With the platform in place, we basically have a store to do business with. Customers will start arriving, and your next concern is how to actually get paid (assuming you have done everything right). The principle is the same with any other aspect of the business: If you want more sales, make your payment process frictionless for your buyer. and for you also.
But payments are not the same. Behind the scenes of your checkout page, in the technical profundities of the software, it makes a huge difference whether the payment happens via a credit card transfer or an e-wallet balance.
For this article, I will leave out Cash on Delivery and all-in focus on digital payment. Since cash is dying, I promise I will cover this in another article. And to be honest, digital payment is much more favorable for the merchant due to the flexibility.
Regardless of your choice, the process usually involves banks at both ends, which exchange messages about such things as the identity of the sellers and buyers, and the fund available. And there are many middle parties to stand in between to ensure the accuracy and the integrity of information (as should anything in life).
Let’s start with something familiar:
1. Credit Card Payment
In an oversimplified manner, the digital payment system, or in our analogy - the infrastructure, consists of 3 major components:
Imagine this, you are a merchant selling fried chicken, and when the occasion arises, you need to collect payment from your customer. Traditionally, the customer will pay you with cash. The typical process would be like this:
Simple right? Well yes but actually no. The actual process would be:
- While they open the Wallet, they check and verify that they have enough money to pay, and only then they will (2) give you the money.
- During the movement of money, both the consumer and you will want to keep your eyes on the money to ensure that there is no jeopardy of the money that is moving from the wallet to your cash drawer.
- Finally, in step 3, you, the receiver of the payment, need to reconcile that money with the value of the transaction that you are about to conduct (In this example, it would be the price of the fried chicken that you are selling). If those two match, you can accept the payment and move money into the cash drawer. (and give them the crunchy, yet tender fried chicken of course).
The actual process would look like this:
Now, the credit card payment would somewhat follow the same principles, the most noticeable change would be the money actually moving from one bank account to another, instead of from the wallet to the cash drawer.
Which means the first step of the process would be the customer providing the details of their credit card to make the payment.
Hold on! Isn’t that like super duper unsafe?
Yes, it is. There are millions of possibilities that can go wrong with giving your credit card info, and this is where the first elements of E-payment processing come in:
a. Payment Gateway
What Payment Gateway does, in this case, is to first capture the amount of money that the customer needs to pay, then collect the card info of your customer. The next step would be encrypting sensitive credit card details and passing that information securely to the payment service provider.
After the Payment Service Provider has processed the payment, the payment gateway will update both you, the merchant, and your customer whether the payment is a success or not.
So how exactly do you, like, have one functioning payment gateway? The same answer with what we discuss on the E-commerce Marketplace: You can build on your own or you can hire from a more capable third party. And I, by all means, recommend the latter option. Seriously, spare yourselves the burden of worrying about PCI Compliance and dozens of other security problems. That is like a no-brainer! Your peace is worth 0.16 cents per transaction (actually there will be other fees in a place like initial setting fee, processing fee, reservation fee, etc but those shouldn’t be too significant, either way, you get my point).
b. Payment Processor
If the Payment Gateway has securely packaged the information, the next step, aka Payment Processor, will ensure that information makes it to the traffic, in this analogy would be the card network.
Now back to our fried chicken store, the simple moving money from one hand to another now become a logistic network of information involving 3 major processes:
- Authorization: A request sent to the bank of your customer with the information of the credit card for approval or decline, either way, a status will be returned to the card network and the merchant bank, and the merchant site (through the gateway). What I find interesting about this is that in the case of approval, from the customer’s POV, he/she will receive a notification of deduction in their bank account, but actually, the money is very much still in the account, and you also have not physically, or digitally, received the money yet. Worry not, the customer can’t access that money since it is reserved in their account. But the reservation can be expired, the duration can vary from 3- pretty much 30 days depending on the Providers.
- Capture: The reservation is removed and now can be traveling to your merchant account. But why do we need this? Why don’t the money just start moving immediately when the issuing bank confirms that the account is legit and has sufficient money for the transaction? The answer is you haven’t done your part of the transaction yet: Deliver the goods. Sometimes, for some services, those tasks can actually take a long time to perform. Only when the service is successfully performed should the income be taken into account because it is just liability otherwise. Also, in the worst case scenario, if you fail to deliver those juicy fried chicken, the authorization can be canceled to release the funds back to the customers, while if you have captured it instantly, you will need to pay for the processing fee of the refund. And refunds can be very expensive.
- Settlement: This part is actually just technical, so I will be short. At night time, your bank and the shopper’s bank will communicate about the approved transaction to make the transfer happen, this time for real. Of course, minus interchange fees. What? Do you think those greedy bankers will do this for free?
