How E-Commerce Transactions Work – Clear Steps!

Understanding how e-commerce transactiosn work is important. Being able to accept credit card payments is the crux of every online business, large or small. If you can't accept credit cards, you won't have much of an online business! But with so much technical jargon, it can all seem very complicated. What are the key components, and how do they fit together? If you're a small business owner who wants to get clarity on how ecommerce works, then you're in the right spot! In this post, I'll lay out all the pieces for you and show you how they fit together. And, you'll discover that it really isn't all that complicated at all. Ready? Then let's go!

One of the huge hurdles when setting up your online business is how to accept payments. After all, your customers are going to expect to be able to pay via credit card. But just how the heck do you do that? And what about shopping carts, merchant accounts, and other ecommerce components? The goal in this post is to help you get clear on these various components, and how they work together. Once you understand a few basic concepts and how the entire process works, setting it up for yourself will be straightforward. So by the end of this tutorial, you'll have a very clear understanding of how to accept credit card payments on your website, and how the entire process works.

Alright, let's dig into it this issue of accepting credit card payments on your website.

How E-Commerce Transactions Work: Key Components

Alright, now in order to accept credit card payments on your website, you're going to need a few key components. They all sort of link, or chain together, to ensure the entire transaction runs smoothly for your customer.

You'll obviously need a website (that goes without saying!), but you'll also need something called an SSL certificate. It sounds technical, but it's actually pretty straightforward. I go into more detail on SSL certificates in another post -- be sure to check it out, because it's important to setting up an ecommerce website for your small business.

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Next, you'll also need something called a payment gateway or a payment processor. Finally, you'll need what's called a merchant account. Optionally, you may also need shopping cart software installed on your site, too.

Let's now take a few minutes to define each of these so that you understand exactly what they are.

Defining E-Commerce Terminology In Plain English

Alright, so let's get some definitions out of the way. There's actually only three components that we need to get clear on, so let's not waste any time -- let's jump right into 'em...

Shopping Cart: Is it safe to assume that you know what a shopping cart is? Just in case there's any confusion, a shopping cart is simply software that runs on your website that provides a way for visitors to collect the products that they'd like to purchase together. This is exactly what you and I do as we wander around our grocery store. In the UK, online shopping carts are often known as a basket, but it's exactly the same concept.

Once the visitor is ready, they can checkout, where the shopping cart software then calculates shipping, taxes, and totals for the order. Now shopping cart isn't critical to the entire ecommerce process -- it's optional. For instance, I don't have a shopping cart running here on Ten Ton (due to technical constraints, actually). A shopping cart simply provides your customer with the added convenience of checking out once, rather than purchasing several products individually.

And by the way, depending on the shopping cart software, some shopping carts will empty themselves if the customer leaves without purchasing, while others will remember what the customer added to their cart when they come to visit again.

Payment Gateway (aka: Payment Processor): A payment gateway or payment processor (same thing) is a service that allows a website to accept credit card payments and other methods of payment, like PayPal. So when you're purchasing something online, even though you're entering your payment information into the website, the actual transaction is handled not by the website you're buying from, but by a third party payment processor or payment gateway.

Unlike a shopping cart, a payment gateway is mandatory for an ecommerce site -- its' the thing that actually takes the payment. So, a payment gateway is simply a service that's used by vendors to accept payments online. And by the way, when a customer enters their confidential payment information into a website and clicks Submit, that information is encrypted using the above mentioned SSL. So, the vendor who's taking your order doesn't see your payment information at all. More on this in a bit.

Merchant Account: Next we have merchant accounts. Without getting too technical (and for our purposes, this definition will suit us just fine) a merchant account is simply your business's bank account where any purchases made from your site are deposited. So when a customer's credit card payment as been approved, those funds will be transferred into your business's bank account.

Interestingly, PayPal provides both a payment gateway and a merchant account, which is a nice combination to have. So if you're using PayPal to accept payments on your website, you can have those funds deposited into your PayPal account.

The ecommerce process: A website with SSL, shopping cart software, a payment gateway, and the vendor's merchant account

So to summarize, in order to accept credit card payments on your website, you must have a payment processor and a merchant account at a minimum. As an added convenience to your customers, you could also have a shopping cart as well. And don't forget, a payment processor handles the encrypted credit card transaction, and the merchant account is simply the bank account that the customer's payment is deposited into. Think of it as your cash register in your store, if you like.

So, with that out of the way, let's now walk through the process -- the various steps that occur -- when a customer purchases a product online.

How The Online Payment Process Works

If you've ever purchased something online, and I'm sure you have, then you've interacted with shopping cart software and payment processors already. You may not have known what they were called, but as we went through them above, I'm sure you were saying to yourself, "Oh got it," or maybe "Right, I know what that is."

