Need Help? Chat icon | Call - 1 888 414 7111
Merchant logo
Home > News and Blog

May 18, 2023
by David Goodale

How e-commerce works

(Slightly edited from video transcript for greater readability)

Key Takeaways

Understanding the Basics of E-commerce
E-commerce can seem overwhelming but it's easy if you break it into it's 3 components.
The Components of E-commerce
Shopping Cart Software (keeps track of what the user wants to purchase), the Payment Gateway (the thing that receives the technical payment requests) and the Merchant Account (the account used to capture and hold funds from credit card sales).
You Need to Have a Good Business
The "e-commerce" part of an e-commerce business is the least important part of the equation. You must offer a valuable product or service, with a unique selling proposition that addresses the customers problem or desire, in a way that is trustworthy and compelling.
Need help with this topic? Or a rate quote?
Whether its questions about this article, or you want to see how we can lower your costs. Don't hesitate to contact us.

Hello, David here at If you're completely new to e-commerce or you're overwhelmed with how it all works, in the next couple of minutes, I'm going to do my best to demystify it. Stay tuned. We'll dig in in one second.


There are so many ways to look at this. Are you asking about how to have a successful e-commerce business or are you asking to understand the technical components? What I'm going to try and do in this video is help you get a general idea of how e-commerce works so that you can build your first e-commerce business. We're going to start by talking about the three components because every e-commerce website has three things.

Shopping Cart Software

One of three is the shopping cart software. It powers the ad-to-cart buttons on your website. You have a website and on that website are the add-to-cart buttons. That's how people buy stuff. Now, when they click that button, the shopping cart software keeps track of what the people want to buy, and then when they click checkout it has a job to do. Dave's in Toronto taxes 13%.

The shopping cart adds that to the subtotal. It says, oh, he wants FedEx shipping. Well, that's 20 bucks to Toronto. The job of the shopping cart software is to come up with an order total. When that's done, its job is done. Now, we'll circle back to that.

Payment Gateway

That's where component two of three kicks in the payment gateway. The shopping cart sends a technical request to the payment gateway. Hey, gateway, wake up. I got this guy here, Dave, he wants to buy these $200 pairs of shoes. Here's his credit card number. Can you process this for me? The payment gateway receives the request, goes to Visa, or MasterCard, and ultimately the request ends up at the card issuing bank. The request is can we have $200 from this guy's credit card when it gets approved?

Merchant Account

That's where component three, the final component is the merchant account. The money would get moved off of my credit card and get deposited into the merchant's merchant account, and that's where you get the money, but the process isn't done. Now some things have to happen in reverse. The payment gateway talks back to the shopping cart. Hey, shopping cart, less than a second ago, you sent me this guy, Dave's credit card number, and you asked for it to be processed. Well, I did. The money got deposited into your merchant account, you have it, and here is your approval code. The shopping cart knows that the order was approved. It can now send the order notification, and email out to the merchant, it can send the receipt out to me, thanks for buying these shoes. The shopping cart can do other stuff. This is where automation comes in. The shopping cart knows the order was approved.

Let's say you're drop shipping; it can send the order off to the drop shipper to be shipped out automatically. There's no limit to the amount of automation that can happen in e-commerce, and it's just understanding that transaction flow, shopping cart to payment gateway deposited to the merchant account, the money. Then what happens is it comes back to the shopping cart. You can send the order emails, that's the technical walkthrough of e-commerce.

Business Plan

Now that you know what you need, how are you going to get it? Are you going to build your website or are you going to hire a developer to build an awesome custom website? Are you going to use off-the-cart software like Shopify, which makes it easy to build a website. Well, consider this. You don't just need to launch a website. You need to run a business, ideally a successful business.

Who's going to administrate said website? Do you have an established business? Do you have a budget? If you do and you end up with something too low end, you're going to be painted into a corner. You'll eventually need functionality that you can't accomplish, a task that you need to accomplish, or you just won't get the optimal result. Now, on the flip side, if you're a cash-strap startup, you could build something great, but you'll need some sort of budget to update it because a website is never finished. It's always changing and growing. If you are too ambitious and it's like a hobby project, you might not be able to take advantage of what you've built. It can be complicated, but it's also just stuff like your improvements, your headlines, your sales copy, new photos, new ideas, new promotions.

How often are you going to be interacting with and updating the website? Will you do it yourself? Will you be relying on someone else? I know I'm throwing a lot of questions at you, but my point is you have to think, do I have a successful business that I'm committed to? Is this a side gig and a hobby project that you want to see how it goes. When you're choosing your platform, how limited is it? Now, if you're overwhelmed with some of this, one of the things that we do at is when people go through this process, they set this all up. It has to work together in the end. It's part of our job to help you understand these components. Let's say you're not sure what you need, we could recommend five different shopping cart software platforms. If you use any one of these five, they would work great.

Investigate if there's any that you like. If you don't like any of them, don't use any of them. Come back and talk to us sometime. If you do need a little bit of guidance, reach out to us. We're very happy to help with that. Now, building a website is only part of the battle. What you need are customers. Well, how do you get customers? Well, how can you get customers? We don't even know what your product or service is. There's so much to it, e-commerce is not the most important part of an e-commerce business. It's the business that's important. A lot of the success or failure of an e-commerce business is not the website. It's not the business model. It's where are your customers? I mean that literally, how are you going to reach them?

Is it a traditional search? Is it social media? If it's Facebook, that's better for an older demographic. If you're targeting younger people, it's Instagram or TikTok. When you're approaching them, like what problem? What is your unique selling proposition? What will make them want to do business with you? Then when they arrive on your website, how are you going to gain their trust? Help them overcome their fear of purchasing. How are you going to make them want to engage with you and make that purchase? When you get into this process, it all flows and makes sense. You start by thinking, who is my customer? What is their problem? How am I helping them to solve that problem? I could do a much deeper dive into how e-commerce works. There are so many components to it.


If you do have any questions that you'd like me to dig into deeper, please do leave a comment below because I would like to know what people would like to better understand. In the meantime, I hope this demystified the components and also got you thinking it's not just the technical stuff. The business is the most important part of an e-commerce business. Thanks for watching and have a great day there. Bye now.

Need professional guidance?
Contact us for a free one hour consultation.

Can I Help Lower Your Processing Fees?

If you found this content helpful, will you give me the opportunity to quote on your business?

View Rates
David Goodale About the Author

My name is David Goodale, CEO at Merchant I launched our business in 2001 and have over 20 years of expertise in the field of online payments. If you have a payments related question or project, and especially if it relates to multi-currency or international e-commerce don't hesitate to contact me. I'm always happy to help with an honest opinion, and enjoy chatting with folks from interesting businesses.

Toll free: 888-414-7111 ext. 5
Direct: (905) 901-2254