What is the online payment process? Essential guide

As e-commerce continues to grow, online payments have become the backbone of every digital transaction. Whether you’re purchasing a product, booking a service, or subscribing to a platform, understanding the process of how online payments work is crucial—not just for consumers but also for businesses. For merchants, understanding the online payment process is key to ensuring smooth transactions, improving user experience, and reducing the risk of payment failures.

Online payments are more complex than they might seem. Multiple players are involved—from payment gateways to banks to payment processors—working together to ensure that funds are transferred safely and efficiently. In this guide, we’ll walk you through the step-by-step process of online payments, explaining the critical role that payment orchestration plays in simplifying and streamlining this intricate process.

What is an online payment?

An online payment is a digital transaction made over the internet where a buyer uses electronic methods such as credit cards, digital wallets, or bank transfers to pay for goods or services. Unlike in-person payments, online transactions require additional layers of security and technology to verify, authorize, and process the payments.

Online payments have become the norm for businesses of all sizes, offering customers a convenient, fast, and secure way to purchase goods or services. For businesses, it’s not just about accepting payments but about ensuring that each transaction is processed smoothly and securely, which is where the complexities of the online payment process come into play.

The key players in the online payment process

Before diving into the step-by-step process, it’s essential to understand the key players involved in an online payment transaction:

1. Cardholder: The customer who initiates the transaction using a credit card, debit card, or digital wallet.
2. Merchant: The business or individual selling goods or services online.
3. Payment Gateway: The technology that connects the merchant’s website or app to the payment processor and bank. It securely transmits transaction data from the customer to the appropriate financial institution.
4. Payment Processor: The entity responsible for facilitating the transfer of funds from the customer’s bank account to the merchant’s account.
5. Issuing Bank: The bank that issues the card to the customer and verifies whether they have sufficient funds to complete the transaction.
6. Acquiring Bank: The financial institution that receives the payment on behalf of the merchant and deposits the funds into their account.
7. Card Networks: Entities like Visa, Mastercard, and American Express that facilitate communication between the banks during the payment process.

Step-by-step process of online payments

The process of online payments may seem quick and seamless from the customer’s perspective, but behind the scenes, it involves several complex steps. Here’s a breakdown of how it works:

Step 1: Customer initiates the transaction

The payment process starts when the customer selects a product or service and proceeds to the checkout page on the merchant’s website. At this point, they enter their payment details, which could include their credit or debit card information or choose to pay via a digital wallet like PayPal or Apple Pay.

Step 2: Payment gateway encryption and transmission

Once the customer submits their payment details, the payment gateway kicks into action. The payment gateway encrypts the sensitive cardholder data and securely transmits it to the payment processor. Encryption ensures that the data remains safe from hackers or fraudsters during the transmission process.

Step 3: Payment processor communication with the card network

The payment processor receives the payment data from the gateway and then forwards it to the appropriate card network (Visa, Mastercard, or others). The card network checks the details of the transaction and forwards the request to the issuing bank, which is responsible for verifying the cardholder’s identity and funds.

Step 4: Authorization request to the issuing bank

The issuing bank reviews the transaction details, including checking whether the cardholder has enough funds or available credit to complete the purchase. The bank also performs fraud checks to ensure the transaction is legitimate. If everything checks out, the bank approves the payment and sends an authorization back to the card network.

Step 5: Authorization approval to the merchant

The card network passes the authorization response to the payment processor, which then sends it to the payment gateway and finally back to the merchant. At this stage, the transaction is either approved or declined. If approved, the merchant can proceed with fulfilling the order.

Step 6: Funds transfer and settlement

Once the transaction is authorized, the issuing bank transfers the necessary funds to the acquiring bank through the card network. The acquiring bank then deposits the funds into the merchant’s account, minus any processing fees that are charged by the payment processor and the card network.

Step 7: Payment confirmation

After the funds are successfully transferred, the merchant receives confirmation, and the customer is notified that the payment has been successfully completed. At this point, the merchant can ship the product or deliver the service.

The role of payment orchestration in online payments

While the steps above outline the basic process of an online payment, things get more complex when businesses have to deal with multiple payment methods, currencies, and processors. This is where payment orchestration comes into play.

