Basic E-Commerce Credit Card Authorization Process

If you've surveyed past issues of Web Commerce Today, you know that e-commerce can seem complex -- especially when you try to comprehend all the pieces for the first time. This brief article is designed to simplify the elements and place them in relation to each other. Some sites, like BigStep.com, combine all these elements, while for others, especially for more complex stores, you need to have each in place.

The animated illustration at http://wilsonweb.com/wct4/images/process-ani.gif shows a simplified version of the path of a typical shopper's order.

• Shopper submits her order in the secure Order Form of your online store.
• Online Store transmits the credit card information securely, using the
• Payment Gateway to the
• Processor. The Processor then checks against lists to make sure the card isn't overdrafted or on a list of cards reported stolen. It then transmits an Authorization Number over the
• Payment Gateway. With some systems, the payment gateway sends information to a
• Fraud Check System (optional) that analyzes previous usage of that card, time of day, amount of charge, country of origin, and other factors, then screens out fraud risks based on a merchant adjusted computer model.
• Payment Gateway carries the information from both the Processor and Fraud Check to the
• Online Store's order form, informing the
• Shopper that the order has been completed, or that the charge did not go through.

Doing e-commerce requires the merchant not only to set up a website, but to set up interconnections with financial services to handle payment through credit cards.

Merchant Credit Card Account

Merchant Credit Card Account enables the merchant to accept credit cards from shoppers for payment.

The Merchant's Bank, sometimes called the Acquiring Bank, opens a Merchant Credit Card Account for the merchant, allowing deposits based on credit card transactions. Independent Sales Organizations (ISOs) that "sell" Merchant Accounts place you with a Merchant Bank -- for a fee. The bank's own fees are typically much lower.

The Merchant Bank then contracts with a Credit Card Processor to processes credit card sales, debiting credit cards and depositing money in merchant's accounts when a transaction "clears" or is completed. You don't select this, your bank does.

Payment Gateway

Payment Gateway. In order to get real-time credit card authorization, you need a bridge between your e-commerce website and the credit card processor that will relay the credit card information securely to the processor and then tell the shopper that her transaction has been completed (or her credit card transaction didn't go through). Merchants need some way to communicate with the processor, either (1) a card-swipe terminal, (2) a PC software program and modem, or (3) a Web payment gateway. You don't need all three. Make sure your Payment Gateway is compatible with both your Shopping Cart program and your Merchant Bank. The most popular are: Verisign Payment Systems, Authorize.Net, CyberCash, and CyberSource.

Sometimes ISOs and banks will bundle the Merchant Account with a Payment Gateway and a shopping cart system with an order form. This may work well for a few products, but if you are planning a serious online catalog, don't let someone else select the Shopping Cart software for you. Get software first, and then find a Payment Gateway and Merchant Account that is compatible with it -- not the other way around. The other articles in this issue don't cover Shopping Cart systems, but Merchant Accounts and Payment Gateways.

You'll find clear explanations of industry terminology from LookSmart.com http://shops.looksmart.com/isroot/orbitres/look/apps/marketing_website/about/ec903.html