Different payments systems used by e-commerce systems include credit or debit cards, paypal, stripe, digital currency, cheques, bank transfers and digital or physical gift cards.
Credit and Debit Cards
Visa and Mastercard credit & debit cards are the most common form of online payment and therefore the most widely used in e-commerce systems. Credit cards are a type of loan. When you buy something on a credit card, you borrow money from the card issuer (usually a bank) for a short period of time. If you don’t pay back the loan within a certain number of days, you’re charged relatively high rates of interest. Some credit cards however charge 0% interest for a short period which means that you can effectively borrow money for free, provided you can pay it back within a set period.
Benefits of credit cards, in addition to being a quick way to borrow money, is that the consumer gets more protection than if they pay with cash. If for example you buy something from a company and the company goes bust, you can claim the money back via the card provider. If the card is used fraudulently, you can also claim funds back from the card provider. Another benefit of using a credit card is that all transactions are timestamped and logged, so both the bank and the customer have a written record of what was bought, when it was bought and for how much. This helps with financial planning and accounting. Some card issuers also provide points and bonuses for every pound spent using a credit card i.e. if you spend £100 using the credit card, you might get £1 cash back at the end of the year.
Debit cards offer the same benefits as credit cards but only subtract money that exists in a current account. If the current account balance drops below zero, the debit card won’t work as it doesn’t offer borrowing facilities.
In order to accept credit and debit cards, businesses generally need a merchant bank account and need to pay a monthly fee (or a per transaction fee) to a payment solution provider. The provider then processes the payment and handles security and compliance.
Another downside to handling credit cards (for a business) are chargeback fees. A chargeback occurs when a cardholder initiates a report of a fraudulent transaction on their account. These fees tend to be non-refundable and range from about £10-20 per chargeback. This means that if a customer forgets they bought something on a businesses website and then looks through their credit card statement, they may call the credit card company and claim the transaction must be fraudulent because they didn’t make it. The business automatically gets hit with a chargeback fee.
Paypal enables customers to send and receive payments online without revealing their credit card or bank data to each other. It’s a faster way of paying for things online as customers only need a username and password to pay via paypal (assuming they’ve previously linked their bank account or credit card to their paypal account). Paypal accounts are free for everyone which means there are no monthly fees for businesses. Businesses simply pay a fee if and when a transaction is made via paypal.
These fees are generally higher than a regular payment gateway such as Realex or Braintree but because it’s a fast and convenient way to accept payments without any upfront costs, many small businesses prefer to use paypal.
Stripe enables businesses to integrate a payment processing (handling debit and credit cards) into their websites and apps without having to set up a merchant bank account. Like paypal, there are no monthly fees involved and businesses are only charged when a transaction is made on their site. Stripe take a small processing fee (currently cheaper than paypal).
Stripe have a seven day waiting period on transactions where they check for fraud before releasing the funds directly in to the businesses bank account.
Stripe is considered more developer-friendly than any other payment system due to the fact it was built by developers specifically to make handling payments online easier.
Bitcoin and Digital Currency
Bitcoin is a digital currency (also called a cryptocurrency) that is created and held electronically. It is independent of any government, bank or private company and cannot be printed or manipulated like traditional currency (i.e. pounds, euro, dollars).
It was created to produce a currency that couldn’t be controlled by any central authority but that was transferable electronically, instantly and with very low transaction fees. The Bitcoin protocol (rules that dictate how Bitcoin works) states that only a maximum of 21 million Bitcoin can exist and the process by which they’re created is called ‘mining’ – similar to how gold or other natural minerals are mined only Bitcoins are mined by computers solving complex algorithms – their reward is Bitcoin.
The bitcoin ‘blockchain’ keeps a log of every single bitcoin transaction in the network along with a record of how many Bitcoins each address on the network has. Bitcoin addresses aren’t linked to names or personal information, they’re simply a random string of 27-34 alphanumeric characters.
Anyone (included businesses) can generate an address and start receiving Bitcoin instantly. There are little to no costs involved in transferring or storing Bitcoin but Bitcoin wallets are a regular target for hackers and scammers.
Cheques are gradually being phased out by banks but in some countries they’re still commonly used (i.e. in the US). The advantages of cheques as a payment method are that customers who don’t have a credit or debit card or a bank account have no other means of paying for something online.
Cheques enable customers to pay for things online by sending a cheque to the businesses address, which is much more secure than sending cash by post. The cheque then needs to be processed and cleared by the businesses bank before the business actually receives the funds. The process can be slow and time consuming for both businesses and banks which is why most businesses don’t accept cheques. If however the business is selling high value items, it could be worth accepting cheques as a form of payment, even if it only results in a handful of extra customers.
Electronic cheques are an electronic copy (scanned image) of a real cheque which can then be transferred by email. In addition to the cheque’s real signature, the transfer must be digitally signed using the sender’s private key to authenticate the transfer. The private key is a secret mathematical calculation used to create the digital signature on the cheque.
Bank transfers or wire transfers are a method of sending money from one bank to another electronically. In order for a customer to send a business funds, the customer must know the businesses IBAN (International Bank Account Number) which is an internationally agreed system of identifying bank accounts. Other information may be necessary depending on the bank involved such as the name and address of the receiver and the receiving Bank’s sort code.
Bank transfers within certain areas (i.e. within the UK or the EU) can take 0-2 days to clear and may be longer for worldwide transfers. Transfers costs also vary depending on what country the funds are being sent to. International transfers are usually more expensive than regional transfers which may be free.
Gift cards function a bit like debit cards in that they enable customers to pay for products and services by deducting a fixed amount of money from an account. They can often be bought as gifts for Christmas or Birthdays which enable a business to generate revenue easily and quickly in bulk on the promise that the card will be valid for at least a certain length of time in the future (usually 12 months).
They are similar to cash in that customers can spend them how they wish on a variety of products / services but the big difference is that they can only be spent in the store in which they were bought and they also have an expiry date.
Gift cards can be physical cards which are scanned at point of sale or they can simply be digital cards or codes which upon entering in to the system, will reduce the total balance by a certain amount.