Payment orchestration refers to the technology and strategy used to manage multiple payment service providers (PSPs), payment methods, and payment gateways in a unified and streamlined way. Instead of juggling multiple platforms or dealing with the complexities of integrating new payment methods, a payment orchestration platform automates and optimizes the entire payment process.

Key benefits of payment orchestration:

1. Unified Payment System: Payment orchestration brings all payment methods, processors, and gateways into one platform, simplifying the entire process for merchants.
2. Smart Payment Routing: One of the standout features of payment orchestration is smart routing, where payments are directed through the most efficient and cost-effective payment processor. This helps reduce transaction fees and improve approval rates.
3. Failover Management: In cases where a transaction fails, the payment orchestration platform can automatically route the payment through a different processor, ensuring that the customer’s payment goes through without them having to re-enter their details.
4. Scalability: Payment orchestration platforms make it easy for businesses to scale by adding new payment methods, currencies, and regions as needed without complex integrations.
5. Enhanced Security: By centralizing payment management, payment orchestration platforms can implement consistent security measures, such as fraud detection and tokenization, across all transactions.

The importance of payment orchestration for businesses

For businesses handling high volumes of transactions or operating across multiple regions, payment orchestration is invaluable. It eliminates the complexities of managing multiple payment processors, reduces the likelihood of failed transactions, and provides insights into payment performance. Here’s why payment orchestration is essential for modern businesses:

1. Improved Conversion Rates: Smart routing and failover capabilities mean fewer declined transactions, leading to higher approval rates and improved conversion rates.
2. Cost Optimization: By choosing the most cost-effective payment processor for each transaction, businesses can significantly reduce their payment processing costs.
3. Customer Satisfaction: A seamless payment experience ensures customers can complete their purchases quickly and securely, reducing cart abandonment rates and increasing customer loyalty.
4. Global Expansion: Payment orchestration simplifies the process of expanding into new markets by supporting multiple currencies and payment methods without the need for additional integration.

Challenges in the online payment process

While the online payment process has many advantages, it also comes with challenges. These challenges can impact both the customer experience and a business’s ability to process payments efficiently:

1. Security Risks: Handling sensitive payment data exposes businesses to the risk of data breaches, fraud, and cyberattacks. Implementing strong encryption, tokenization, and fraud detection systems is essential to mitigate these risks.
2. Payment Failures: Technical issues, such as network failures or system downtimes, can result in failed payments, leading to a poor customer experience.
3. Complexity in Payment Management: Managing multiple payment processors and payment methods can be complex, especially for global businesses. Without payment orchestration, businesses may face integration issues and inconsistent user experiences.
4. Regulatory Compliance: Businesses must comply with various regulations, such as PCI DSS, GDPR, and local financial regulations. Failing to comply with these standards can result in hefty fines and reputational damage.

FAQs about the online payment process

What is a payment gateway?

• A payment gateway is the technology that securely transmits payment information from the customer to the payment processor and the issuing bank. It acts as the bridge between the merchant and the financial institutions involved in the transaction.

How does smart routing in payment orchestration work?

• Smart routing directs payments to the most efficient and cost-effective processor based on factors like transaction size, region, and historical performance, improving the success rate of transactions.

What happens if a payment is declined?

• If a payment is declined, the issuing bank typically provides a reason, such as insufficient funds or suspected fraud. In a payment orchestration system, failover management may automatically retry the payment with another processor.

How does tokenization protect online payments?

• Tokenization replaces sensitive payment data, such as credit card numbers, with a unique token that cannot be exploited. This enhances security and reduces the risk of data breaches.

Why are payment processors necessary?

• Payment processors facilitate the transfer of funds between the issuing bank and the acquiring bank, ensuring that the transaction is securely completed.

The process of online payments involves a complex interplay of multiple players, technologies, and security protocols to ensure that transactions are completed quickly and securely. For businesses, mastering this process is critical to improving transaction success rates, reducing costs, and delivering a seamless customer experience.

Payment orchestration plays a vital role in simplifying this complexity, providing businesses with the tools they need to manage multiple payment methods, streamline operations, and scale globally. As online payments continue to evolve, leveraging payment orchestration can give businesses the edge they need in today’s fast-paced digital economy.

To learn how Gr4vy can help optimize your payment process with advanced payment orchestration solutions, contact us today and start streamlining your online payments.