Internet Processing: Understanding its Role in the eCommerce Process

Internet processing of credit card payments is a bit different from how we handle card-present transactions. Whether you’re new to credit card acceptance, or a brick-and-mortar retailer interested in establishing an online store, it’s important to understand what’s going on behind the scenes of online payment processing.

In this post, we’ll explain the mechanics of internet credit card processing. We’ll examine the different costs involved, and outline some of the unique challenges and risks that should be considered.

What Is Internet Processing?

Internet Processing: Internet processing is the method used by merchants to electronically accept customer payments involving debit or credit cards.

When we refer to credit card internet processing, we’re talking specifically about the way payment card transactions work in an eCommerce setting. Before we get too deep into the process, however, let’s take a quick look at the entities involved:

Merchant: A business accepting card payments.
Cardholder: The authorized user of the credit card.
Card Networks: Card brands like Visa, Mastercard, American Express, or Discover.
Acquiring Bank: The bank at which you have your merchant account.
Issuing Bank: The cardholder’s bank which issued the card used for the purchase.
Payment Processor: A provider responsible for handling data between parties.
Payment Gateway: Technology that acts as a bridge between you and the banks.

How Internet Credit Card Processing Works

The entire transaction process starts with the cardholder. Shoppers visit your website, make their selection, and proceed to checkout. Once there, they fill out a web form. This form combines transaction information with personal data such as name, address, shipping details, and credit card information.

Once the webform is completed and submitted, the transaction processing begins. There are for main steps to this operation:

Authorizing: The payment processor authorizes the transaction, ensuring that the card hasn’t been reported stolen and the cardholder has sufficient funds/or credit available.
Batching: The merchant submits a collection (batch) of transactions, typically at the end of the day. The batch is forwarded to the appropriate card network by the acquiring bank.
Clearing: The card network passes transaction details to the issuer, which charge the cardholders account. The issuer then transmits payment back to the acquiring bank.
Funding: The acquiring bank deposits funds into your merchant account, less any applicable fees. Once the funds appear in your account, they are available for use.

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Internet Processing: Fees

As you might suspect, none of the providers involved are working for free. Each one charges a fee for their services. These will typically include:

Transaction Fee: A fee assessed for each processed payment
Gateway Fee: The cost of having transaction information encrypted and securely transmitted.
Per-Transaction Gateway Fee: Charged for each transaction that goes through your gateway.
Statement Fee: A flat fee for your monthly record of transactions, provided by the processor.

Depending on the provider, there may be additional charges associated with online processing, too. These may include:

Application Fee
Setup Fee
PCI Compliance/Certification Fee
Ongoing Customer support

… and potentially others. Some of the various charges are one-time only. Others range from $10-20 per month. Others might be applied on a per-transaction basis; for example, charging $0.15-0.75 per transaction processed.

The Risks and Challenges of Internet Processing

By their very nature, payment card transactions present a certain amount of risk to the merchant. Many of the challenges that accompany brick-and-mortar sales, however, are amplified in the realm of eCommerce.

Challenge: High Risk Merchant Accounts

Merchant accounts are necessary for internet processing. Securing one can be problematic, though, if your business is labeled “high-risk.” Your business can be deemed high-risk based on a number of factors. Some examples include the products sold, the countries sold to, the processing methods used, or the average amount of sales.

Unfortunately, many online merchants have a higher risk or liability level that banks are willing to accept. This is largely because the growth of eCommerce has brought a matching surge in fraud. This leads to chargebacks, and the more chargebacks received, the riskier your business looks. For that reason, some banks and processing companies are not willing to work with eCommerce merchants at all.

The challenge doesn’t end there, though. Not only are high-risk merchant accounts harder to obtain, you’ll face higher processing fees, excessive set-up costs, and more higher per-chargeback fees.

Risk: Increased Fraud

You don’t have the benefit of face-to-face customer interaction in the eCommerce space. As a card-not-present merchant, you’re forced to validate a cardholder’s identity through less reliable methods. At the same time, eCommerce growth has lead to an increase in fraud cases. This one-two punch greatly raises your risk of fraud.
There are two main sources of fraud in internet processing:

Criminal Fraud: Someone other than the cardholder makes an unauthorized purchase.
Friendly Fraud: TA cardholder authorizes a purchase, but then files an invalid chargeback to reverse the transaction.

