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How Does E-commerce Work?

This article will help you understand what a merchant account is, what a payment gateway is, and the issues to be aware of when building an e-commerce website.

Credit card acceptance is critical to operating a successful business on the internet because it enables you to generate sales and profits from your website. However, you should not try to get a merchant account without first understanding how it works. Otherwise, you could be setting yourself up for a tremendous exercise in frustration, wasted time and lost money.

The Basics: The Components of an E-commerce Website

There are 3 components that make up an e-commerce website:

1.   A shopping cart
2.   A payment gateway
3.   A merchant account

These things work together to enable an online shopping experience for your customers. If it sounds complicated, don't worry. It is actually quite easy to understand. We'll break each of these three components down below.

1.   The Shopping Cart

Shopping cart software is relatively simple software that runs on your website. As people browse through your site they will look at products or services they might want to buy. The job of shopping cart software is fairly simple. It just keeps track of the products your customers want to purchase as they surf through your website. It powers the "Add to Cart" buttons that you have probably seen on many e-commerce websites.

When someone presses the "Add to Cart" button the shopping cart software adds the product to the list of things they want to purchase. When the customer is done browsing and wants to complete the order they will press a button that says something along the lines of "Checkout Now". When that happens the shopping cart has a few jobs to do. It adds the cost of all products the user has selected to arrive at a subtotal for the order. Think of a checkout at a grocery store. The shopping cart is performing the same job as the cashier scanning your items to figure out how much you owe for your groceries. When the shopping cart has figured out the order subtotal it still has a few other calculations to make. The shopping cart has tax and shipping logic. For example, you may have configured your shopping cart to charge a $25 shipping fee to customers located in the USA. The same principle applies to taxes. The shopping cart will look at the shopper location and decide (based on how you've configured your shopping cart) how much tax should be charged to the customer.

At that point the shopping cart software has figured out the subtotal, taxes and shipping for the order. It now has enough information to finalize the sale and the job of the shopping cart software is done. It has figured out how much money is owing, and simply needs to send the order somewhere to be processed. This is where the second component of an e-commerce transaction comes in: the payment gateway. (Which we will explore in a moment further below.)

Some businesses have web developers build custom shopping cart software for their website. Others may choose to use pre-made shopping cart software that can be installed on any website. There are hundreds of existing shopping cart programs to choose from. Some are extremely easy to use, while others are targeted towards advanced webmasters. Picking a good shopping cart can be a daunting process if you are new to e-commerce and have just started your research. We maintain a list of compatible shopping carts that work with our credit card processing service. If you would like some help selecting a good shopping cart for your business do not hesitate to contact us.

2.   The Payment Gateway

The function of the payment gateway is actually quite easy to understand. When you go to a gas station and pay with your credit card, the attendant inserts your card into a POS machine. In an e-commerce transaction the payment gateway accomplishes the same job as the POS machine, except it's an online transaction so the information is just sent online. The shopping cart securely encrypts the credit card and order details and sends it to the payment gateway to be processed.

In the background, the payment gateway will then contact the customers card issuing bank and to see if they have sufficient funds to pay for the sale. If so, the card issuing bank will return an authorization and the funds will be debited from the customers card.

When those funds are captured from the customers credit card account, they must go somewhere. This is where the final part of an e-commerce transaction comes in: the merchant account.

3.   The Merchant Account

When the payment gateway processes the transaction and the customers credit card is charged for the sale, that money has to go somewhere. Specifically, it needs to deposited into a bank account. Funds from credit card sales are deposited into a special type of bank account that is called a "merchant account".

That really is all a merchant account is. It's just a bank account that is used to hold funds captured from your credit card sales. Then, once per day the money is sent out of your merchant account and into your regular business bank account.

What We Include

We include both the merchant account and payment gateway with our service. If you have a website, all you need to do is tell it to start sending your transactions to us. In other words, you setup your shopping cart software to use our service. In a practical sense, it means that you can select from dozens of compatible shopping carts, install it on your website, and begin processing payments through our system.

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