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Any business that accepts payment via credit or debit card, i.e., nearly every business, requires payment processing software. Those that have an online presence* in addition to a brick-and-mortar store require online payment processing.
The right online payment processor for your business will largely depend on the payment methods your customers typically use. With recent technology advances, including mobile payments and digital wallets, there are several factors you need to consider when selecting online payment software.
Whether you're looking to invest in an online payment processing system for the first time or looking to upgrade your current software, this guide can help you make a more informed purchase decision.
Here's what we'll cover:
*If you aren't set up for ecommerce, you should be. Head over to this article detailing why every store should have an online component and read our tips for how to get started.
What Is Online Payment Software?
To understand the role that online payment software plays in payment processing, you need to first understand the payment processing value chain, and second need to know how payment processing works.
There are several parties involved with the payment processing value chain:
Issuer: Bank that provides the cardholder with a credit/debit card. The bank approves/denies any transactions, bills the customer and collects the owed funds.
Cardholder: Consumer who initiates a sale at a business with their bank-issued card
Merchant: Business owner who submits transaction authorization request to an independent sales organization (ISO)/acquirer
Acquirer: Or, merchant service provider (MSP). Owns the merchant account enabling the merchant to process transactions, i.e., payment gateway
Card associations: E.g., Visa, MasterCard and Discover. Govern bank cards, monitor processing, manage clearing and settlement/funding of transactions.
Payment processor: Organization/vendor that partners with acquirer to open merchant accounts. Provide technology and support and oversees payment processing for acquirers.
Source: Fidelity Payments
There are four key stages in how online payments are processed when businesses use a traditional merchant account:
Authorization: Customer initiates the sale; merchant requests authorization from customer's issuing bank via payment processor. This request route is known as the payments value chain (see above).
Batching: Merchant compiles daily sales and submits transactions in a batch to the acquiring bank for payment. Batching is important to allow time to manually review orders to check for fraud.
Clearing: Acquirer/MSP accepts batched transactions from the payment processor, forwards them to the card networks, who then distribute payment to the corresponding issuer. The issuer then debits the funds from the cardholder's bank account, routing the funds back to the acquirer through the card network.
Funding: The acquirer/MSP deposits the funds into the merchant's account.
Fees accrued during this process are subtracted from the funds the merchant receives: The issuer collects an interchange fee; the card network collects an assessment fee; and, the payment processor collects a processing fee.
Online payment processing software plays a pivotal role in this process, helping to pass authorization from the merchant to the issuing bank, payment through the card network from the issuing bank and settlement between the merchant site and the MSP.
Common Features of Payment Processing Software
While features will vary from system to system, online payment software should contain some or all of the following capabilities:
Common Capabilities of Payment Processing Software
Payment pages, merchant accounts and payment gateways allow merchants to accept payments for ecommerce, membership drives, event registration and more.
Market your business, showcase and sell your goods or services online. Link online shopping cart to inventory, report on sales and manage customers. Mobile store (m-commerce) enables customers to access an ecommerce website from a mobile browser or app.
Allows sales staff to process transactions for customers and ensures pricing is correct, inventory is adjusted and receipts are printed/emailed. Ability to accept multiple payment types, e.g., cash, check, electronic funds transfer, credit/debit cards (swipe and chip/EMV cards and both card present and card not present) and mobile payment apps.
Gift card management
Merchants can purchase gift cards through their POS vendor, or through a third-party supplier, depending on the POS provider. Merchants have several options for setting up a retail gift card program, from using them in brand marketing or in a loyalty program (read more about that here).
Collect customer information including contact information, billing and shipping information, purchase history and recent searches. Use key dates like birthdays and anniversaries to target marketing efforts and tailor deals and loyalty programs to customers. Encourage customers to create and maintain user accounts.
Set up customers on subscription plans for products or services, save payment information and bill them on a recurring basis, e.g., weekly or monthly.
Reporting and analytics
Track business performance and sales. Manage cash flow, automate invoicing and gain customer insights.
What Type of Buyer Are You?
Traditional business (with an online store): The ecommerce payment process referenced above will be the norm for most businesses with an online component. Customers can shop in the brick-and-mortar or visit their online marketplace, and inventory will be the same across both. Business owners require online payment processing to handle online purchases/returns.
Ecommerce business: A fully ecommerce business will follow this payment process as well. E-businesses will require online payment software to connect them to a merchant account and payment gateway and to process transactions, and won't require an in-store POS to handle card-present POS transactions.
Subscription economy business: Subscription economy businesses are relatively new. Examples include Blue Apron and Netflix. This business model is based on membership and recurring subscription fees. Most will be E-businesses without a brick-and-mortar. The focus is on marketing the brand, improving the customer experience and retention.
Key Purchase Considerations
Implementing POS software: If you're considering opening a retail shop, you'll need to implement a POS system to help you manage sales, inventory, accounting and customer management. Download our POS implementation checklist to help you as you get started.
Setting up an online business: Once you have your retail store set up and your POS system in place, you need an online presence. It's important to align your ecommerce strategy with your POS platform. Jordan Brannon, president at Coalition Technologies (a leading provider of online marketing services to small and midsize ecommerce retailers) says that if either the POS or ecommerce platform lacks an API, or pre-built integration, business owners should walk away.
Retail technology disrupters: On-demand services and support, i.e., subscription-based businesses such as Uber, Instacart and Stitch Fix, are considered to be the number one technology disrupter in the retail industry. This business model reflects how consumer expectations have changed regarding their retail experience. This includes a heavier focus on building relationships, creating memorable experiences and emphasizing personalized services.