Woohoo that’s 2 out of 3
The final is Merchant Account, which is probably the easiest lifting. Basically, if you want to do all the stuff we just discussed above, you need to work with your own bank to create a special bank account for credit card payment. And no your personal bank account will not do.
There are obviously certain twitches here and there depending on the service. Like if suddenly you decide to open a hotel or some sort of homestay, upon the booking, you would want your Payment Service Provider to be able to preauthorize - Reserve a fund that is slightly more than their actual staying fee, just in case they break something in your room. But all in all that is basically how the payment is conducted.
c. The Alternatives
No one takes away anything from credit card payment. The level of security and the sheer volume of transactions processed per second (1700 for VISA and no less than 5000 for Mastercard) is enough to make them irreplaceable in this digital era (cash is dying and Bitcoin is like what? processes 7 transactions per second). However we can see that there are a lot of middlemen in the process, and each of them will snip a little from your income. Not much at first but sum up pretty quickly. Worst case scenario, customer demand refund after settlement? You literally pay those fees all over again, but this time to the losing money.
So what is your other option?
2. Store Credit & E-Wallet
If the payment processing fee is the pain in your a.., I mean neck, the pain in your neck, the most make-sense solution would be to minimize the number of payments. One big payment for many transactions. So you only need to pay for those greedy middlemen once while still ensuring the level of security.
We know it under many names: Top up, store credit. The idea is the customer can prepay a certain amount of money, store that money in a virtual wallet as a form of credit, and can use that credit to make future purchases. E-Wallet, in my very own opinion so please don’t witch hunt me, is a superman version of store credit, expanding to the point where the wallet can be used for other services outside of your own store, and allow users to transfer money to each other. This can be seen in the case of Shopee Pay, formerly known as Air Pay, well most of you still use that to pay for Shopee orders only but if you want you can still buy movie tickets or even book a flight with them.
If you are an E-commerce merchant using Magento 2, highly recommend checking out Magestore Store Credit Module.
However, the value of store credit or E-Wallet far exceeds the idea of saving some puny transaction fees.
- First, it makes the process of refund much less painful for you, the merchant, because you now have the option to issue store credit instead of actually paying back, avoiding those middlemen fees. Thus, the money still stays on your E-commerce system and this can also improve the engagement with the customer by encouraging them to come back to your store to spend those sweet sweet credit.
- Second, the idea of store credit and e-wallet is a great instrument for marketing in the combination with other loyalty programs. Not only the container for electronic money but also for storing digital discount vouchers and even gift cards also.
- And finally, data analytics. Payment history, customer behavior data. All those data set, if done correctly, can help you to improve the user experience and their lifetime value. Even make some income by *cough* selling *cough* those * cough* data*
3. Bank Transfer
Aw yes. If any of my readers ever eat fried chicken in Don Chicken, you will notice that their credit card reader is always broken and they can only accept cash or bank transfer. Sneaky!
Well, I’d like to think that everyone gets why businesses do that: Instant payment with no transaction fee. But in long term, it brings more bad than good. As the business grows, this will become a nightmare for the accounting department. Can you imagine matching thousands of bank transfers with the transaction, based on only the time of payment and the receipt? 10/10 not recommend.
There is another way: Virtual Account. From the POV of the customer, it is pretty much the same, however from your banking POV, one slight twitch to make it breathable for the accountant. The Payment Service will generate a unique banking account only for that transaction, which of course is linked to your merchant account. This way, the accountant will find it easier to reconcile the transaction.
4. Final Thoughts
Look close enough, you can find one common problem of those 3 above: regardless of whether you are a seller or buyer, you must depend on the mercy of one centralized organization to carry the transaction exactly as they promise: either the payment service provider or the bank or the card network, hell even the central bank ninja their way in. This exact pain point is what pave way for the birth of blockchain: a decentralized system where users can verify the transaction for each other instead of depending on one singular party.
If I am honest, this topic is much tougher to write than I expect, and I definitely not 100% happy with this work, but perfection is only procrastination in disguise. There are still many subtopics we can investigate further such as How to choose/build a payment gateway? Types of E-wallets? and even The state of cash in the world of digitalization? Let’s do it together.
Above is the article of SotaTek's BA, Haku Hung Hoang. To read more about his articles, follow this link: https://substack.com/profile/7706211-haku-hung-hoang
In case you are looking for a reliable E-commerce Software Provider to integrate the digital payment options into your platform, feel free to leave us a message. With the experience deploying a huge number of E-commerce projects for worldwide clients, our SotaTek experts can bring you the best Tech solutions to increase brand engagement and boost sales.