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Online Payments For Small Business Owners: An Overview

online-payments-for-small-business-owners:-an-overview

Choosing an online payment processing system that doesn’t accept the payment methods your customers prefer is much like speaking Chinese at a Marrakech market.

Both approaches are unlikely to result in a successful transaction.

In ecommerce, a merchant's POS (point-of-sale) system must sync with the customer's preferred payment method. While traditional brick-and-mortar stores have their own payment protocols, online stores operate differently. This underscores the importance of having a specialized POS for ecommerce stores, ensuring they are adept at handling online payments.

What are online payments?

Online payments are types of payments submitted and processed over the internet. These include credit card payments, ACH payments, wire transfers, and payments made using a mobile wallet.

While online and in-store payments may use the same payment processors, the point of sale (POS) differs. For an in-store payment, POS is your physical checkout counter. For an online payment, POS is an online payment interface, and your software payment solution is your point-of-sale system.

In addition to accepting customer payments via online payment methods, businesses may also use online payments to pay bills or payroll expenses.

How do online payments work?

Online payments involve a customer, a vendor, and the financial institutions of each party. They may also involve payment processing partners such as PayPal, Zelle, or Square.

Online payment processes differ by payment method. Here’s a sample breakdown of how an online payment using ACH debit (automated clearing house debit) works:

  • A customer purchases a good or service and elects to pay by ACH debit.
  • The merchant or third-party payment processing partner sends an ACH debit request to the merchant’s financial institution.
  • The merchant’s bank batches the transaction along with other ACH transfers.
  • An ACH operator receives the batched transactions, sorts them, then submits the transactions to the customer’s bank.
  • The customer’s bank processes the transaction and credits the payment amount to the merchant’s account.

5 types of online payments

  1. Credit card payments
  2. ACH payments
  3. Direct debit
  4. Wire transfers
  5. Digital wallets

Different types of online payment offer different benefits for businesses and customers. Variables include cost, speed, security, and popularity with your customer base.

1. Credit card payments

Both businesses and individuals frequently used credit cards for online payments. The credit card company settles the purchase debt with the vendor, and the cardholder either pays off their total credit card balance at the end of each billing cycle or accrues additional interest debt as an annual percentage rate (APR) fee. APR reflects the annual cost of the loan, including the interest rate plus other charges.

Because many customers use credit cards as their primary means of payment, businesses that accept credit cardsonline and in-person have advantages over those that don’t. Many credit card processing partners charge merchants a per-transaction fee, ranging between 2% and 5% of the total transaction cost.

2. ACH payments

Automated Clearing House (ACH) transfers are a type of online payment sent through the ACH network, an electronic network that serves as an intermediary between financial institutions.

ACH transactions are processed in batches. This keeps fees down but can make ACH payments slower to process than other types of online payments. ACH payments typically process in one to three business days, while wire transfers and credit card transfers complete within 24 hours. Businesses frequently use ACH direct deposit to pay employees, and many financial institutions offer this type of transaction free of charge.

3. Direct debit

Direct debit is a form of ACH payment that transfers money from one bank account to another through the ACH network. When customers pay for goods or services using ACH direct debit, the merchant’s financial institution instructs the ACH network to take money from the customer’s bank account and put money into the merchant’s bank account.

The ACH network processes direct debits within one business day. Still, the receiving bank often holds transactions for an additional one to two business days, bringing the total transfer time to one to three business days.

4. Wire transfers

Wire transfers are online payments from one bank to another without using an intermediary like the ACH network. Wire transfers move money quickly and tend to have higher per-transaction limits than ACH transfers. They also carry higher per-transaction fees, ranging between $20 and $30 per transaction. Although wire transfers are secure, they are more often targets of fraud than ACH transfers because they process more quickly. The one-to-three-business-day payment processing period of ACH transfers allows businesses to stop payment if fraud is suspected.

5. Digital wallets

Digital wallet is an umbrella term referring to any method of electronic payment (such as a debit or credit card) stored on a user’s devices (e.g., Apple Pay or Google Pay) or in the cloud. Digital wallets are not payment methods; they allow customers to use existing payment methods without access to a physical card. Digital wallet purchases can be made both online and in person.

Choosing a POS for Your Ecommerce Store: What to Consider in Online Payment Options

Selecting an optimal POS (Point of Sale) system for an ecommerce store involves considering various factors to ensure that online payment solutions align with your technology budget and provide ease for customers during transactions. A fitting POS for your ecommerce store should be straightforward to set up, ensuring your online business is operational promptly.

In choosing a POS for your ecommerce store, it's imperative to consider the needs and preferences of your customer base. Younger customers might predominantly utilize digital wallets and be acquainted with various payment processing partners, necessitating a POS system that integrates with multiple payment gateways. Conversely, a segment of older customers may predominantly utilize traditional payment methods like credit and debit cards, making these options indispensable.

Another pivotal consideration is the fee structure associated with your chosen POS for the ecommerce store. Evaluate how much you will allocate towards transaction fees and ensure that the chosen system balances cost-effectiveness and comprehensive functionality.

Online payments FAQ

What is an online payment?

An online payment is any payment made over the internet. Many ecommerce businesses accept online payments to make it easier for customers to purchase goods and services. They also frequently use online payments to pay vendors and employees.

What are the different types of online payments?

Online credit and debit card payments, ACH payments, wire transfers, and digital wallet (e.g., Apple Pay, Google Pay) payments are all online payments. Third-party payment providers like Zelle, PayPal, Apple Pay, Venmo, and Square also offer online payments reconciled via debit or credit card, or through ACH transfer.

What are examples of online payments?

There are many types of online payments. Examples include:

  • A customer uses a credit card to purchase a Martha Stewart–signed spatula from your online store.
  • Your business uses an ACH credit transfer to pay employees through direct deposit.
  • Your business uses PayPal to pay a contractor's invoice for painting a life-sized portrait of a hot dog stand in your lobby.
  • Customers use credit card information in their digital wallet to purchase a 90-minute scalp massage.
  • Your business sets up a recurring bill pay through ACH debit to cover utility expenses from your operating expense account.
This originally appeared on Shopify and is available here to cast a wider net of discovery.
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