Over the last decade, e-commerce has boomed. In fact, during the COVID-19 pandemic, shopping online was the only option for many people. Since that time, the convenience of e-commerce has continued, leading to even more businesses popping up in the same category.
Of course, e-commerce businesses must have strong payment processes to ensure security and smooth operations. A 2023 study showed that 56.3% of e-commerce purchases were paid for with payment cards, with 41.6% of that through credit cards. For that reason, ecommerce credit card processing is at the forefront of many business owners’ minds, and any associated payment processing costs.
But don’t worry; we’ll cover everything you need to know in this guide.
TL;DR
- Digital payments rely on complex, largely invisible infrastructure that enables smooth e-commerce transactions.
- Efficient payment processing can provide a significant competitive edge by improving customer experience and reducing costs.
- Innovations like real-time payments, AI-driven fraud detection, and embedded finance are shaping the future of e-commerce payments.
- Businesses can gain leverage by understanding and negotiating behind-the-scenes payment processing contracts, impacting fees, terms, and service levels.
- Outdated or inflexible payment systems can create technical debt, slowing innovation and increasing operational risk.
The Invisible Infrastructure of Digital Payments
Digital payments happen seemingly within the blink of an eye, but what happens behind the scene is complex, to say the least. By understanding digital payments infrastructure, you can optimize your payment strategy and save money along the way.
The Technical Anatomy of a Digital Transaction
Using a payment processing service basically means that everything is handled for you, faster than you can blink. Yet, what happens when a customer makes a purchase on your website? Basically, the payment information moves through several systems within milliseconds, including authorization, bank verification, authentication, settlement, and finally, the transfer of funds. Each step is vital and there are many parts of the process that can be optimized.
The Six-Step Transaction Journey
We can simplify the ecommerce credit card processing journey into six steps. This is far from mere approval or decline. Each step is crucial to avoid delays.
The table below outlines the six steps and gives some key information on where you may be able to optimize to save money.
Transaction Step | Optimization Opportunity | Potential Impact |
Authorization Request | Optimize data elements and formatting | 1-3% approval rate increase |
Bank Verification | Implement local acquiring for international | Up to 15% higher approvals |
Authentication | Dynamic 3D Secure implementation | 5-8% abandonment reduction |
Response Handling | Smart decline recovery | 3-7% transaction recovery |
Settlement | Processor selection and negotiation | 24-48 hour faster funding |
Funds Transfer | Multi-processor routing | Reduced processing costs |
The Hidden Cost of Latency
Speed is key, and it’s about more than the overall customer experience; it affects your approval rates too. When a transaction takes too long to process, it’s frustrating for the customer, potentially leading to dissatisfaction and lost future revenue. In many cases, business owners don’t even notice this issue, and customers could be lost due to something which could easily be optimized and fixed.
In fact, some payment systems set a 4 second timeline for processing, and if it doesn’t go through in that time, the payment is automatically declined. Again, this can be very frustrating for customers, particularly when it’s a latency issue and out of their hands.
The Psychology of Digital Payment Trust
When a customer makes a payment, they’re effectively trusting you with their financial details. Understanding the psychological elements of this can help you boost conversion rates, reduce churn rates, and cut down on cart abandonment. You can also use this information to implement trust signals and familiar design elements, increasing customer confidence.
Trust Signals During Checkout
What do we mean by trust signals? These are small signals that adapt to customer behavior and develop a sense of trust in your business. One option is real-time transaction protection notifications. These can appear during card entry and can help reduce cart abandonment. You can also display local payment methods and security certifications that automatically default to the customer’s location.
The Familiarity Principle in Payment Design
E-commerce and card-not-present payments go hand-in-hand. However, these have a higher fraud potential, so boosting trust here is vital. Familiarity between this type of payment and a physical card experience can help you boost confidence and increase completion rates. This means that your checkout process matches the layout, color schemes, and input process of a physical card experience, helping customers process information more easily.
You could also have visual card detection, which updates the form design on the page according to the entered card.
