Sunday, February 3, 2019

Online Payment System and Its Role in E-Commerce

Online Payment System and it's Role in E-Commerce

Why people came up for online business? 
The Sellers - There are many reasons why we go for this type of business. For the seller or merchants, they can operate their business profitably 24/7 and reach the market across the world - geographical boundary is not a barrier anymore. It is not necessary for them to establish their shops physically in many places around the world which means anyone even small businesses can have their business online. 
The Customers - While at customers’ end, it is more convenient where one can place his/her purchase orders in just a click of the mouse any time of the day regardless of where one is standing.

Another reason is transactions are even faster that transactions are done in just a few minutes. Payment transactions for these online businesses can be done either online or offline. However, nowadays the method of payment has become important and the possibility of online payment acceptance provides convenience to the customers.

Also read: Difference between Visa and Mastercard.

Online payment is when the customer or buyer makes his payment transactions for the goods or services purchased with the use of the Internet – to be online. “This type of payment lowers the costs for businesses as the more payments made electronically, the less they spend on paper and postage. Also, it helps on improving customer retention as he is more likely to return to the same e-commerce site where his or her information has already been entered and stored.”

Types of Online Payment Methods:

  • Credit Cards
  • Debit Cards
  • Internet Banking
  • Virtual Credit Cards
  • Smart Cards
  • E-Cheques
  • Digital Cash
  • E-Wallets
  • Peer-to-Peer
Also read: What is Internet of Things (IoT)?

Online Payment Process:

  • Cardholder – the individual or the entity or simply the customer that uses his credit card to pay the purchases made online.
  • Issuing Bank – the financial institution that issues a credit card to the cardholder. The issuing bank establishes and verifies the cardholders’ credit line to see if he has available credit to purchase a product/service and it provides the cardholder with the monthly billing statements, etc. 
  • Credit Card Issuer/Association – a financial institution that provides credit cards and other products for banks who privately brand the products such as Visa International or MasterCard International. Also, they often set up programs for merchants to accept their cards. Also, they are involved in operating and managing the authorization and settlement systems worldwide.
  • Also read: How Live Traffic on Google Maps works?
  • Merchant – the entity or an individual that is selling products/goods or services. Goods can be either hard goods (tangibles) such as apparel, computer hardware any kinds of goods that is possible to sell over the Internet or soft goods (intangibles) such as service contracts or pay-per-view content. 
  • Acquiring Bank – an entity that is often referred to as the merchant bank or acquirer. It is a financial institution that enables merchants to accept credit card payments. The acquiring bank often works with the third-party processor to accept or decline the cardholder’s credit card purchase or request, deposits funds into the merchant’s bank account provides the merchant with the periodic deposit statements, etc.
  • Payment Application – the application that is used by the merchant to request credit card authorization and settlement of funds between the merchant and the acquiring bank. This application can either be a self-managed application or can be an outsourced service.
  • Third-party Processor – also known as payment processing networks, frontend processors, or just processors, the organization that works with an acquiring bank (merchant bank) to process credit card transactions via the card issuers/associations. The third-party processor communicates to the card associations/issuers to obtain authorizations and execute fund transfers. In some cases, the acquiring bank and the third-party processor may be the same entity.

What is a Payment Gateway?

What is a Payment Gateway

A Payment Gateway is a software that connects your website (or cash register) to the processing networks. When you process a credit card (or another form of electronic payment) the Payment Gateway securely authorizes cards and electronic payments by encrypting and protecting the customer’s sensitive information—like credit card numbers and other account information.

