Online Payments – Essential Survival Guide

The technical details of accepting payments is often near the bottom of the priority list for entrepreneurs or developers. You’re more than likely focused on your next big app or product, not payments. And when it comes time to set up accepting payments you might be a little confused with all the terminology and the complexity of it all. These next few articles will give you a good enough understanding of credit card transactions so you feel comfortable moving forward with taking payments.

This first article talks about Merchant Accounts, what they are, how to get one, as well as the process flow of credit card transactions through Payment Gateways.

Part 1

Merchant Account Basics

If you want to accept credit card payments for your store you need a merchant account. A merchant account is an account established with a credit card acquirer for the receipt of funds on your behalf. When a transaction is processed your merchant account will be the end-point for the transaction. The actual money will be deposited into your linked bank account, usually within 2-3 days.

You need to consider where you get your merchant account from, and there are two types of merchant account service providers: Acquirers and Independent Sales Organizations (ISOs). Acquirers have the relationship with Visa and Mastercard and many have connections to other financial institutions and do the actual processing of the payment volume. The Acquirer market is quite concentrated and the top 5 control around 70% of all online transaction volume.

Independent Sales Organizations (ISOs) resell an Acquirer’s services. Beanstream, for instance, is an ISO of First Data (as well as a few others). You might be thinking that you should just go with an actual Acquirer and not have a middleman so you can save on fees. There is a good reason not to, and that is because of the extra services you get by signing up with an ISO. They usually have many value added services on top of what a Acquirer offers and any cost savings you would get by signing up with an Acquirer would be lost with your own implementation of those services. In fact First Data Canada and TD Bank have white-labeled Beanstream as their payment gateway because of the services we offer. Services such as fraud protected, tokenized (secure) payments, payment forms, inventory management, the list goes on.

An ISO can also resell for several Acquirers, contributing to all of their services, giving you more flexibility with rates and services. An Acquirer r can, and sometimes do, try to implement these extra features, but they usually can’t quite compete with the faster moving ISOs. It is also easier and more profitable for Acquirer to just resell their service, leveraging economies of scale with many ISOs.

Not all ISOs are created equal, so you need to do your research when choosing one. Customer support should be high up on your list because, guaranteed, you will have to contact the company at some point to deal with chargeback disputes. And talking to a real person that same day instead of waiting a week to maybe get an email response, is crucial for your business.

Now that you know what Acquirers, ISOs, and Merchant Accounts are, we can talk about the flow of payments through the whole system.

Payment Process Flow

These are the players in the online payment processing game:

Merchant

  • That’s you. The one with the online store who collects the card information.
  • You send the information to the Payment Gateway and listen for a response if the transaction was approved or declined.

Payment Gateway

  • Sends the payment information onto the appropriate Payment Processor.
  • Provides a secure interface to accept online payments.
  • Sometimes a Payment Gateway and a Payment Processor are the same company.

Payment Processor

  • This is often a Merchant Acquiring Bank.
  • They take the payment information and forward it to the Card Association and then listen to see if the transaction was approved or declined. That message is then sent back to you.
  • Back-end communication pipeline between the banks.

Card Association

  • Visa/Mastercard etc.
  • They will look up the Issuing Bank and forward on the transaction information.

Issuing Bank

  • Card-holder’s bank.
  • Checks if the transaction is approved or declined and sends back the response.
  • That response goes all the way back up the chain to the merchant.
  • This is also where a lot of the transaction fees come from for specialty rewards cards.

The Payment Gateway

As a developer you will integrate into the Payment Gateway’s APIs to process payments using your merchant account.

What is the difference between a Payment Gateway and a Processor then? It’s a good question. Payment Gateways are the digital connection for your e-commerce store to your Merchant Account Processor. Sometimes the terms get lumped together since Processors often offer a Payment Gateway solution. Some gateways, including Beanstream, allow you to attach different Merchant Accounts to the same gateway. This is called our bank-neutral gateway. So if you already have a merchant account with a processor, you can use our gateway to handle the payments for your e-commerce store. It makes it easy if you want to switch Processors – you don’t have to change any code since the gateway stays the same.

Gateways provide interfaces using web communication protocols for you to send your payment data and receive responses. Sometimes they will have hosted forms, as well as shopping cart plugins, fraud detection, and other tools. You can view the Beanstream Developer Portal to see what integration options we support and what tools are available to make your integration easier.

Conclusion

In the end if you want to accept credit card payments online you need two things: a merchant account, and an interface into a Payment Gateway. Now you should have a general sense now of what they are and why you need on. The specifics of different kinds of merchant accounts will be talked about in the next entry in this series.

Brent Owens

Brent Owens

Brent is our open source software enthusiast and developer advocate. When he is not commuting between Nanaimo and Victoria, he can be found in front of a monitor, working on open source projects. With a software background in enterprise systems and architecture, geographic information systems, emergency management systems, video game engines, and payments he can confuse the best of us with developer jargon. When he wants a break from the blue light, he can be spotted hiking, surfing or fishing with a six-pack of his home-brewed craft beer.
Brent Owens