Ecommerce Payment Processing: How It Works & Top Tools To Consider

Ryan Baum
Ryan Baum
Last updated on 
June 7, 2022
June 7, 2022
Ecommerce Payment Processing: How It Works & Top Tools To Consider

Running an effective and growth-focused ecommerce store requires getting the right tech infrastructure in place, including selecting an ecommerce payment processor.

With a strong ecommerce payment processor, platform, or service provider, you’ll rarely — if ever — have to think about what’s going on with the back end of your sales transactions. Instead, you can stay focused on order fulfillment, and growing your ecommerce business.

You’ll find a range of companies offering payment processing to ecommerce businesses. Many bundle this service with other tools, and each has its own flavor and fee structure.

In this guide, we’ll show you what you need to know about how ecommerce payment processing works. Plus, we’ll give you our take on eight of the top ecommerce payment processing tools being used by businesses like yours.

3 essential components of ecommerce payment processing

While most people can (and do) enjoy ecommerce without thinking about what’s going on behind the scenes, it’s helpful as a business owner to have a sense of what goes into ecommerce payment processing. This working knowledge becomes vital as you work through decisions like which online shopping payment options you’ll offer in your store and which solutions you’ll include in your ecommerce tech stack.

We can break down ecommerce payment processing into three essential components, which provide a basic framework for understanding what goes on when a customer makes an ecommerce purchase.

1) Payment gateways

The payment gateway is the mechanism that connects your ecommerce website to the payment processor. It’s a courier of sorts, safely and securely ferrying ecommerce payment information from your website over to the payment processor.

You need a payment gateway because you don’t want to have to build out this kind of functionality on your own. While the concept of sending data securely isn’t hard to understand, the execution is far from simple.

2) Payment processors

The payment processor is the entity that receives payment information from the payment gateway and then does the technical work with that information. Your payment processor will verify that a payer has the necessary funds to pay for what they’ve ordered. Then, it will execute the transaction, taking funds from the customer and depositing those funds into your merchant account.

3) Merchant accounts

Your merchant account is essentially the business bank account you’ve set up to receive funds for ecommerce payments. (You can also send payments from a merchant account, and you may use this one that way, too — but for the purposes of discussing ecommerce payment processing, we’re looking at the merchant account as a place that receives funds.)

How does ecommerce payment processing work?

We’ve covered the three main components of ecommerce payment processing, so now we’re ready to walk through everything that happens during a standard transaction. Here’s a step-by-step overview. 

1) Open payment gateway after the customer enters their payment information

The process starts when a customer finishes adding items to their cart, begins the checkout process, and enters and submits payment information. Usually this is credit card or debit card information, though your site may support other forms of payment, from Google and Apple Pay to gift cards to other currencies and even cryptocurrency.

When the customer enters and submits payment information, your ecommerce site or platform opens a payment gateway.

2) Encrypted payment details are sent to the processor

With a payment gateway opened, now the payment information is sent — fully secure and encrypted — to the payment processor. Your chosen payment gateway (or the one chosen by your payment service provider) handles the technical work here, so you don’t have to.

3) Payments are either authorized or rejected

When the payment processor receives the encrypted payment information, the processor checks to see if the information is valid (in other words, whether the customer has funds or credit to back up the transaction, along with whether the information is correct and intact with no mistakes).

If the information is valid, the processor authorizes the transaction. If there’s a problem with the information (ranging from a typo to missing funds or even fraud concerns), the processor denies or rejects the payment.

4) Payment processor informs the gateway of authorization or refusal

Next, the payment processor lets the payment gateway know whether the transaction has been authorized or refused. Then, the gateway reports back to your site or platform, and the user can see the results there.

5) Payment processor credits the merchant account

If the payment is authorized, the payment processor credits the merchant account with funds for the transaction. At this point, the ecommerce payment process is complete:

  • The merchant has received funds from the customer (or, more specifically, from the customer’s creditor).
  • The customer (or creditor) is charged for the purchase and should soon see a pending charge on a credit or debit statement.
  • The merchant is ready to proceed to order fulfillment and shipping.

This entire five-step process (along with any subtasks or exceptions encountered along the way) happens typically in just a few seconds. The process — when it works properly — is nearly invisible, both to the customer and to your business. You get to focus on growing your business and fulfilling those orders, and your customers enjoy a seamless ecommerce experience.

Best ecommerce payment solutions (with pros & cons)

The ecommerce payment solutions market is a busy one, with dozens of solutions available to most ecommerce businesses. They range from simple, limited payment systems built into an ecommerce platform (see all the limits on Shopify Payments, for example) to wide-ranging systems with more features (and, perhaps, costs) than make sense for your business right now.

We’ve rounded up eight of the best solutions available right now. Below we’ll show you the basics of each ecommerce payment processor or payment service provider, along with pros and cons for each one.

We’re giving you unbiased, real opinions here: Gorgias works equally well with the big three ecommerce platforms (see how we work with Shopify, Magento, and BigCommerce), and our helpdesk and customer support system can work with just about any payment processor as a result.

PayPal

PayPal is a household name and one of the earliest successful payment processors, dating all the way back to 1998. Originally a brainchild of eBay, PayPal now exists independently, with its own considerable network of subsidiaries and targeted products.

As one of the first and most popular solutions, PayPal has an impressively wide global footprint and is widely adopted as an online payment platform for ecommerce businesses of all types and sizes.

There can be some confusion surrounding PayPal because the platform is both an ecommerce payment processor (where customers can pay using a variety of methods, including their PayPal balance) and a personal payments platform where customers store or send money. This doesn’t damage the brand as a payments processor, but it can create customer confusion (for example, prominent PayPal branding could lead users to think they must pay with PayPal when that isn’t the case).

