Online payment processing – how does it work?

If you manage your own website or are part of a well-developed ecommerce business, online payment processing is essential for your company’s performance and long-term business journey. 

With the rise of cashless and contactless payments, customers prefer the convenience of digital transactions. Naturally, your ability to securely accept card payments and other online payment methods is crucial. 

In the following sections, we will explore online payment processing and how it works in detail. We will also dive into the importance of these solutions for online stores and other businesses that sell online. 

What is online payment processing?

Online payment processing, in short, enables businesses to accept payments for products or services purchased online. 

While online payment processing is not considered a complex procedure, it consists of multiple steps to secure online payments. 

Payment processing companies ensure that money is transferred securely from a customer’s bank account to a merchant’s bank account to process payments successfully. 

Online payment processing features diverse payment methods, including credit and debit cards, bank transfers, digital wallets, and more. 

Exploring the components that shape the broader term “payment processing” is critical to understand how online payment processing works.

How does online payment processing work?

Online payment processing is more than just a single-step process. Instead, it consists of several different parts that operate together to ensure customers pay online easily, safely, and securely. 

Every UK business will likely have its own approach to collecting payments and providing different payment options. While some may partner with third-party providers, others may require a personalised, built-in solution.

Key components in payment processing 

Regardless, if you’re looking to introduce online payment processing to your business, you’ll need to consider some essential components.

Let’s see what they are:

• Payment gateway;
• Payment processor;
• Merchant account;
• Customer data;
• Fraud detection;
• Fund settlement.

Below, we explore each one in detail. 

Payment gateway

Online payment processing requires a payment gateway. It is a solution that enables card payments and other online payments. 

It encrypts and sends payment information between the website and the consumer’s bank or card issuer.

Payment processor

On the other hand, the payment processor manages the secure and safe transmission of transaction information between the consumer’s credit or debit card, the merchant’s acquiring bank, and the consumer’s bank. 

In most cases, payment processors handle things like security, credit card validity, and card limits. 

Once the payment processor has confirmed enough funds in the consumer’s bank account to cover the purchase, the transaction will be authorised.

Merchant account

Another key component of online payment processing is having a merchant account. 

This term represents a bank account that allows companies to receive online customer payments.

The funds received in your merchant account will not be directly accessible. However, the money in your merchant account will be automatically sent to your business bank account within a specific period.

Customer data 

For online payment processing to take place, the customer’s payment details must be collected. 

It includes bank account information, digital wallet data, or debit or credit card details. 

Fraud detection

Online payment processing companies guarantee fraud protection via strict fraud detection mechanisms.

There are diverse security protocols and methods put in place to ensure that sensitive customer data is protected, minimising the chances of data theft.

Fund settlement

Lastly, online payment consists of fund settlement or the transfer of money from the customer’s account to the merchant. 

This process can also include funding, which means sending money from the merchant’s account to the business’s bank account.

Online payment processing: payment methods 

Regarding online payment processing, it’s worth mentioning that several different online payment methods are available to businesses. 

Usually, the more diverse the payment methods supported by your business, the better the customer experience of your shoppers. 

Some of the most popular types of payment options include:

• Credit and debit cards – Credit and debit card payments are among the most popular options in the UK. According to data, one of the months that marked the highest value of credit and debit purchases in the UK was August 2023, reaching £21.09 billion. These payments require users to submit their payment details to a payment gateway. 
• Digital wallets – Digital wallets are also very popular in the UK. They allow customers to rely on mobile payments for shopping. Digital wallets store payment information, which eliminates the need to provide sensitive data during every purchase. 
• Bank transfers – In that case, the consumer transfers funds straight from their bank account into the business’ bank account via online banking or mobile banking applications. 
• Direct debit – Direct debit is a popular choice for recurring payments. It enables customers to permit the business to withdraw specific funds from their bank account via recurring billing.
• Cryptocurrency – Cryptocurrencies like Bitcoin and Ethereum are growing in popularity, making them a popular choice for online payments. Through this method, consumers can rely on a decentralised system and enjoy secure transactions. 

Now that we’ve laid out the basics of online payment processing, it’s time to go through a real-case example of an online payment. However, the process looks different based on the selected payment method.

Here are a few examples.

Online payment processing for card payments

First, the customers initiate a transaction when they have selected products or services to purchase from a website. They’ll be redirected to an online checkout process where they’ll choose to pay via card.

The customer will be asked to provide their card details on a payment page. From there, the card details are sent to the payment gateway, which transfers the data to the payment processor. 

Next, the payment processor will send the payment information to the credit card network and confirm the user’s details. 

After data verification, the card network will request authorisation to use the funds for the purchase from the customer’s issuing bank. The credit card network will confirm the transaction when enough funds are in the account, and all security measures have passed. 

The payment processor receives this confirmation and initiates a money transfer from the customer’s issuing bank. The money is then sent to the merchant account before being transferred to the business’s bank account. 

The transaction fees for this process are usually higher than those for other methods. That is due to the fact that there are many steps involved in the procedure that involve multiple intermediaries, increasing the associated costs. 

