ecommerce flow

[Evoir]

I've set up a few ecommerce sites, but I always get confused about the terms... can you help me figure out how best to explain this process to the client?

Basically, I set up a shopping cart program, and they set up a ________ account with Verisign or Athorize.net (are they a payment gateway?). That company then processes the transaction, approves or denies the card and then puts the money in a merchant banking account. The bank has to have the ability to talk with the payment processor. But, the bank just accepts the money from the payment processor, right?

It's kinda confusing because I install the cart, and hook it up to Verisign or Athorize.net (or whatever payment gateway they have chosen), but the rest is left to my client... so I never get to see the whole system. But, I have someone asking me specifics, and I want to make sure I can talk about it intelligently. :)

Are the terms payment gateway and payment processor the same thing?

[Rich]

Payment gateway and payment processor are used interchangeably although sometimes the term "payment processor" is used to mean the 'back end" processor whereas the gateway is the 'front end' processor.

(An example of a back end processor is First Data. Only banks and gateways would use the services of a back end processor as this implies direct communication over the private banking network.)

Here's the flow of events which actually happen as two separate steps:

Charge/Authorization:

(1) Merchant website 'talks' to gateway (front end processor).

(2) Gateway 'talks' to bank that issued credit card. Receives accept or decline decision. Decision returned to merchant.

Note: The Gateway might actually use the services of a "back end" processor to conduct the transaction with the issuing bank.

Batch/Settlement

The actual settlement process is a complex choreography of financial transactions that result in funds deposited in the merchants bank account. The following is a very brief summary.

(1) Gateway submits transactions to Acquiring (merchant) bank.

(2) Acquiring bank "settles" each transaction between card association (MasterCard/Visa) and the Issuing banks. In other words the Merchant bank "gets paid" (acquires payment) for each transaction.

(3) Merchant bank transfers funds into merchant's bank account.

Hope this helps.

[TVB]

Hi Rich,

This brings a question to mind---

Why can't my local bank be the "merchant bank"?

Betsy

[Mandi]

I've always wondered why local banks that offer merchant services, don't have a tier of service that comes with a basic shopping cart application and easy plugin to your merchant account. Reading Rich's post about private banking network makes me think it's just that it's not an easy matter to point a data stream in that direction.

[Rich]

Why can't my local bank be the "merchant bank"?
Most local banks DO offer merchant account services. However, these services are limited to retail accounts and not Internet accounts. The reason for this limitation has more to do with risk than technology. Retail accounts are very low risk whereas Internet accounts are very high risk. Merchant banks that offer Internet merchant accounts have a Risk department and a staff of people whose purpose is only to review every single transaction for potential risk and fraud. Local banks simply cannot afford to do this.

I should also point out that although most local banks offer merchant services, very few are actually a merchant bank (or acquirer). They simply outsource this to other banks. Because of this trend, many local banks now offer Internet merchant account services (they simply outsource this to others).