Internet Credit Card Processing

What you need to know to get started in online credit card sales?

The primary purpose of online credit card processing is for ecommerce. Retailers want to automate the sales process with a virtual store, online shopping and checkout. Ideally, the actual seller simply ships merchandize out (although, this too can be outsourced) and watches their bank balance grow.

To make this ideal happen though, there are some behind the scenes operations taking place. Most have to do with security and identity verification, including transmitting credit card information.

Outline of the “Back-end”

Because most of the data handling goes on behind the scenes and customers aren’t aware of it, these functions are called backroom or back-end operations. The flow for authorization of these back-end operations is:

  1. Order is placed through online store/shopping cart
  2. User’s browser encrypts the information through a SSL (secure socket layer)
  3. The website forwards credit card information to a payment gateway company (also SSL)
  4. The payment gateway forwards the information to one of several payment processors used by the merchant’s bank (depending on credit card type)
  5. The processor receives a reply (approved, declined, error) from the issuing bank.

The chain then reverses and each step is repeated in the other direction back to the website software and the transaction either goes through or fails for some reason. When a transaction is declined, a code will be issued that tells you the reason.

Settlement happens as a separate step. This is where the merchant actually gets the money put into their account. Although the chain of authorization above typically takes only a few seconds, the final transfer of funds can take a few days.  Some processors will offer expedited transfers (as short as next day) but they are acting as an intermediary and providing funds that haven’t actually been transferred yet, essentially risking their money until the bank releases it, and they add a fee for this service.

Payment Gateways

Critical to the above chain, and the company the online merchant actually deals with, is the payment gateway company. Some examples of payment gateway companies are: PayPal, Advantage Processors, 2checkout,, and Paymentsphere.

To send information to these companies, you will need software that is able to communicate with their systems that integrates with your shopping cart software. Note these are two different functions. The first runs your site, keeping track of a shopping cart and which items a customer wants to purchase (among other things) while the second simply transmits a credit card number (along with customer identification information) and a total dollar amount. The payment gateway doesn’t care if they bought 6 or 16 widgets, just the amount of the charge.

The payment gateway will have separate modules designed to match up with different payment options. The reason for this is that MasterCard, Discover, American Express or Paypal will want different information or a different format. These modules are easily grafted on and the one you need will depend on which types of payments you will be able to accept.

Because of the popularity of online retailing, many payment gateways also offer checkout software that is already matched to their systems. Using their native software assures that everything on the site related to the shopping cart function will work properly.

Merchant Accounts

An Internet merchant account is different than a regular brick-and-mortar credit card account. This is because the risk of fraud is greater – you don’t have a customer in front of you who can sign, nor do you have a physical card you can look at. The type of accounts used for online sales are similar to those offered for mail order. These are called MOTO accounts, for Mail Order/Telephone Order. These have been around ever since merchants started taking credit card information over the phone.

MOTO accounts have higher fees than physical retail location accounts to offset the higher risks. Some merchants, when adding Internet to an existing offline business, will try to dodge the higher fees by running credit cards through their offline store terminals – this is a very bad idea! If you are caught doing this, your offline merchant account will be shut down.


There are four main players involved that will charge fees. The first is the payment gateway itself. This is usually a set fee per transaction ($.10 – $.15) in addition to any membership or leasing fee on the software. Some companies offer free software and just charge by transaction fee.

The second player is the processor/credit card network. This layer of data handling is set up by the banks and charges a standard interchange rate depending on the credit card used. So, for example, MasterCard will have a different fee than Discover.

The third player is the acquiring bank. This is the bank where your merchant account actually resides and where your money will end up. They “acquire” the debt from the issuing bank. They charge you what is known as the “discount rate.” This is a fee based on dollar volume – a percentage of the sale instead of a single, set fee per transaction.

The issuing bank is the bank on which the credit card account is drawn. This is the bank that issues the debt to the customer who has the credit card. The issuing banks shares the interchange fee with the credit card processing network.

The main fees are the transaction fee and the discount rate. Combined, they can amount to 2 to 6% of gross sales, depending on dollar volume and the number of sales. In our example above, selling 6 or 16 widgets in one sale will generate a single transaction fee that is fixed – it costs you the same for either sale. But the discount rate, which is a percentage of the total amount, will be higher for the 16 than the 6.


Not all payment gateways require you to have a merchant account. PayPal has an offering that doesn’t, but the fees will be higher and you may be limited in the amount of sales you can do in a month. Others will set up a merchant account for you, usually at low or no cost.

Your legal location can make a great deal of difference on whether you can do business with a particular company and how much they will charge you. Almost all payment gateways will offer services in the US and Canada. Where you customers come from may also matter. Some payment gateways deal only in US currency. Others convert foreign currencies for you (and take a percentage).

All will offer email support, and this is useful when setting up the software on your server. Almost all offer phone support – some may charge for excessive use.

There are also variations that allow debit cards, gift cards or reward cards. If you sell items on a subscription basis, some gateways will allow future payments automatically (if approved by your customer) as an added function.

One final area of interest is fraud detection and the ability to set limits. If you only want to take credit cards from a certain country or block some types, this software will allow you to do so. However, expect to still pay a transaction fee when someone tries to get one through. Remember, the transaction fee will be charged even if the sale is declined – it is a fee just for using the system.