Keep in mind that there are also additional fees to consider, like scheme fees collected by card networks. For example, these include authorisation fees, a per-transaction fee, or other service fees.

Online payment processing for digital wallets

If consumers prefer to pay via a digital wallet, there are a few steps in the UK to follow. Let’s see which ones they are.

After the shopper selects products or services, they must authenticate their digital wallets via a PIN or two-factor authentication.

Once the wallet authentication is complete, the next step is to confirm the payment. Next, wallet authorisation takes place, where an authorisation response is sent to initiate payment processing. 

Finally, settlement of funds and reconciliation complete the payment process. 

Digital wallets are often a preferred payment method for businesses with a younger target audience. If most of your shoppers are under 40, it’s highly recommended that this payment option be supported.

How to set up online payment processing

When you start to build your website, apart from investing in web hosting, accounting software, and content management systems, you’ll also need to set up online payment processing. 

If you’re ready to add payment processing to your website, there are a few options you can choose from:

• Payment gateway – As noted above, payment gateways are popular in online payments. Naturally, they’re the most preferred option for adding payment processing to a website. Via this service, you’ll be able to connect your site to a merchant account and a payment processor. As a result, shoppers’ card details will be securely transmitted to the payment processor for processing. 
• Shopping cart software – An alternative is to rely on shopping cart software, which allows for creating an online shop and accepts payments. The shopping cart software is usually connected to the payment gateway and merchant account. Such solutions usually provide access to various features, like inventory tracking and consumer management. 
• Plugins and extensions – If your website is integrated with content management systems such as WordPress, you can use different plugins and extensions for payment processing. 
• Generators for payment buttons – These easy-to-use instruments enable companies to generate payment buttons that can be included in online stores or other websites. They can also be connected to the business’s merchant account or payment gateway, enabling them to be utilised for online payments. 
• Developers – Having in-house developers in your team means you can efficiently use developer resources created by payment processors to establish payment processing on your website. Although this option demands more knowledge and experience, it also promises flexibility and control. 
• Third-party integrations – There are plenty of businesses that choose to rely on third parties for payment processing. In this case, all parts of the process are managed by an outsourced company. 

The right choice ultimately depends on your business size, scope, needs, and peculiarities. 

How secure are online credit card payment processing services?

Online credit card payment companies have individual security features and protocols. However, they are all considered to provide high levels of security to businesses and consumers.

It is possible due to the following factors:

• Encryption;
• Authentication;
• Tokenisation;
• Compliance with PCI DSS standards.

Here’s what you need to know about each of these security measures.

Encryption

One of the ways through which online payment processors guarantee security is via end-to-end encryption.

All payment processing providers encrypt received and sent data to ensure it is only accessible by the involved parties. 

The best way to determine whether a provider relies on encryption is to check if they have an SSL (Secure Sockets Layer) or TLS (Transport Layer Security) certificate.

Authentication

During checkout, multiple measures are taken to authenticate customers and payment details. 

For example, these include strong password requirements, two-factor authentication, address verification services, card verification value, reverse lookups, and contact requests.

Tokenisation

Tokenisation is another crucial component of online payment processing solutions that guarantees safety.

Providers substitute sensitive data, like card details, via tokenisation with randomly generated tokens. The tokens are then sent to the payment gateway rather than submitting the actual card number of the customer. 

The actual card numbers and verification values for recurring or one-off payments are safely recorded in vaults controlled by the payment gateway.

Compliance with PCI DSS standards

In most cases, online payment processors work with Level 1 PCI compliance. In other words, they meet and exceed the expected level of security provided by PCI DSS (Payment Card Industry Data Security Standards). 

Providers also store card data outside the merchant’s system to guarantee an extra layer of merchant protection. It puts the entire responsibility regarding PCI compliance into the hands of the payment processor. 

Payment gateway vs Payment processor: what is the difference?

Payment gateways and payment processors are crucial components in the market of online payment solutions. 

Although they are often used interchangeably, they represent individual elements of the process that enable businesses to process transactions.

The payment gateway is responsible for authenticating customer payments. On the other hand, payment processing solutions facilitate the communication between the merchant account and the bank.

In other words, the payment gateway is the point-of-sale machine that would be used to accept card payments in-store. 

The payment processing company is then in charge of verifying the customer’s credit card details are correct and confirms that there are enough funds in the account to complete the transaction. 

It’s worth noting that frequently, payment companies add payment processing and payment gateway solutions into a single offering, taking care of both sides of the online payment process. 

Top online payment systems

In 2023, there were 1,981 Payment Service Providers businesses in the UK. This vast availability often creates challenges when selecting the right payment gateway or payment processor. 

Below, we share information on some of the best online payment systems in the UK.

PayPal

PayPal has much to offer as one of the most frequently used payment providers in the UK and globally. 

This solution comes with a quick and easy setup, which is ideal for beginners or first-time users. The reputable brand also helps build consumer trust as it’s associated with security and safety.

This payment processing system allows users to exploit various benefits with zero developer skills. You can tailor payment buttons and other parts of the user experience. 

