Online Payments for Ecommerce: The Complete Guide

Financing Insights | 15 mins

Think of the last time you purchased something online. Chances are, the payment process was so simple and painless that you almost didn’t notice.

You put your items in the cart, enter your payment details, press the submit button, and received your order confirmation. The whole process takes seconds. But for many retailers, what happens behind the scenes when someone pays for a product online isn’t quite so straightforward. The jargon and complexities of online payments for ecommerce can become overwhelming.

This comprehensive guide breaks down the online payment process in language that any ecommerce retailer—whether they’re already established or just getting started—can understand.

Why Are Online Payments On the Rise?

As online shopping grows in popularity, online payments are becoming more common. Today, more than 22% of the world’s population buys online, and in 2018, ecommerce sales accounted for 12% of all retail sales worldwide. According to Internet Retailer’s analysis of U.S. Department of Commerce figures, consumers spent $517.36 billion online with U.S. merchants in 2018. That’s up 15% from consumer spending in 2017.

With that kind of growing consumer acceptance, retailers need to make sure they’ve got all the tools they need to accept online payments flawlessly.

What Tools Are Needed to Accept Online Payments?

Because these payments happen online, ecommerce retailers need the right payment technology stack to accept online payments through their websites. Retailers will require each of the following tools.

Payment Gateways and Facilitators

Think of the payment gateway as the messenger between your website (where the sale is made) and the bank. The gateway encrypts sensitive information (such as credit card details) and passes it back and forth between you, the consumer and the bank so payments can be processed securely. Payment facilitators like Stripe do the same, along with a wider range of functionality.

There are numerous payment gateways on the market, but popular providers include Braintree, PayPal, Square, and Authorize.Net.

Payment Processor

The payment processor is the tool that’s responsible for approving or rejecting a payment. It receives payment information from the payment gateway, analyzes the details, and then allows that payment to be completed or sends a rejection notice back to the customer.

Popular payment processors include the merchant services side of banking companies such as Chase and Bank of America, as well as third parties like Worldpay and Adyen.

Merchant Account

In order to accept credit card and debit card payments—common ways of paying both online and off—a business must have a merchant account through a financial institution. That is where all online payments made with a credit or debit card will be deposited.

Thankfully, you don’t need three separate tools to accept payments online; ecommerce technology has advanced to wrap all three in one comprehensive solution. Stripe, for example, is both a payment gateway and a payment processor, and doesn’t require retailers to have a separate merchant account.

What Are The Pros and Cons Of Accepting Online Payments?

Spoiler alert: The pros outweigh the cons, which is excellent news because accepting online payments is necessary for any ecommerce business. But it has its pitfalls.

Ecommerce retailers should be aware of both pros and cons so that they can take advantage of the benefits of online payments while adequately preparing to mitigate possible problems.

Pros of accepting online payments

1. Increased convenience
Today’s consumers demand streamlined experiences and a high level of convenience, which is why online shopping has become so prevalent.

While methods like mailing a check and sharing credit card info over the phone were once business as usual, today they seem impossibly outdated and clunky. With a one-click shopping becoming more commonplace, customers expect an increasingly convenient experience. Low-friction and lightning fast online payments is really the only viable option for accepting funds from your customers.

Due to the ease of online payments, they’re becoming the norm across a variety of industries—not just ecommerce. A reported 93% of consumers stated that they even prefer to pay their health care bills online.

That level of convenience is a benefit for your customers, but it’s also a perk for you as the retailer. Accepting payments online not only makes it easy to track your sales but also means you efficiently get the money you’re owed—without having to run to your bank to make deposits of cash and checks.

Find out why you need online financing in your ecommerce store.

2. Increased sales
The easier you make it for your customers to purchase something, the more likely they are to do so. In fact, 6% of online shoppers state that they will abandon their carts if there aren’t enough payment methods available.

Eighty percent of customers prefer to make purchases with either a credit or debit card, which ecommerce retailers can easily accept when they get up and running with an online payment system. And research shows that giving customers this option can lead to a big boost to a business’s bottom line. One survey found that 83% of small businesses that accepted credit cards experienced a lift in sales. More than half of those made at least $1,000 more per month; 18% saw monthly increases of $20,000 or more.

We rounded up six actionable tactics to increase online sales revenues.

Cons of accepting online payments

1. Cost
Though accepting online payments can increase your profits, they also have additional costs of which you should be aware.