The Online Payment Flow:

How Online Payment System Works

Most of a payment’s journey is completely invisible to consumers and businesses. Whether you’re keying-in your customer’s card or your customer is hitting a “Buy Now” button, payments go through a series of stages before they reach your account. By understanding the different stages, you’ll have a better sense of what the players are doing (and charging you for), and how to negotiate the best payment processing for your business. The following is a typical flow of a traditional transaction process.
  1. Your customer has just made a purchase on your site using credit or debit. The transaction begins its journey through your payment gateway.
  2. When your customer’s personal information and payment transaction data goes through the payment gateway, it’s encoded to ensure secure transmission across the Internet.
  3. The payment processor validates (aka “authenticates”) that the payment data is being sent by its claimed source, as a way to curb fraud.
  4. The payment processor requests the issuing bank to authorize a specific amount of funds from your customer’s credit or debit card. The issuer checks to make sure the customer has enough credit to make the purchase and sends back an approval or decline. This entire process takes only a few seconds.
  5. Settlement occurs when the card issuer sends the appropriate funds to your acquiring bank, which then deposits them into your merchant account. It can take a few days to complete.
  6. The funds are accessible in your merchant account. Yay! But you may notice that some of the funds are not available, as most payment processors hold back a reserve temporarily to make sure you can take care of any liabilities like chargebacks or reversals.

Online Payment Security  - Encryption, and Tokenization:

Solutions like end-to-end encryption and tokenization can help merchants go beyond the current requirements of PCI, solving for many vulnerabilities in the payments processing chain. All merchants – whether they are brick-and-mortar, brick-and-click, or completely web-based – have both an obligation and an industry mandate to protect consumers’ payment card data. The Payment Card Industry (PCI) Data Security Standards (DSS) provide guidelines on what merchants need to do to secure the sensitive data used in payment transactions.

Also read: What is Dark Web?

Now there are technologies available that merchants can use to go beyond the current requirements of PCI. End-to-end encryption (E2EE) and tokenization solve for many vulnerabilities in the payments processing chain. E2EE addresses security weaknesses that exist when cardholder data has been captured but not yet authorized and tokenization addresses security vulnerabilities after a transaction has been authorized. When combined, these two technologies provide a very strong way to secure data.
Where merchants are concerned, there are two points in the payment process where sensitive cardholder data is at risk of being exposed or stolen: 
  1. Pre-authorization – When the merchant has captured a consumer’s data and it is being sent or waiting to be sent to the acquirer/processor.
  2. Post-authorization – When cardholder data has been sent back to the merchant with the authorization response from the acquirer/processor, and it is placed into some form of storage in the merchant environment
  3. Also read: The story of Amazon Prime Video and Netflix.

The Pricing:

How you get your money, and now you want to know: what does it cost? It’s no surprise that everyone who touches the transaction wants to get paid, including the issuing bank, the credit card associations (Visa, MasterCard, etc.), the merchant bank and the payment processor.

  • Interchange fee: The issuer gets paid by taking a percentage of each sale, called the interchange. This fee varies depending on a bunch of things, such as industry, sale amount, and type of card used. At last check, there were almost 300 different interchange fees. The fee could look like this: 2.0% of the volume + $0.10 per transaction.
  • Assessment fee: The credit card association (Visa, MasterCard, etc.) also charges a fee, called an assessment. For example, 0.10% + $0.02. This rate is usually bundled with (and called the same thing as) the interchange fee.
  • Markup fee: This is a set of fees charged by everyone else who moves the transaction through the network, including your merchant bank, the gateway, and the payments processor (who might all be the same company). The amount of the markup fee varies by industry, amount of sale, monthly processing volume, etc. This is really the ONLY fee where you have the ability to negotiate. Again, it is usually structured as a percent of the sale amount and a per-transaction fee (for example, 0.25% + $0.10).
  • Other fees: There can also be fees charged for setup, monthly usage, hardware, and even account cancellation.
Top Payment Gateways across the world

PayPal, Amazon Pay, GooglePay, PayU, Stripe, Wirecard, Adyen, Alipay, 2CheckOut, ApplePay
Top Payment Gateways in India
Image Credit: ProfitBooks
Paytm, HDFC Bank, Instamojo, Ingenico, CCAvenue, PayUbiz, EBS, DirectPay, atom Paynetz, Citrus 

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