Electronic payment refers to the mechanism of paying for a product online via a debit/credit card or another electronic payment service. Amazingly, some companies still do not accept payment online, preferring phone or other payment methods. Taking online payment has the following advantages:
- Convenience for the consumer. Consumers can enter their payment details online instead of mailing or phoning them through to the retailer. This removes steps in the purchasing process, making a purchase more likely.
- Speed. Online payment allows products to be instantly bought. Internet customers are increasingly expecting a quick and painless payment process followed by a speedy delivery.
- Efficient payment processing. Electronic payments require minimal manual processing cutting down on the workload. Payment details are collected on the website, processed by a third-party payment processing company and the funds transferred to the business without any other administration.
- Credit. Paying via a credit card or a buy-now-pay-later service such as Klana enables customers to buy on credit.
Customers expect the convenience and immediate satisfaction which online payment provides. A company that is not offing its customers the opportunity to pay for products or services online is certainly losing sales to competitors which offer a quick and easy online purchasing process.
There are three main ways of accepting payment for online retailers:
- Merchant account + payment gateway
- All-in-one solutions
- Alternative checkouts, e.g., PayPal, Amazon pay
One way or another, these are usually funded by credit/debit cards, though a bank account can finance third-party payment solutions such as PayPal.
Before payments went online, offline businesses accepting credit cards required a merchant account with a high street bank to settle transactions and a handheld card machine known as a PDQ to process the payments in-store.
When collecting payments online, a merchant can use a payment gateway (a virtual PDQ) to process payment onsite. They will also need an online merchant account to settle the transactions.
Payment gateways are available from high street banks or separately from third parties. There is a fee payable to the payment gateway and the acquiring bank when accepting payments online. This fee will depend on the volume of transactions and the risk associated with the business.
All-in-one solutions such as Stripe offer a complete solution for collecting and processing the card details on behalf of the business without requiring an online merchant account or a separate payment gateway to be set up. They can be more user-friendly and fees more transparent as all the processing happens under one roof.
Worries about online payment security in the early days of the Internet led to the launch of alternative checkout solutions such as PayPal, which enabled customers to pay online without entering their card details. When paying using an alternative checkout, the customer is directed to the checkout provider to complete the payment. Popular solutions include:
- PayPal. PayPal is the most popular ‘Digital Wallet’ solution. It offers both an alternative checkout solution and an all-in-one solution for collecting and processing credit cards.
- Amazon Pay. Amazon Pay is a payment solution from Amazon where customers can use the payment details they have stored in their Amazon account to make online payments.
- Apple Pay. Apple Pay is a payment solution available on apple devices where customers can use stored payment cards to make payments.
- ShopPay. The payment system used by many Shopify merchants in their integrated Shopify checkout.
These solutions have an easy sign-up process and offer competitive commission rates. As well as supplying an excellent service to retailers, these payment solutions also improve the user experience of making payments online. With more sales happening online, the alternative checkout experience has some advantages for users:
- Quick. The customer’s details are stored, so no need to re-enter every time they make a purchase.
- Uniform experience. Checkouts come in a vast range of shapes and sizes and can be confusing for the user. Alternative checkouts provide a consistent experience which increases conversion.
- Fraud protection. Alternative checkouts offer increased security.
The familiarity of alternative checkout such as PayPal reassures the customer that their money is safe and can reduce abandonment. This is a big problem with up to 80% of customers going through part of the checkout process without completing the transaction (source: Bolt).
Whilst online security has improved, fraud is still very much a worry, especially as fraudsters are moving online with the shift from offline to online commerce. It pays to understand:
- Tell-tale signs that fraud might be occurring (see below)
- The processes you can set in place to detect fraud.
- Under what circumstances you are covered against fraud
Below is some general advice for avoiding fraud online:
- Beware of telephone orders. 3-D Secure and chip and pin mean that online and in-person transactions are now much more secure. Telephone orders do not have this level of protection and so are targeted by fraudsters.
- High-risk shipping address. Unfortunately, some locations, e.g., West Africa, are known for their fraudsters.
- Unusually large orders. Be suspecious if you receive an unusually large order from a new customer, especially if it is a popular, high price item.
- Changes to the shipping address. Fraudsters initially enter the card holder’s address so fraud systems will not catch them before contacting you to change the address.
- Unusually large number of overseas orders within a short time. For example, if you receive 50 orders from customers outside your market within a few days, but you usually only receive two international orders per month.
- Orders from different customers with the same shipping address. Criminals often place orders from several stolen cards and ship the orders to the same address.
- Overpayments. Fraudsters will often overpay and then ask for the overpayment to be returned through a bank transfer. Always repay via the original payment method.
- Strange combination of items. If a customer orders multiple of the same thing, be suspicious.
- Undue haste. Fraudsters will try and get an order quickly before it can be inspected closely.
- Suspicious email address. Real customers are more likely to use email addresses that has their name. Watch out for email addresses created without due care, like ‘email@example.com,’ or undeliverable emails.
- Different delivery and billing addresses. Whilst there are legitimate reasons why shipping and billing address would be different, sending to a different address is less secure.
Due to privacy restrictions, merchants know surprisingly little about the card transactions they are accepting. When a card transaction is successful, they will have access to the following information:
- 3D-Secure. Whether this card passed the 3-D secure test
- CV2. Whether the CV2 code was successfully entered.
- Billing address match. Whether the numbers in the billing address entered match those on file
- Country. The card issuer and the country of issue.
When setting up their payment system, merchants will need to decide the level of risk they are willing to accept when taking payments. For example, it is standard to accept card payment only where the CV2 code was correctly entered. This, however, is not obligatory. The stricter the test, the more transactions will be rejected. There will inevitably be some false positives, so exercise common sense.
When selecting a payment processing system, ensure that they provide a fraud alert system that will help your business find orders that need to be rejected or reviewed. Stripe, for example, provides merchants with a fraud score for each order based on its subjective assessment of the risk. The merchant can create rules around this score, e.g., < 50 always accept, 5-100 review, over 100 reject.
One of the benefits of alternative checkout solutions such as PayPal is that their scale enables them to have sophisticated fraud detection systems. Typically, both the merchant and the customer will have a level of protection against fraud and a dispute process for when things go awry. However, it pays to understand the conditions of seller protection. For example, The PayPal Seller Protection Policy requires:
- Proof of delivery. Protection is only available for items sent via a tracked service.
- Delivery address match. The order must be sent to the address given at the time of purchase.
- Tangible goods. The item must be a physical good to be covered.
Making products available to international buyers is a fantastic way to increase sales, and accepting local currencies increases the conversion rate. Payment service providers differ in how well they support multi-currency transactions and the fees they charge. Check:
- Currency support. Some payment gateway will make additional charges to accept payment in foreign currencies.
- Conversion rate. What is the conversion rate used? The conversion rate used may often be hard to find and uncompetitive.
- Multi-currency transfers. Can the provider transfer currency into a foreign currency account? Frequently a currency trader account will give a better conversion rate. Examples include Payoneer and World First
- Additional fees. Are extra fees charged for cross border transactions?
PayPal, for example, will only allow funds to withdrawals in the default currency of the account and at a generous spread above the spot rate. It also charges a cross border fee on top of its usual fees.
Offering multiple online payment options increases satisfaction by improving the customer experience. On average, customers use 3.6 different payment methods for their monthly bills (Source: Annual Billing Household Survey).