E-commerce payment systems explained: What to know

Key components of e-commerce payment systems

The main elements of an e-commerce payment system need to allow secure and efficient online transactions.

1. Payment gateway: Secure software that connects your e-commerce website to the payment processor. It encrypts and transmits payment data safely, protecting customer information.
2. Payment processor: A service that communicates between the customer's bank and your merchant account to ensure adequate funds and authorise financial transactions.
3. Merchant account: A special account provided as part of merchant services, that holds funds from sales before they're transferred to your business bank account. Some providers offer integrated services, allowing you to operate without a separate merchant account.

Some companies offer services that combine the functions of an e-commerce payment gateway, processor and merchant account, handling all aspects of the transaction from start to finish. You integrate your e-commerce platform with just one service, simplifying the setup and reducing technical hurdles, making it especially beneficial for small to medium-sized businesses or those new to e-commerce.

The difference between a payment gateway and payment processor

It's easy to confuse payment gateways and processors because both are merchant services involved in handling payment data and ensuring electronic transactions are completed. Since they work together during an online purchase, their individual roles might seem indistinct. But knowing the differences helps you choose the right services for your business and select options that offer the best value.

Main responsibilities of a payment gateway

A tool that securely transmits payment information between the customer, business, and payment processor

• Secure data transmission: It encrypts sensitive payment details, like credit card numbers, to protect customer information during the transaction
• Fraud detection: Many gateways offer tools to identify and prevent fraudulent transactions
• Support for multiple payment methods: They often accommodate various payment options and currencies, enhancing the checkout experience for a global audience

Main responsibilities of a payment processor

A business that partners with merchants to process and authorize payments, and ensure funds are transferred between the customer's and business's banks

• Authorisation: Communicating with the customer's bank to verify that funds are available and the transaction is legitimate
• Transaction processing: Facilitating the transfer of funds from the customer's account to your merchant account
• Settlement: Ensuring that the funds are correctly deposited into your account after approval
• Compliance and security: Adhering to industry standards like PCI DSS to protect cardholder data and reduce the risk of fraud

Key differences

• Role in the transaction:

• Payment gateway: Acts as the front-end interface that securely captures and forwards payment data
• Payment processor: Works behind the scenes to execute the transaction by interacting with banks

• Functionality:

• Payment gateway: Focuses on data encryption and secure transmission
• Payment processor: Handles authorisation, fund transfers and settlement

• Customer interaction:

• Payment gateway: Interacts with the customer during checkout
• Payment processor: Operates without direct customer involvement

The rise of diverse payment methods and systems

As the world of e-commerce expands, the ways to accept payments from customers are evolving just as quickly. Online shopping has made convenience and security top priorities for consumers. Traditional payment methods like credit and debit cards are still important, but there's a noticeable shift toward alternative online payment options that offer greater ease and flexibility.

Digital wallets and mobile payment apps allow one-click checkout on a customer's smartphone, eliminating the need to enter card details for each transaction. With frictionless payments being the top innovation customers are asking for in e-commerce, it's easy to see why they're so appealing. Similarly, Buy Now, Pay Later (BNPL) services provide shoppers with the flexibility to pay for purchases over time without incurring interest, which is especially attractive to younger consumers.

Here are different types of e-commerce payment systems and how they may benefit your online business.

Credit and debit cards

Some examples

Visa, Mastercard, American Express

Paying via credit and debit cards

Bank-issued cards that enable customers to make electronic payments either by drawing funds directly from their bank accounts (debit cards) or through a line of credit (credit cards).

Reason for popularity

Cards are accepted and trusted in many parts of the world. They are a go-to option for many consumers across different age groups and regions.

Benefit for businesses

Accepting card payments is vital for international sales and reaching customers who prefer traditional payment methods, ensuring you don't miss out on potential sales from a significant portion of online shoppers.

Bank transfers

Some examples

Direct bank transfers, ACH transfers (USA), SEPA transfers (Europe)

Paying via bank transfers

Customers pay by transferring funds directly from their bank account to the merchant's bank account. This can be done by entering bank details during checkout or being redirected to their online banking portal to authorize the payment.

Reason for popularity

Trusted by customers who prefer not to make credit card payments or use digital wallets. In many regions, especially parts of Europe, bank transfers are a common and preferred method for online payments. They offer immediate payments with high security due to bank-level protection and are familiar to consumers who rely heavily on banking services.

Benefit for businesses

Lower transaction fees compared to credit card payments; reduces the risk of chargebacks since bank transfers are typically irreversible once completed. Attracts customers who prefer or only have access to bank-based online payment methods, especially in regions where credit card usage is low but bank account ownership is high.

Digital wallets and e-wallets

Some examples

PayPal, Apple Pay, Google Pay and super apps such as Alipay

Paying via digital and e-wallets

Services that securely store customers' payment information, allowing for quick and seamless online transactions without repeatedly entering card details.

Reason for popularity

They offer convenience and robust security measures. Digital wallets are especially popular among mobile users and in regions where mobile payments are the norm, such as the Asia-Pacific area.

Benefit for businesses

Integrating digital wallets can attract tech-savvy customers who prefer faster checkouts. This is particularly important in markets like Asia-Pacific, where e-wallets are widely used. By offering these options, you can tap into a larger market segment that values quick and secure mobile payments.

