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Payment processing workflows for ecommerce

Understanding how payment processing works for ecommerce and the pros and cons of different strategies.
Posted Mar 21 2022
Topics:
Payment gateways and payment products
(A.K.A. “wallets”)
Different payment strategies
(Auth, Capture, and Sale)
Definitions:
Authorization Transaction
A hold on the customers funds
Capture Transaction
A transaction that takes the funds that were held from an authorization transaction
Sale Transaction
A combination of an authorization and capture in a single transaction

Payment gateways and payment products

Payment gateways

If you want to accept payments on the internet and ecommerce, there is a long standing and ubiquitous solution – the payment gateway. A payment gateway is a technology that connects your merchant account to the web. It allows you to accept payments over the internet that deposit into your merchant account – a special bank account for merchants.

Common payment gateways include Authorize.net and Braintree. Some payment gateways offer merchant services as well, so even if you don’t have a merchant account, the payment gateway company can often facilitate this. A notable example of this is Stripe – Stripe makes it very easy to get a merchant account and a payment gateway up and running quickly, along with POS (point of sale) features.

Payment products – A.K.A. “Wallets”

We’re still seeing most payments processed in Orderwave being processed though traditional payment gateways, but that majority is being eaten away by payment products (or “wallets”) that connect customers and merchants through a 3rd party, such as PayPal, Amazon Pay, and Apple Pay. These types of wallets differ from the traditional payment gateway / merchant account in that you do not have funds managed directly in your own merchant account (funds are deposited in your account on a periodic basis), you do not collect payment/billing details directly from the customer, and you have different requirements for shipping and capture.

Gateways compared to wallets

Like anything in life, there are tradeoffs. Collecting payments with a payment gateway your own merchant account gives you control over the payment flow, quicker access to funds, and more visibility into the payment information from your customers. When you let your customers use a wallet, you are removing friction from the checkout experience, since customers can easily authenticate with those services, and thus will convert more sales.

In a wallet scenario, you cannot initiate a payment transaction without the customer interacting with the payment process. The customer must log in, approve the transaction, and confirm it. For example, let’s say that a customer calls and wants to upgrade their shipment method on an order that they just placed. If the customer paid through Amazon Pay, you have no way of reauthorizing their payment for a higher amount, since you do not have the customer’s credit card information – that sensitive information is securely stored in Amazon Pay, and you have no access to it for merchant-initiated transactions.

If you’d processed that order through a payment gateway and tokenized the credit card information (securely stored the customer’s credit card information in the payment gateway), you would have the access you need to initiate a new transaction. Depending on your business model, you need to consider these tradeoffs carefully. If you process payments in installments, you may need the flexibility of a payment gateway. If your goal is to reduce friction and take as many orders as possible, offer a payment gateway and as many wallets as you can.

Different payment strategies

When processing payments for ecommerce orders, whether through a payment gateway or wallet, they all offer similar transaction types: Authorization, Capture, and Sale (A.K.A Auth-Capture).

An Authorization is a transaction that attempts to reserve the funds on the customer’s credit card account for a certain amount. It’s also process that makes sure that the customer has enough available credit for that transaction, and you can also use this step to access additional fraud prevention features like address verification, CVV checks (Card Verification Value – that little 3 digit code on the back of the card), and more. After a certain amount of time (it varies by payment method and wallet), if the authorization is not captured, the “hold” on the funds is released back to the customer, and you cannot get access to that money anymore.

A Capture transaction is a transaction that instructs the payment processor to take or commit the funds from a prior authorization transaction. You cannot perform a capture transaction without a prior authorization to base it from. A Sale transaction is a combination of authorization and capture. When you perform a sale transaction with a payment gateway, the payment gateway (or wallet) will perform an authorization and capture and return the results of the capture.

A Sale transaction is a combination of authorization and capture. When you perform a sale transaction with a payment gateway, the payment gateway (or wallet) will perform an authorization and capture together and return the results of the capture.

Auth+Capture strategy

In an Auth+Capture strategy, you perform an authorization transaction to reserve the funds from the customer, and later when you ship or otherwise fulfill the customer’s order, you perform the capture transaction to collect the funds.

With this strategy, you’re benefiting from not needing to refund the customer should something occur where you cannot fulfill the order. If you cannot fulfill the order and cancel it, you can void the authorization, or let if “fall off” automatically, and the funds do not need to be refunded.

You do need to fulfill the order as fast as possible – within a few days – to make sure that you can successfully capture the authorization and get paid. PayPal has a notoriously short authorization window of 4 days. Visa and MasterCard allow 7 days, but features and real-world limits can vary by the gateway or wallet that you’re using.

Sale strategy

In a Sale strategy, you’re taking the money up-front from the customer, and fulfilling the order later.

With this strategy, you have the benefit of not needing to worry about fulfilling the order before you lose access to the capture the funds. However, if you are unable to fulfill the order, you will need to refund the customer. Too many refunds on a merchant account can cause you to lose your merchant account or have reserves raised.

Conclusion

With so many options, it can be difficult to choose the right strategy for your ecommerce business. Any way you go, you need an Order Management System (OMS) that manages both flows automatically so that it does not become an administrative nightmare.

Orderwave will automatically calculate and perform capture transactions after shipment, as well as calculate and perform refund transactions after order cancelation. If an order is authorized and canceled, Orderwave will even automatically void the authorization transaction, releasing the hold on the customer's available credit, which reduces customer service inquiries.

Contact us today to see how Orderwave can improve your payment processing workflows for your ecommerce operations.

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