PayPal provides reliable security features, including fraud protection and customer protection. 

In terms of pricing, PayPal has a fixed price for each transaction, in addition to a percentage of the total amount (2.9% + £0.30 per transaction) with no monthly fees. 

Although some find the pricing structure created by PayPal confusing and challenging to understand, the provider offers transparent pricing models.

Stripe

Designed for Web, Android, and iOS, Stripe is an incredibly flexible online payment processing solution. It provides access to multiple tools and features, enabling experienced developers and users without much technical knowledge to quickly start using the product.

Via Stripe’s API, businesses can seamlessly link payments wherever needed. The solution is ideal for ecommerce websites with a high volume of transactions. 

That is because businesses can access sales volume information and advanced reporting features. You can also control refunds and returns via Stipe. 

The payment processor also empowers businesses to use personalised hosted payment pages or website integration. 

The associated transaction fee per payment is 1.5% + 20p for standard UK cards and 2.5% + 20p for EU cards. However, other hidden fees can build up for businesses with high transaction volumes. 

This online payment processing company supports multiple currencies, with more than 135 available options. 

In a nutshell, with Stripe, you can receive:

• Support for more than 135 currencies;
• Flexibility;
• Minimal downtime;
• Powerful analytics;
• Diverse plugins and integrations.

However, a potential area for concern is that there are frequent cases of settlement delays. 

Amazon Pay

Another payment processor that you can rely on is Amazon Pay. 

The solution is ideal for younger businesses that are still in the process of establishing their brand on the market. 

By relying on a reputable partner like Amazon, you can quickly gain popularity and build trust among your audience. 

One of the biggest perks of Amazon Pay is that it offers access to downloadable logos, banners, and other valuable assets that can be used to market your brand. These can not only be personalised and added to sales channels but can also act as trust signals. 

If you want to provide quick checkouts to your customers, Amazon Pay is a reliable option. The solution uses saved Amazon account details, making the checkout process much easier and reducing cart abandonment rates. 

Another benefit of Amazon Pay is that it’s extremely easy to set up. All you’ll need is to create a professional checking account with Amazon and install its hosted gateway on your website. 

The processing fee per transaction is 2.7% + 30p for UK charges and may vary in cases of non-UK transactions. 

Overall, with Amazon Pay, you can gain access to:

• Integrations with more than 200 ecommerce platforms;
• Secure payment processing via PCI compliance and additional two-factor authentication layers; 
• Support for a range of different payment methods;

A potential drawback is that funds can arrive in your account over the duration of a few days, while other platforms offer instant settlement. In addition, the solution doesn’t support PayPal purchases, which could be a deal breaker for some. 

Shopify Payments

As an all-in-one ecommerce solution, Shopify Payments is a common choice for online stores in the UK. 

The solution is easy to install and use, eliminating the need for experienced professionals or developers. However, remember that Shopify Payments is only accessible to businesses that host their online shop on the Shopify platform. 

Via Shopify, you can:

• Customise your checkout page using templates;
• Stay in control of refunds and returns;
• Have access to an admin panel to track orders;
• Accept popular credit and debit cards, in addition to other payment methods, like PayPal;
• Monitor payment activity and transaction fees.

A monthly subscription plan includes creating a website, using marketing tools, and taking advantage of payments. The most affordable monthly plans start at £19 per month.

Transaction fees could drop to 2.4% and 24p, depending on your subscription level.

HubSpot Payments

If you’re part of a B2B online business, HubSpot Payments is one of the most reliable choices. 

This solution makes billing more accessible through payment links, transforming payment flows. Customers can initiate payments via a visually appealing payment form, improving customer experience and putting control in the hands of your business.

Payment processing with HubSpot is integrated with other sales software components, like marketing, website, operations, and content. This enables businesses to manage everything from a single platform.

While the payment infrastructure is designed and owned by Stripe, HubSpot charges 2.9% per transaction with no additional fees. However, if you connect Stripe with HubSpot to process payments, you’ll be charged by both providers, accumulating per-transaction fees of 3.4% + 24p.

Conclusion

Online payment processing is at the heart of online business operations. Enabling digital transactions for your website would be impossible without a robust and reliable system. 

When selecting the right payment processing provider for your company, ensure you’ve researched all possibilities and gathered essential details. Choose a partner that will fit your business needs and will be able to support your plans for growth in the future. 

Frequently Asked Questions

What is online payment processing?

Online payment processing is a system that enables businesses to collect payments online securely. The system consists of different components, like a payment gateway, payment processor, and more, allowing the transfer of funds between a customer and a merchant.

What are the advantages of using a payment processing company?

Some key benefits of using an online payment processor are convenience, reduced costs, enhanced security for the business and its customers, higher sales volumes, and streamlined payment operations.

Is online payment processing safe?

Online payment processing is highly secure. It relies on advanced encryption technology, fraud detection systems, and compliance with standards like PCI DSS.

What payment methods do online payment processors support?

The methods supported by payment processors vary. However, some of the most popular ones include debit and credit cards, digital wallets, cryptocurrencies, and more.