, this can result in more fraud since you're not always capturing details like the full billing address and ZIP code to help validate the transaction.

In this section, we'll give you an overview of the online payments funnel and share best practices to increase conversion.

Designing the best checkout forms

The online payments funnel starts with the checkout experience, where customers enter their payment information to purchase goods or services. At this stage, you want to collect enough details to be able to verify that customers are who they say they are, but avoid adding too much friction to the checkout process--which can cause customers to abandon it altogether.

If your checkout form is too complicated, you risk losing sales from the most likely buyers-- customers with items in their cart and every intention to make a purchase. In fact, 87% of customers abandon a purchase if the checkout process is too difficult.

To improve your checkout completion rate, the first step is to go through your own checkout process from the customer's point of view and look for any friction that could lead to drop off. Pay attention to how long the site takes to load, how many fields are in your form, and if your checkout process supports autofill.

The best checkout forms adapt to the customer's experience. For example, it's best practice to offer responsive checkout forms that automatically resize to the smaller screen of a mobile device and offer a numerical keypad when customers are prompted to enter their card information. You should also consider supporting mobile wallets, such as Apple Pay or Google Pay, to bypass manual data entry.

If you choose to expand internationally, your checkout form should cater to each market. Allowing customers to pay in their local currency is a start, but you also need to support local payment

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