Payment Processing as a Competitive Advantage
Choosing the best e-commerce payment processing service can turn challenges into opportunities for business growth.
Payment processing is not simply a logistical need, it can be leveraged as a competitive advantage that drives customer loyalty and profit margins. Let’s explore how you can optimize your processes to impact your bottom line.
Dynamic Payment Routing Strategies
Some businesses use dynamic routing systems that use several payment processing services. This allows them to maximize their approval rates and reduce costs along the way. Within this, systems direct transactions to the best-suited processor depending on specific characteristics. They also use automatic failover mechanisms when transactions are declined, to help avoid further issues and delays.
Intelligent Failover Systems
We just mentioned failover mechanisms, so let’s briefly explain what these are. When a payment is declined, it is automatically rerouted through a different processor or retried. Taking this a step further, intelligent failover systems use algorithms that identify recoverable declines versus true fraud rejections. This can help recover a large portion, avoiding false positives and common credit card decline codes.
Transaction Profiling for Optimal Routing
Every transaction has its own unique features and these can make it either less or more likely to be approved by specific processors. The main factors include issuing bank, card type, customer location, amount, and purchasing history. You can analyze your transaction data and create routing rules from all that information. From there, you can direct each transaction to a processor more likely to approve it.
The table below gives some useful things to remember and examples:
Transaction Factor | Routing Consideration | Example Rule |
Card Type | Different processors have varying success with specific card types | Route American Express to Processor A (3% higher approval) |
Issuing Bank | Certain processors have better relationships with specific banks | Route Bank of America cards to Processor B (4.2% higher approval) |
Transaction Amount | High-value transactions may perform better with certain processors | Route transactions >$500 to Processor C (reduces declines by 7%) |
Customer Location | Local acquiring can improve cross-border transaction success | Route European customers to EU-based Processor D (15% higher approval) |
Time of Day | Processing performance can vary by time | Route overnight transactions to redundant processors (reduces timeout declines) |
The Future of E-commerce Payment Processing
The e-commerce world is certainly growing year on year, but what is it likely to look like in the future in terms of ecommerce credit card processing? While we don’t have a crystal ball, we can look at some emerging technologies and trends in customer expectations. From there, you can use that information to prepare a new payment strategy as the years go by.
The Rise of Alternative Payment Methods
Credit cards are certainly one of the most common forms of payment in all areas, especially in e-commerce. However, times can and do change, and there are several alternative payment methods that are on the rise, particularly amongst younger demographics.
It’s important to stay up-to-date with new trends and implement them where you can, to satisfy growing needs amongst your customer base. However, each payment method is likely to have unique characteristics that could create opportunities or challenges for your business.
There are many new, emerging payment types in ecommerce credit card processing.
Durbin Amendment 2.0 and Credit Interchange
One of the most significant regulatory changes was the Durbin Amendment, which capped debit interchange. However, since that time, similar regulations for credit card interchange fees are also under consideration. While these are yet to pass, it certainly raises future potential for cost lowering opportunities.
Beyond Buy Now, Pay Later
Buy now, pay later services have been popular for a while but they’re certainly in trend at the moment, and the model is changing. Now, you’ll see dynamic financial options that adjust terms based on each specific customer profile and cart characteristics. All this happens thanks to AI that determines the best financing options in real-time. This can help to increase conversion rates due to speed, personalization, and a smoother experience.
However, to implement this, you’ll need multiple financing providers available to you, and you’ll need sophisticated eligibility assessment algorithms.
Account-to-Account Payment Infrastructure
A new innovation within the payment processing service arena is account-to-account payments. In this case, regular card networks are completely bypassed, creating lower processing costs and faster settlement, often instant.
Businesses adopting this process often use a hybrid approach that allows account-based payments and traditional methods, giving the option to choose. Of course, you can also use new systems to add an incentive for customers to choose the most cost-effective method.