And, when your online transaction is approved for the product you're purchasing, your funds were transferred from your credit card and deposited into the vendor's merchant account. It's a pretty amazing process, actually, so let's break it down so you can understand exactly how it all works.

How an online payment transaction works:

  1. First, the visitor comes to your website. And if they find a few products they'd like to purchase, they add them to their shopping cart.
  2. Once the visitor is ready to purchase, they click Check Out, or an equivalent button (it might read Buy Now, Proceed To Purchase, or something similar).

If your site isn't running a shopping cart, then the customer is taken directly to this step -- they find a product they want to purchase, and then they click Buy Now.

  1. As soon as the customer clicks Check Out or Buy Now, this triggers the website's payment gateway.

Without getting bogged down in too many technical details, if the website uses what's called a hosted payment gateway, then the visitor is taken off your website and over to the payment gateway's site, like PayPal.com, for example.

Alternatively, if your website uses a self-hosted payment gateway, then the customer remains on your website. From the customer's perspective, the entire purchasing transaction takes place on your site. This makes for a nice, smooth customer experience.

  1. Either way, the payment gateway then asks buyer to fill out their payment information.
  2. Next, the payment gateway then forwards the customer's transaction information to what's called the credit card issuing bank. This is simply the method of payment the buyer is using. So said more simply, the transaction information is submitted for approval to Visa, MasterCard, or whatever other method of payment the buyer is using.
  3. The credit card issuing bank receives this request, and then verifies if the funds are available for the customer's account or not. The credit issuer then sends a response back to the payment gateway, either approving or declining the funds.
  4. The payment gateway receives the response from the credit issuer, and then forwards this "approved" or "declined" message back your website, where it's displayed to the buyer.
  5. Assuming the payment method and funds have been approved, the customer receives some kind of a "success" message. The funds are then deposited into your merchant account, and it's now your responsibility to get the product to the customer.

Pretty cool, huh? And as detailed and complicated as this entire process might seem, despite all the steps involved, the whole thing takes less than three seconds. That's pretty incredible when you think about it! If it took an entire day, it would still be incredible!

And the best part is, all of this technology is readily available for entrepreneurs like you and I to take advantage of. And it's all reasonably priced.

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A Note On Security And Customer Information

Now interestingly, a lot of the material I've come across that discusses things like payment gateways and merchant accounts tends to be...let's say overly dramatic. I've read articles where they'll say things like, "You have to ensure that your customer's sensitive personal information is secure," "There are plenty of people online who'll do whatever it takes to steal your customer's information," and "You’ll be handling customer's highly confidential information."

What I want to make clear is this: When building an ecommerce site, we have to take online payments -- by definition, that's what an ecommerce site does. And the only way to do that is via a payment gateway like PayPal or Authorize.net. Understand that these are business-grade services that are governed and regulated by federal law. So, this plus an SSL certificate running on our website means of course customer payment information is going to be secure. The above statements warning about security are, frankly, overly dramatic fear mongering, and not helpful to those who want to learn about ecommerce and online business.

With reliable web hosting and SSL in place, transactions on your small business website will be secure.

As I briefly mentioned above, as the business owner, you won't even see your customer's transaction information. That information is kept secure and private from you and from everyone else. For example, when you enroll in a course here on Ten Ton, we can see the order come in, and if I we're so inclined, I could dig a bit and find out that you paid via MasterCard or Amex, but beyond that, I can't see any other payment information on my end. So, all I have is your name, maybe your address (but not likely), your method of payment, your email address, and the amount you've paid. That's it. And it'll be the same for you when you receive payments on your website.

Buying online is actually safer than using your credit card in a store or at an ATM, believe it or not.

So, so long as you have that SSL certificate in place and you're using reliable, secure web hosting, everything will be just fine. It's not like you have to build a secure online payment system from scratch...all the pieces are there, offered by very reputable and professional services. All we have to do is put them together on your website. That's all there is to it!

In fact, while I think of it, you might want to check out another post I put together called 4 Steps To A Highly Secure Website. It touches on a lot of these issues as well. Give it a look if you like.

Let's Wrap Up!

Alright, I hope you enjoyed! I love putting together material like this that really lays out and demystifies otherwise overly complicated topics. So I hope you got a lot out of this.

You learned about the various components that need to be connected together in order to begin accepting credit cards on your website -- shopping cart software, payment processors or payment gateways, and finally merchant accounts. Also, we also took a look at all the steps that are involved in an online transaction...that take all of three seconds to occur.

Okay, that's it for now. See ya in the next post!

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Geoff Blake, Ten Ton Online

Hey there, I’m Geoff! Business, marketing, and the web can seem like a tangled, confusing mess, right? Well if you wanna get clear, straight info on all this stuff (no gimmicks or hypey nonsense)...then you're definitely in the right spot! Start here (free!)