For starters, ecommerce retailers need to invest in payment tools and software. Additionally, credit card payments come with associated fees that retailers are expected to cover:

  • A percent of the transaction to the issuing bank: The issuing bank (which is the bank that issued the credit card or debit card to your customer) gets paid through a percentage of each purchase made on that card. You’ll often hear this referred to as the “interchange fee.”
  • A percent of the transaction to the merchant bank: Your own bank (i.e., the bank that has your merchant account) will also take a cut of that sale. Again, the exact fee can vary.
  • A fee to the credit card company: Mastercard, Visa, American Express, or whichever credit card association you’re using, also charges a fee per purchase. This is known as the “assessment fee.”
  • A dollar amount for your payment processor: The vast majority of payment processors also charge a fee for every transaction you process. For example, Basic Shopify takes 2.9% plus 30 cents of every online credit card transaction. Additionally, most payment processors charge a monthly fee for having an account.

Often packaged as a single fee, the cost of offering credit card payments is substantial. So it makes sense that, according to a National Federation of Independent Business report, costs for processing credit card payments rank as number 38 on the list of problems facing small businesses—even above obtaining licenses and permits and abiding by employment regulations. These expenses are a simple fact of doing business today, but it’s good to be aware of the impact they can have on your profit margins.

2. Security risks

Accepting payments online also opens retailers up to the potential of fraudulent charges because people can easily use stolen credit card information to make unauthorized purchases online.

That risk is an increasing concern, especially as credit card fraud has been on the rise. In 2017 it was reported that an estimated 46% of Americans have had their credit card information compromised at some point.

This rapid rise in fraud is having a major impact on the ecommerce industry as well. In 2017, ecommerce fraud was up over 30% from the previous year—which means that ecommerce fraud actually grew at double the rate of ecommerce sales.

Fraud is bad news for your customers, but it can have negative consequences for retailers in the form of chargebacks. Chargebacks occur when a credit card provider demands that a retailer make good on the loss of a fraudulent or disputed transaction—essentially covering the cost of that fraudulent charge.

That can be costly. According to one report, 5% of an organization’s yearly revenue can be lost to fraud, on average. That might not sound like much, but if your ecommerce business is doing $500,000 in revenue, that means you’re losing $25,000 to fraud.

How Do You Track Online Payments To Your Ecommerce Store?

The online payment process isn’t over once that money lands in your business’s bank account. You need to closely track the online payments that are received, not only to monitor the financial health of your business but also to ensure you pay the appropriate amount of sales tax.

Fortunately, tracking all online payments made to your ecommerce store requires very little manual effort. Almost all modern ecommerce platforms provide retailers with detailed sales and financial reports that show a breakdown of how many online sales were made in a specified period.

Most ecommerce solutions will offer this sort of basic functionality, but here are some of the most popular:

These platforms (and numerous others) make it simple to track your online payments automatically—without needing to create spreadsheets and document payments yourself.

How Can You Maximize the Impact of Online Payments?

Accepting online payments is nonnegotiable for ecommerce retailers. But online payments can be more than a necessity—they can give a major boost to a business.

There are several tactics that ecommerce stores can implement to maximize the impact of online payments and improve their store’s bottom line.

Offer alternative financing

Not all customers are prepared or equipped to make an entire online payment all at once—particularly if your ecommerce store sells a number of big-ticket items.

That’s why many shoppers want to use alternative financing in order to make online payments for their purchases. With financing, they can break the total into more manageable payments rather than covering the lump sum at once.

It might seem like a minor detail, but implementing alternative financing for your ecommerce store can make a measurable impact when it comes to completing more checkouts: 47.59% of baby boomers report that they wouldn’t have made a purchase online if financing hadn’t been available; 22.13% of Gen Zers, 25% of millennials, and 33.9% of Gen Xers report the same.

Retailers can use a solution like Bread to offer full-funnel and white-labeled pay-over-time solutions to their ecommerce customers.

Learn more about offering alternative financing.

Leverage pricing strategies

You want to increase your number of sales or your average order value (or both). Relying on some tried-and-true pricing strategies can help instill a sense of urgency and inspire your customers to complete their purchase now.

Below are four different pricing strategies that are common and effective in the ecommerce industry.

1. Dynamic Pricing
With dynamic pricing, retailers continuously adjust the price of products in response to supply and demand. If demand is high and supply is low, for example, the price will be higher. But if the opposite is true (supply is high and demand is low), retailers will issue a price cut.

Basing prices on supply and demand allows retailers to set the optimal price for maximum profit—in that exact moment. But dynamic pricing also requires quite a bit of work and attention, which is why it’s most prominent among large retail sites that have a lot of resources.

As just one example, ecommerce giant Amazon reportedly adjusts prices on products 2.5 million times each day, meaning an average product will see a shift in price almost every 10 minutes.

Smaller ecommerce businesses don’t have the necessary resources or bandwidth to make these frequent price adjustments. But you can still experiment with lower-lift dynamic pricing tactics to see the impact on the bottom line.

