Market outlooks project that by the end of 2021, digital payments will total over $6.6 trillion in transactions (report). Influenced by both a global pandemic that led buyers to hands-free, contact-free payment solutions as well as digital-age users who overwhelmingly prefer to use their mobile devices for banking, the necessity for online payments is paramount to successful business operations today; a practice that will only continue to compound as time goes on.
What is online payment software?
The ease of making online purchases or payments has dramatically increased in the last decade leaving users a little in the dark when it comes to understanding just how money moves from one entity to another. Online payment software facilitates this process and gives the impression that it’s all happening in one place when in fact there are a number of entities and steps involved.
First, a bank (“issuer”) provides a credit or debit card to a cardholder. The issuer will approve or deny transactions, billing the cardholder as necessary. Visa, Mastercard, and AmericanExpress are examples of issuers. The cardholder uses the bank-issued card to initiate purchases with a business owner (“merchant”) who has a merchant account. Once a purchase has been initiated, the merchant pushes the authorization information to a merchant service provider (MSP, or “acquirer”) to process the transaction. While the merchant account may simply be the business’s bank, often there is a payment processor involved who partners with—and provides technology to—the acquirer for merchant use. The payment processor ensures that payments are cleared and funded into the merchant bank account. More often than not, a day’s worth of transactions are batched at once rather than individually.
If your head is swimming, you’re not alone. Payment processing terms haven’t changed much over time, but they have taken on more inclusive meanings as the digital age transforms how various payments are completed.
Payment processors and payment service providers
A payment processor, or payment service provider (PSP), facilitates transactions from buyer to business, ensuring that the business receives the payments for their goods or services. They function as a mediator between two entities to collect payment information, providing that information to both the issuing and receiving bank, and communicating authorization or decline of payments.
Businesses of all sizes who accept, process, and/or store credit card or debit card payments must remain compliant with Payment Card Industry Data Security Standards (PCI DSS, or just PCI). These standards were established in 2006 and are overseen by PCI Security Standards Council (PCI SSC). Payment service providers should be providing information to their users on their PCI-compliant standards.
Payment service providers equip their users with systems to efficiently manage payments. These are called point of sale (POS) systems. If the payment service is your bank, they will provide hardware to run credit cards for in-person transactions. For online payments, this is usually a third-party software that the business pays to oversee payments digitally. Rather than hardware, different types of software are involved that support the options the payment provider offers.
PSP online system complexity will vary. Some businesses will be able to use software provided by their bank to integrate with their website. However, compatibility between the two entities may be limited. In other cases, businesses use software that integrates with their website and that platform offers payment gateway and processing options. Merchants are able to merchandise their items online, and buyers are prompted to use that payment platform. These processors automatically factor shipping costs, tax, and transaction fees into the final cost of goods.
Payment gateway vs payment processor: What’s the difference?
When a client decides they would like to purchase something from the business, a financial transaction is initiated. In a brick and mortar retail location, this may look like a guest swiping a credit card on a physical machine that captures the card data, requests any authorization in the form of a signature or PIN, and notifies the issuing bank to transfer funds to the merchant account.
In an online landscape, instead of a physical card swipe, a payment gateway is used to capture and encrypt financial information to prevent fraud. The encrypted data is then provided to the payment processor who oversees the transaction from initiating bank to receiving bank.
While some payment service providers offer end-to-end options that include both the payment gateway and the payment processor, the two elements should not be considered synonymous. Both are required for secure online payments from clients, and knowing whether the payment service provider is only one or the other will make a significant difference. Merchants that do not verify their payment processor includes a payment gateway may find that client financial data is at risk, making the merchant not PCI compliant.
Paypal is an example of a payment service provider that is both the payment gateway and the payment processor. Paypal users can exchange funds within the paypal platform without the need for inputting sensitive banking information for each transaction. But the funds remain within Paypal’s platform. Once a user decides to deposit their funds into their bank account, Paypal processes that transaction.
Common features of payment processing software
Great online payment software should be impeccably user friendly for both merchant and buyer. Common options available are:
Payment processing software helps to make B2B payments seamless, eliminating the slow snail-mail method. Businesses are able to create, send, and receive invoices automatically. Businesses are then able to initiate and receive payments in real time with minimal time for processing and deposit.
Much the same way that a consumer can fill up a cart with items they wish to purchase as they shop, so can customers fill up a digital cart before they process their transactions. These mobile point of sale (mPOS) options allow businesses to integrate inventory data so that as online shoppers buy items, the merchant tracks stock levels. Further, payment software will often include a dashboard to review time of day and product trends for future inventory planning.
Subscriptions, membership fees, phone and utility bills, rent—payment processing software makes these bills simple to process and maintain. Buyers are prompted to provide payment information one time and authorize future payments for an agreed timeline in exchange for services or goods over that timeline. Payment software providers offer customizable email payment reminders as well as flag errors that may have occurred in the payment process.
Just as we have all watched cash payments move aside, familiar use of the physical credit or debit card is beginning to wane. Advances in how payments are made include use of finger-tip verification or face ID (biometrics), contactless payments in the form of chip technology so you can simply tap a card, using smart speakers to be able to initiate payments, and even payments made on social media sites rather than redirecting to merchant website.
AP and AR automation options make use of AI to read, record, and process B2B billing, minimizing human error and gaps in data. Automation speeds up reconciliation so that business owners can make strategic choices faster and with more confidence that the data is accurate.
Why are online payment services needed?
Meet customer expectations.
Customer experience in the e-commerce environment will make or break retention and purchase recurrence. Modern consumers want fast, secure payment options. Today, even small businesses are able to offer both with the use of online payment services.
Speed up the payment process
The convenience of fast and secure payments goes both ways. Businesses also want payments to process quickly, improving cash flow. With online payment services, transactions are initiated in real-time, removing the need for deposit trips to the bank or waiting for checks in the mail.
Easily manage vendors & customer data
Payment platforms simplify managing customer and vendor data. Traditional retail settings are not conducive to collecting customer contact information for future promotions—we’ve all stood in that line while a customer uncomfortably recites their email address. Online payment systems make this data collection a part of the transaction so that even a one-time payment can turn into a retention client.
Make faster payments with Routable
Automated accounts receivable
Routable makes getting paid easy through automated invoicing, real time accounting software updates, and accepting various online payment options so you can connect with a diverse landscape of clients and vendors.
Making sure your software options are communicating and functioning together is paramount in keeping business running smoothly. With Routable’s Robust API-first approach, users can depend on up-to-date options for keeping your software connected.
Accounting software integrations
You need integration with your accounting software to ensure real-time data. Routable integrates with Xero, QuickBooks online, and NetSuite with dependable two-way syncing, helping you cruise through invoice processing.
Online payment transaction value will likely grow by another 15% within the next few years and online payment landscapes are developing fast to keep up with consumer demand. Choose the right online payment system to best support your business needs and stay relevant and accessible to the evolving consumer outlook. Schedule a demo with Routable to optimize security, reliability, and accessibility in accounting integrations and AR automation.