I once developed custom Web shopping cart software for one of my customers. It turned out that accepting credit card payments from customers on-line was the most difficult part of the project. The difficulty wasn't so much in the coding of the software interface, although that had its challenges, it was in understanding how Internet payments are processed in general. I was surprised at the complexity of the issue and I knew that many vendors would be confused by it. Since that time, I've made it a personal mission to learn more about how the process works and figure out a way to explain it to others who don't share my penchant for technical detail. The best approach I have found so far is to compare Internet payment processing against a traditional point-of-sale scenario. So here we go...
The first step in accepting credit card payments of any kind is to establish a merchant account. The merchant account is a special bank account into which payments are deposited and from which credits and fees are withdrawn. The financial institution that sets up your merchant account is called the "acquiring" institution, because it acquires the credit card payments. If your bank offers Internet merchant services, they may let you use your existing business banking account as your merchant account. If you need a new account, be prepared to allow the financial institution a couple of weeks to set you up.
Even if you accept credit cards now at your brick-and-mortar store, that does not necessarily mean you are ready to accept Internet payments. There are two types of merchant accounts: "Card Present" and "Card Not Present" accounts. A Card Present account is usually associated with a point-of-sale "card swipe" terminal. A Card Not Present account (also called a MOTO - Mail Order/Telephone Order - account) is for situations where the customer is not at the point of sale. All Internet transactions are treated as Card Not Present transactions. Because Card Not Present accounts are more risky, the fee structures are different, so you may have to get a new account if your current account is the Card Present type.
A credit card transaction is usually completed in three steps: authorization, capture, and settlement. Authorization verifies that the customer's card is good for the transaction. Capture collects the transactions you are ready to settle into a batch. Settlement transfers the money from your customer's credit card account to your merchant account. In a point-of-sale scenario, you use a card swipe terminal or personal computer software to connect with the banking network and perform these activities. In an Internet scenario, you use a Payment Gateway.
The Payment Gateway receives payment requests from your Web site's shopping cart software and connects to the banking network to authorize them. It returns the authorization (or decline) code to the shopping cart for disposition and keeps a record of the transaction. At the end of the day, you log in to the Payment Processor's merchant interface to capture the transactions for orders you shipped, or to enter credits and voids. You can usually configure the gateway or the shopping cart to capture automatically for you. Finally, late that night, the gateway connects to the banking network and settles the captured transaction batch.
The Payment Gateway is usually a separate service that you must sign up for. It has its own setup fees, per-transaction fees, and minimum monthly charge. Ask your acquiring financial institution for a Payment Gateway recommendation, because not all gateways work with all banking networks. Also, your bank may be able to give you a discount on the gateway service charges if you order gateway services through them.
Another thing to consider is that not all gateways work with all shopping carts. Before you choose a gateway, make sure that your shopping cart supports it. Or, to look at it another way, select a shopping cart that supports the gateway you want to use. The gateway connects your Web site with your merchant account's banking network, so it must be compatible with both of them.
Internet transaction processing isn't really that difficult to understand, once you know the steps and the players involved. And knowing how it works can save you from making expensive mistakes.