Pros

  • Widely scalable, from small business to enterprise
  • Supported by most other tools/solutions
  • No monthly fees for lower tiers

Cons

  • Known to erroneously freeze assets, temporarily crippling affected small businesses in the process
  • Inconsistent features based on geography

Checkout Champ

Checkout Champ is an ecommerce platform that works with Shopify, BigCommerce, WooCommerce, and more. Checkout Champ promises to boost conversion rates by 20% or more, boost average ticket value through one-click upsells, etc. It offers free initial setup and migration from your existing solution and includes a powerful internal ecommerce CRM.

Checkout Champ shines especially well for businesses that sell recurring or subscription-based solutions, and it boasts faster page-load speeds (which matters if 53% of shoppers abandon a slow cart).

Pros

  • Impressive, wide-ranging feature set includes many marketing- and sales-friendly features
  • Promises no or lower fees compared to competing products (but see the hefty monthly subscription below)
  • Best for established companies looking for aggressive sales growth

Cons

  • Aggressive pricing ($300 per month + 1%) may lock out smaller businesses and early-stage startups
  • May be more product than many businesses need

Stripe

Businesses like Stripe as a payment processing solution because its API gives them ultimate customization and flexibility for accepting payments, setting transaction fees and processing fees, and just about everything else related to payment processing services. It’s also PCI-compliant and works well internationally.

Of course, not every ecommerce business wants endless customization. If you’re looking for a turnkey solution, Stripe might not be the best choice.

Pros

  • API availability gives larger and more tech-forward ecommerce stores the ability to customize Stripe’s functionality
  • Accepts payments in nearly all currencies (and allows for payment in Bitcoin)

Cons

  • Unnecessarily complex according to some Stripe users
  • Nickel-and-dime pricing structure
  • Funds availability can be slower than other services (depending on setup and location)

Square

Square first made a name for itself with its headphone jack (and, later, Lightning port) credit card skimmers, which it delivered to small businesses and startups for free or deeply discounted. Others (including PayPal) have since copied that business model, but Square retains a strong market share, especially among small brick-and-mortar retailers and restaurants.

Because the company has a point of sale foothold as well, Square is uniquely situated to support both in-person and online payment. The platform also contains payroll and time management tools, online invoicing, and other operations-specific tools.

Pros

  • Great solution for small businesses that need POS, ecommerce payment processing, and other operational tools
  • Original use case (turning your phone into a POS terminal) remains invaluable to mobile businesses

Cons

  • Clearly built for smaller operations, and outgrowing the platform is a real possibility
  • Basic functionality is fee-free, but per-transaction costs can add up quickly

BlueSnap

BlueSnap is another globally-focused payment processing solution that charges per-transaction fees but not monthly fees or setup fees. BlueSnap boasts support for several prominent Chinese brands and services, including AliPay and China Union Pay.

One of the big selling points of BlueSnap is the ability to receive payment in over 100 currencies and pay out in 16 currencies. Businesses with a significant international customer base will benefit from this. It supports virtual terminals, has a payment API, and can handle invoicing and other merchant services.

Pros

  • No recurring or setup fees
  • Reduces backend complexity
  • Sandbox mode for testing new implementations

Cons

Amazon Pay

While it might sound like a feature reserved for Amazon sellers, Amazon Pay is a much more broadly available product. Online ecommerce sellers can add Amazon Pay as a payment service provider and essentially outsource the checkout and payments process to Amazon. Companies like EyeBuyDirect, Belkin, and even Samsung offer Amazon Pay.

Existing Amazon customers will love that they don’t have to give you new shipping and credit card information, and you’ll greatly reduce friction at checkout — potentially reducing cart abandonments (recently clocked as high as 81.08% in one survey) and increasing conversion.

Pros

  • Leverage the trust that people have in Amazon as a payments platform
  • Stable and unsurprising, with very few negative reviews on G2
  • Less expensive overall than the competition

Cons

  • Requires customers to have an Amazon account
  • Users are at the mercy of Amazon in terms of data sharing, feature changes, etc.

Klarna

Klarna is a buy now, pay later (BNPL) solution that lets you offer financing options to customers without taking on any financing liability. If you sell higher-ticket items and want to expand your payment methods beyond the conventional, Klarna could be a valuable add-on product.

However, be aware that it isn’t a standalone payment processor. You’ll need another solution that supports Klarna (such as PayPal) if you want to implement Klarna’s real-time BNPL solution in your online store.

Pros

  • Lets you offer financing without taking on additional risk
  • Expands your reach as an online business, allowing you to reach customers that might not otherwise be able to afford your products

Cons

Sezzle

Similar to Klarna, Sezzle is a bolt-on product in the buy now, pay later space. With Sezzle, your customers can split purchases into four payments spread over six weeks. The payments are interest free — as long as customers pay on time.

Financing services like this aren’t the right choice or look for every brand. But if you’re looking to add financing options to your ecommerce presence and don’t want to take on risk or liability, Sezzle is worth considering.

Pros

  • Offer financing without incurring risk 
  • Reach customers with your products that may have previously been priced out of your market

Cons

  • Not a full-service or standalone ecommerce product
  • May not offer the image you’re aiming for as a brand

Manage your ecommerce store’s customer service with Gorgias

Getting the right ecommerce payment processing platform in place is a big step toward maximizing your ecommerce efforts. Another crucial step is reining in everything that happens after checkout.

Customer inquiries like tracking, returns, the status of an order, and more can quickly overwhelm your growing business. But controlling all those inquiries and other concerns from one customer service software platform puts you back in control.

Gorgias is the helpdesk and customer support platform tailor-built for ecommerce businesses like yours. We understand what it takes to thrill ecommerce customers, and we have the features you need to get this crucial aspect of your business right.

Learn more about how Gorgias performs with Shopify, Magento, and BigCommerce.

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