No other technological advancement has revolutionised an industry more than the internet and finance. The world we live in today is so unbelievably different to the world of ten or fifteen years ago

The growth in online payments has created a brand new industry — eCommerce — which is now worth $2,842 million.

With so much money changing hands, it’s only natural to wonder how the whole system works. How does a customer click a button on their mouse and send a payment to a company hundred or thousands of miles away?

In this article, I’m going to explain all the nuts and bolts of a credit or debit card payment.

Meet the Players in Online Payment

For each online credit/debit payment, there are several players you need to think about. In this section, I’ll give you a short introduction to each of them.

First, an eCommerce platform. This is the piece of software behind an online business and it handles things like the website, the shopping cart, email receipts and so on. 

Second, a payment gateway. This is a service that integrates with your eCommerce platform and coordinates the actual payment.

Third, a merchant account. This is a special category of bank account that allows businesses to accept payments via debit and credit cards.

Fourth, the acquiring bank. This is the institution that provides your merchant account.

Fifth, the issuing bank. This is the institution that issued the credit/debit card to a customer.

Sixth and finally, the card scheme. This is the network that bridges the gap between the acquirer and issuer.

Now you know the six key players (seven if you include the customer), we can move on to the nitty-gritty of payment processing. How does a single click result in these seven players moving money from one account to another?

How Do Online Payments Work?

While online payments are intensely complicated at a technical level, they’re actually quite simple to explain in a more general sense.

In fact, I can explain how an online payment works using just eight steps. Here they are.

• Step #1: A customer adds a product to his or her bag and clicks check out on your eCommerce platform.
• Step #2: The eCommerce platform processes the order and sends the transaction details to the payment gateway.
• Step #3: The customer enters their payment information — name, address, card number, security code — into the payment gateway.
• Step #4: The payment gateway encrypts that information and securely transmits it to the acquiring bank.
• Step #5: The acquiring bank then forwards the information to issuing bank via the card scheme.
• Step #6: The issuing bank compares the customer’s payment information to its own records. If the information matches, the transaction is approved. And if it doesn’t, the transaction is rejected.
• Step #7: The issuing bank reports the success or failure back down the chain to the payment gateway, which in turn informs the eCommerce platform.
• Step #8: If the transaction was successful, the eCommerce platform finalises the order. If it was rejected, the platform will usually alert the user and allow them to try paying again.

What’s most impressive is that all of that happens in just a couple of seconds! So next time you’re shopping online, try and think about all the parts whirring around behind the scenes.

About Will Cunningham

Hi! My name is Will and I recently left the world of print media for the open expanse of digital. Recently, I’ve been helping Cardswitcher educate the world about merchant services, payment technology and all sort of other things.