2. Bundle Pricing
As the name implies, bundle pricing means that a preset package of items is sold at a discounted price. It’s cheaper for the consumer to buy that bundle of items than to purchase each one individually, and that perception of a good deal instills a sense of urgency in buying that package.

You’ve seen bundle pricing in a lot of different industries—from discounted package offers from your cable company to McDonald’s meals. That’s because it really is an effective strategy.

For starters, it’s beneficial for consumers because they get increased convenience and the option to get more value for their money. But it’s also a positive for retailers who want to boost their sales and their cost efficiency. If they have an item that isn’t selling well independently, they can package it with other items that have higher demand, so that seemingly unwanted item can piggyback off the sales success of other hot sellers.

This strategy can also boost average order value: customers will spend more to get the entire bundle—even if they were only looking for one of the items—because it’s a deal that’s too good to pass up.

Find out how the JTBD Framework can help with product bundling.

3. Loss Leaders
The term “loss leader” sounds negative—like being the best loser. And, technically, it is. Loss leaders are products that are sold below their market value, meaning they aren’t profitable for the retailer.

Why would a business do that? It’s not a sound strategy to use on a consistent basis, but it can be helpful for new businesses or products.

This tactic is common for retailers who need to make an introduction, establish a customer base, and begin to gather some social proof. They sell their products for less than market value temporarily because they know that it’s hard to get a customer to gamble on a product that has little or no reputation—unless they believe they’re getting it for a steal. Other businesses will keep a loss leader to strengthen their relationships and foster goodwill with their customers.

Apple’s App Store is said to be a well-known example of a loss leader. Despite the fact that the site is accessed and adored by nearly every Apple user, Apple has claimed that the App Store barely breaks even. In fact, the App Store reportedly contributes only 1% to the technology giant’s profits. While it’s not quite a loss, it’s definitely less than you’d expect for something with such a huge audience of users.

4. Consumer-Based Pricing or Value-Based Pricing
Consumer-based pricing, which is also frequently referred to as value-based pricing, is a little more complex to understand. Using this pricing model, prices are set based on the customer’s perception of a product’s value.

Shopping for a new car is an example of consumer-based pricing. While the car has a sticker price, most salespeople take the opportunity to understand their customer’s values and desires and then use that to assess just how much the customer is willing to spend on a new vehicle.

An online example is Priceline’s now defunct name your own price” format, where customers could enter travel dates and a rate they would accept for a flight or car rental. If Priceline accepted that bid, then they’d see the name of the airline or rental company that matched their criteria.

While many retailers think that value-based pricing means customers can demand a low price and walk away with a steal, this pricing model works the other way, too.

Online clothing company Everlane is transparent with their pricing—even outlining how much it costs to manufacture and transport their items. They’re up front about the fact that they charge more than what an item costs to produce, but because customers value Everlane’s radical honesty and ethical practices, they are willing to spend more on the company’s products.

Modern jewelry brand Noémie breaks down how much customers save by buying a piece directly from them as the sole manufacturers and designer right on the product page. They even translate the difference between their listing price and the piece’s appraised value into an equivalent vacation package—inspiring customers to use their savings to go on a journey of their own.

To get started with value-based pricing in your own ecommerce business, identify customers in your various target personas, and collect their feedback on different price points to get a sense of how much they’re willing to pay for specific products or categories of items.

Optimize the checkout process

The online payment process is important, but it’s really only one small piece of a much larger process: checkout.

In order to see a true improvement in sales and collect more online payments, ecommerce retailers need to streamline their entire checkout process to remove any potential barriers for customers.

A reported 26% of consumers abandon a cart due to a checkout process that’s too long or complicated, which proves that shoppers aren’t willing to tolerate a cumbersome set of steps in order to complete their purchase.

But how can retailers optimize their own checkouts? Set a recurring reminder to walk through your own checkout flow occasionally (at least once per quarter) to spot any bugs, unnecessary fields (research shows that the average checkout flow has twice as many form fields as necessary), extra steps, or slow-loading pages.

For a short time, you can also send customers a brief email to thank them for their purchase and include a survey that asks them to rate their checkout process and point out any areas that could be improved.

The combination of these two exercises will help you identify areas of bloat in your own process and keep things as streamlined as possible for your customers.

Learn how to optimize your checkout experience and minimize cart abandonment.

Understand Online Payments And Boost Your Bottom Line

The online payment process might seem like just a small sliver of your overall customer journey—and, in reality, it is. But it’s also an undeniably important step, especially when you consider that 46.1% of cart abandonments occur at the payment stage.

That’s why ecommerce retailers need to go beyond plugging a payment solution into their website and watching as the money magically ends up in their accounts.

The more retailers can understand about what’s happening behind the scenes during the online payment process, the more prepared they are to maximize all opportunities to complete checkouts, increase conversions, and boost their bottom lines.