Embedded Commerce and Contextual Payments
Content and e-commerce are two areas where the boundaries are regularly blurring, and this brings challenges and opportunities in abundance. You’ll find content with purchasing options embedded, creating a friction-free, almost intuitive purchasing experience. However, this requires a new payment processing approach, and architecture in place to adapt to different contexts.
Social Commerce Payment Optimization
It’s been possible to make purchases through social platforms for a while now, e.g., TikTok Shop and Instagram. However, these purchases all have their own unique characteristics and this can affect whether or not a payment is successful. In many cases, these purchases are impulsive and they have only a few checkout steps, making it easier for the customer to press ‘pay.’ However, the challenges come through a higher risk of fraud, and a risk of chargebacks as a result.
When implementing this type of ecommerce credit card processing, it’s vital to have fraud protection in place, along with chargeback prevention. In fact, at PayCompass, all of our merchant accounts come with these two tools as standard, and real-time transaction monitoring.
Headless Payment Architectures
You may or may not have heard of headless payment systems, but these are likely to become more commonplace over the next few years. This is because e-commerce uses several touchpoints, such as apps, voice assistants, websites, and IoT devices, and payment systems must keep up. In this case, headless payment systems take the processing logic from the first layer, and allow for a consistent payment experience across any interface.
Of course, implementation is complex and requires considerable investment. For that reason, it’s important to weigh up the pros and cons beforehand. Yo’ull need an API-first payment provider and a unified payment orchestration layer. This will keep security at the forefront and ensure you remain compliant with financial regulations.
Negotiating the Unseen: Advanced Contract Strategies
If you look for standard advice on how to optimize your ecommerce credit card processing, you’ll probably see plenty about rate structures. While this is still important, you’ll get more benefit from understanding which parts of the payment processing structure you can change and negotiate. This is over overlooked by many businesses, but creates some excellent opportunities to save over the long-term.
In this section, let’s explore some points suitable for negotiation and areas that may create greater profits.
Negotiating with your payment processing service can create profitable opportunities.
Decoding Processor Economics
How does a payment processing service make its money? You might think that’s an unconnected question, but if you can grasp this, you’ll spot some key leverage areas for negotiation and restructuring.
To break it down, processors earn money from several sources, including interchange qualification, value-added services, and float. Let’s explore these in more detail so you can see where you can negotiate to save money.
The Float Revenue Factor
We just mentioned ‘float,’ but what is that? This is the time gap between when a processor receives the funds from an issuing bank to when they place them in your merchant account. Processors make a considerable amount of money from this, but it is also an area for negotiation.
This is particularly the case if you can reduce settlement times, so they’re 24-48 hours faster than the standard route. This will give you an improved cash flow, and you can use it as working capital value as a negotiation point against rate concessions.
Interchange Qualification Optimization
Many business owners only look at the payment processing service’s markup, and completely overlook the opportunity to optimize interchange qualification. If you can improve how your transactions qualify at the card network level, you’ll save over time.
One way to do this is to ensure you select the proper business category code. High-risk businesses typically pay more in interchange fees simply because of the category they’re in. However, if you can optimize this, you’ll reduce the amount of fees you pay.
Another option is using optimized transaction descriptors, along with enhanced data transmissions for B2B transactions.
Strategic Reserve Management
Many high risk businesses are required to have reserves in place to guard against chargebacks and fraud. This can significantly affect cash flow; yet, all is not lost. You can create strategies that minimize reserves or at least optimize them, freeing up working capital that you can reinvest into your business.
Let’s dive deep into this and see what moves you can make.
Reserve Reduction Frameworks
Most processors set their reserved requirements based on risk factors, and they hold anything up to 5-10% for high risk businesses.
Many businesses simply accept this as a fact, yet you can ask for a phased reserve reduction program that is tied to specific performance metrics. For instance, reduce chargebacks and processing history. Similarly, quarterly reviews can allow for reserves to be reduced depending on performance during the previous few months.