Criminals commit fraud by acquiring legitimate card information and making unauthorized purchases. They can use methods such as phishing, account takeover, or identity theft, to name a few. The loss from criminal fraud, however, is only part of the problem.

There are legitimate reasons cardholders may give for filing a chargeback. They seldom coincide with the true reason behind a dispute, though. In many instances, cardholders use chargebacks out of convenience, ignorance, or an attempt to steal from the merchant. This is a practice called friendly fraud.

For effective prevention strategies, it’s critical to know whether you’re fighting legitimate fraud claims or friendly fraud attempts. Distinguishing between the two, however, can be difficult. Intelligent Source Detection™ from Chargebacks911® is currently the only solution on the market designed exclusively to help identify the true sources of fraud.

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Challenge: Balancing Fraud Prevention with the Customer Experience

Customers can be fickle…especially in eCommerce. They’ll click away to a different site at the slightest inconvenience. Abandoned carts are a common occurrence; one that is often based in friction during checkout.

Front-end fraud detection techniques (like 3-D Secure and card security codes) have varying levels of success. Each adds more steps to the checkout process, though. Despite the fact that fraud prevention measures protect both you and the cardholder, impatient customers will often balk at any slowdown such tools create.

Finding the right balance of protection and customer satisfaction can be a significant challenge for eCommerce merchants. If front-end fraud detection techniques are interfering with conversions, you might consider adding less intrusive solutions such as fraud filters or chargeback alerts. These come with their own limitations, which why you must ultimately develop a strategy customized to your needs.

Risk: Chargeback-Causing Errors

One nice side-effect to internet processing is that customers typically input their own personal information. This means they’re responsible for any inaccuracies. That’s not to suggest you should let down your guard, however. There are dozens of missteps that could potentially trigger a chargeback. Identifying and eliminating these internal triggers is vital to your bottom line.

If you’re like most merchants, you’re probably too invested in your company to view your processes and procedures with complete objectivity. That’s why Chargebacks911 created the Merchant Compliance Review. Our 106-point inspection locates even minor errors and procedural missteps. You’ll receive an actionable plan designed to reduce error by resolving any potential triggers.

Challenge: PCI Compliance

Global card networks joined forces to establish the Payment Card Industry Data Security Standard (PCI-DSS ) for the purpose of To ensuring that cardholder information remains secure. PCI-DSS is a set of standards dictating how data is to be used and stored. For internet processing, all merchants must comply with these PCI-DSS standards.

The compliance processes are complex and time consuming. They involve regular assessments and audits. Requirements become more stringent as the volume of transactions increases, as do the expenses of maintaining compliance. Ultimately, this is just one more area where time and resources must be expended for the privilege of accepting credit cards.

Need Help Making It All Work?

Credit card processing is a complex part of doing business online. Add in the stress and restrictions associated internet processing? It can overwhelm you quickly if you try to do everything alone.

Fortunately, we can help. Our end-to-end dispute service platform prevents more chargebacks, wins more reversals, and maximizes your ROI. For more information, contact Chargebacks911® today.

FAQs

What is internet processing?

Internet credit card processing refers to the technology and methods merchants use to process credit card payments from online transactions.

How does online transaction processing work?

The transaction process involves multiple parties, including merchants, cardholders, banks, card networks, and other service providers. Each of these parties have multiple touch points in each individual transaction.

Do I have to pay for internet processing?

Yes. There are a number of fees associated with internet processing, from administrative and set-up charges to per-transaction fees and more. Talk to your processor for more information on your specific monthly/transaction costs.

Does internet processing increase my chargeback risk?

Indirectly, it can. The process itself doesn’t present a significant risk, but using internet processing means you’re dealing with eCommerce transactions. That in itself typically means you have a higher chargeback risk, and other associated factors might increase that risk even more.