Cryptocurrencies

Some examples

Bitcoin, Ethereum, Litecoin

Paying via cryptocurrencies

Decentralised digital currencies that use blockchain technology to secure transactions and control the creation of new units.

Reason for popularity

Cryptocurrencies appeal to consumers interested in privacy, security, and cutting-edge technology. They offer lower transaction fees and eliminate the need for traditional banking intermediaries.

Benefit for businesses

Accepting cryptocurrencies can help you attract a niche market of tech enthusiasts and early adopters. It positions your online business as innovative and forward-thinking. Additionally, crypto transactions can reduce processing fees and eliminate chargebacks since transactions are irreversible.

Buy Now, Pay Later (BNPL) Services

Some examples

Atome, Afterpay, Klarna, Affirm

Paying via BNPL

Payment solutions that allow customers to purchase items immediately and pay for them over time in instalments, often without interest.

Reason for popularity

BNPL services provide financial flexibility, making higher-priced items more accessible. They're particularly popular among Millennials and Gen Z shoppers who appreciate the ability to spread out payments without incurring debt from credit cards.

Benefit for businesses

Offering BNPL options can increase your average order value by making products more affordable upfront. It attracts budget-conscious consumers and can improve conversion rates among shoppers who might otherwise abandon their carts due to cost constraints.

Choosing the right payment provider

When choosing a payment system for your e-commerce business, it's important to focus on factors that directly impact your operations and customer satisfaction. Here are some questions to ask:

What are the security features?

Protecting your customers' sensitive information is essential for maintaining trust and reducing the risk of fraud. Ensure the payment system complies with industry security standards, such as PCI DSS compliance. Security measures include encryption, tokenisation, two-factor authentication (2FA) and real-time fraud detection.

What are the transaction fees?

Fees affect your profit margins and pricing strategy. You'll need to factor in all fees you could pay, including setup fees, monthly charges and fees per transaction. Evaluate multiple providers to find a cost-effective option that fits your sales volume.

Are the merchant services scalable?

Your payment system should accommodate online business growth without compromising performance. You may need to process more transactions during peak periods, or accept different customer payment methods if expanding overseas. Consider options that allow you to upgrade services as your needs evolve.

Is it compatible?

Seamless integration minimises technical issues and improves the user experience. Look for compatibility with your website, shopping cart, mobile app and accounting software.

How do customers prefer to pay?

Offering a wide range of electronic payment methods for your target audience can increase conversion rates and enhance the customer experience. For instance, 70% of respondents considered a website's available payment methods very important when choosing where to make a purchase.

Can it accept international payments?

Being able to accommodate global customers expands your market reach. A payment system should be able to process international transactions in different currencies and support region-specific payment options such as Alipay or WeChat in Asia.

How responsive is the customer support?

A customer service team that can help resolve issues quickly means less downtime when issues arise. Consider whether the support hours align with your business hours and customer activity, as well as the ways of contact, such as phone, email and live chat.

Does it offer reporting and analytics?

With detailed reporting comes better business decision-making. Choose a payment system that provides insights into your sales, transaction history, and customer behaviour, and can sync with your accounting software or CRM software.

Is it compliant with regulations?

Ensure the provider follows Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations, and complies with data protection laws like GDPR if you operate internationally.

Key trends in e-commerce payment systems

The world of e-commerce payment systems is changing rapidly, bringing new opportunities for businesses to improve the shopping experience. Here are some key trends to keep an eye on.

Expansion of digital payments

Digital payments are becoming more common worldwide and a growth opportunity in regions like Africa, with low levels of electronic payments historically. However, the speed of growth is dependent on digital infrastructure, with the growth likely to be uneven on the continent. In other countries like Germany, where cash was king, the decline of cash payments continues.

Rise of BNPL services

The Buy Now Pay Later market continues to be important, with an estimated compound annual growth rate (CAGR) of over 40% between 2004 and 2032. As a payment alternative, BNPL is now used in a wide range of industries beyond e-commerce, such as healthcare and travel. For merchants, the integration of BNPL with e-commerce sites is leading to higher conversion rates and less cart abandonments.

Continued use of credit and debit cards

Despite new payment methods emerging, credit and debit cards remain widely used and trusted by consumers globally.

Increasing digital wallet popularity

While APAC and China continue to lead the way in digital wallet adoption, other regions are catching up. Digital wallets are the tope-commerce payment method in several European markets and homegrown wallets such as MobilePay in Denmark and Vipps in Norway have taken off.

A2A payment adoption

Advancements in Open Banking and instant payment technologies have made account-to-account (A2A) payments more viable. For merchants, benefits include lower fees and faster cash flow.

Antom's e-commerce payment systems

Choosing the right e-commerce payment system for your business model can greatly improve your online business by ensuring smooth and secure transactions. Focus on important factors like security, fees, scalability, and what your customers prefer to create a positive shopping experience. Staying updated on trends such as digital wallets, Buy Now Pay Later services, and mobile payments helps you meet changing customer needs and stay competitive.

We're here to support you in navigating these choices and finding the best payment solutions tailored to your needs. Contact us to discuss how Antom can help enhance your payment systems and drive your business forward.