Alternative Security Instruments
There are other things besides cash reserves you can use as security arrangements. Here, we’re talking about things like letters of credit, performance bonds, or insurance products designed to cover processing liability. Using these alternatives can free up considerable “trapped” capital while still giving the payment processing service the security and guarantees they need.
The Technical Debt of Payment Infrastructure
Ecommerce payment processing makes use of payment systems that have been around for a long time, and while they’re complex, they can impact innovation and agility. This creates what is known as a ‘technical debt.’ For this reason, understanding how to manage and then modernize systems is vital for success over the long-term.
Let’s take a deeper look at some of the modern innovations and testing frameworks that can reduce this technical debt and boost payment performance.
Modular Payment Architecture
Monolithic payment systems have always been popular. This means all payment processing functions are integrated into one system. However, modular payment architecture is catching up, allowing for different components of the process to be updated individually, whenever the need arises. Moving from a monolithic to modular system means you can optimize different components without requiring a full system overhaul, therefore saving time and money.
In a modular system, processor integration, fraud management, and customer experience management are all moved into their own modules. That means you can change small pieces with much greater ease and flexibility, therefore reducing technical debt.
The Payment Orchestration Layer
Some businesses have started to implement specific orchestration layers between their commerce platforms and their payment processors. This means you can add or change processors without any change to your overall customer experience.
To implement this approach, you’ll need specialized middleware. This will create a standard method of communication between systems, yet still retains control over routing decisions.
Tokenization Strategy Design
Security is key, and tokenization is one way to ensure that as much as possible. In this case, transaction data is replaced with a unique token that cannot be read if intercepted, therefore reducing the likelihood of fraud. Tokenization is also an important tool in ensuring PCI compliance.
However, modern tokenization systems focus on creating portable tokens that can work across several processors. This creates flexibility while maintaining customer safety and convenience.
Testing and Optimization Frameworks
A/B testing is often the best route for new technologies and approaches, yet in payment processing, the best approach varies. This is because optimizing ecommerce credit card processing requires sophisticated methodologies that consider the unique characteristics of this method. Using these frameworks allows you to test out your new approaches without risking the customer experience or your revenue.
Shadow Processing Environments
Parallel processing environments are a good option for testing without disruption. In this case, transactions are sent to both regular processing and test processors. You can then test out real-world approval, costs, and performance without it affecting your sales. Meanwhile, the transaction goes through the regular route while you’re conducting tests simultaneously.
Synthetic Transaction Testing
Another option is to test payment systems with real cards. This gives you the benefit of using different variables that can often make optimization harder. Synthetic transaction testing uses specialized cards and scenarios without actually changing them in real life. Again, you don’t have any disruption to your regular systems in the meantime, but you can gain valuable information on performance in specific situations.
This type of testing can reproduce cases such as partial authorizations, processor-specific decline patterns, and step-up authentication challenges. All of these decline patterns would be extremely difficult, if not impossible, to test with regular means.
Final Thoughts
We’ve arrived at the end of our guide to ecommerce credit card processing and it’s clear that it’s a complex and sophisticated beast. While e-commerce has certainly risen in popularity, and looks set to continue, there are specific challenges in processing that may cause issues if not addressed. However, looking on the bright side, there are equally as many opportunities to optimize your processes and save over the long-term.
As with everything, payment technology certainly looks set to continue evolving into the future. This means you must stay up-to-date with new trends and changes, while keeping an eye on what may occur in the distant future. Always being ready to shift and change whenever necessary will help you maintain a competitive advantage and avoid any bumps in the road.
One way you can do this is by selecting the best payment processing services for your individual needs. At PayCompass, we see every individual business as a unique entity, and that requires a specific approach that may not fit anywhere else. That’s where our specialized and tailored high-risk merchant accounts come in. We know that you encounter issues in payment processing, but we specialize in helping you over those hurdles and onto even ground. More stress and more opportunities.
If this sounds like something you’d like to learn more about, reach out to us today. One of our experts will be in touch to help you move toward the optimal solution for your needs. No more headaches, no more confusion!
