Guide: How Online Payments work

Get smarter on online payments and which payment methods are right for your webshop.

Online shopping is becoming more and more popular

In 2018 the nordic consumers spent a total of staggering 71 billion euros on online shopping.  

As online shopping grows bigger, more companies and entrepreneurs dream of opening their own online business.

The transition from a physical store to a webshop is easier than most people expect. Managing a webshop is in many ways similar to running a physical store. It's about having the right products at the right times, marketing your business and delivering a good and trustworthy service to your customers.

A significant difference between online shopping and physical shopping is however the payment part. In physical stores the payment is made at the cash register, but in a webshop it takes place on a screen. It's a fairly new phenomenon and raises a completely natural question: How does online payments work?

On this page we will have a closer look into online payments. What is it actually that happens when the customer enters his payment information and presses the purchase button. How does the money move from the customer's account to the webshop? 

The transfer of money is not the only thing we dive into, because as online shopping grows, a wider range range of payment options are becoming available on the market. But what is it exactly that the different methods of payment can do, what differentiates them and what types of payment methods should you pick for your webshop? 

We hope with this article that you will get wiser on online payments as well as the payment methods suitable for your webshop. 

Enjoy!

TABLE OF CONTENTS


 

1. WHAT IS ONLINE PAYMENT?

 
         • Payment solution

 
         • Payment service provider

   
         • Acquirer


 

2. HOW DO I GET
     STARTED WITH
     ONLINE PAYMENTS?
 

         • Enter into an agreement
            with an aquirer


         • Enter into an agreement
            with a payment service provider


         • Integration of payment
            methods in your webshop

 


 

3. WHAT ARE THE DIFFERENT
     PAYMENT METHODS?


         • Card payment

   
         • Invoice payment

   
         • Total solution

   
         • Paypal

   
         • Split payments online

   
         • Link payment
            - payment via email and sms

   
         • Call center payment

 

 

 


 

4. ONLINE MOBILE PAYMENTS



         • How does online
            mobile payments work?

 
         • What does the future of online
            mobile payments look like?


 

5. SECURITY FOR WEBSHOPS
     WEBSHOPS


         • Conclusion

Payment Service Provider

The payment service provider delivers the technical platform, which makes it possible for online stores to accept payments. The technical platform typically consist of a payment window where the customer enters his/her card details and an administration portal that the webshop owner has access to. In the administration portal you handle transactions/payments from the online store, such as approving, refunding and canceling payments.   

Meanwhile and "behind the stage" the payment service provider forwards the customer's card information to the acquirer (see next chapter) in a secure environment. 

The payment service provider usually has nothing to do with money, but only transfers information in a secure environment. However, some also offer aquiring so you get it all in one place. In these cases the payment service provider will both move information and ensure that the money is drawn and ends up the right places. DIBS is an example of such a payment service provider with our newest solution Easy (an all-in-one solution that includes both payment service provider and acquiring agreement). 

In addition to creating the technical platform and forwarding card information to the acquirer, the payment service provider can advise on which payment methods you should specifically offer to your customers.   

Acquirer

An aquirer has two important tasks in online payments. The key task is to approve your webshop to receive card payments with payment cards, provided by the respective acquirer. 

The other task is to transfer payments from your customers' bank account to your webshop's bankaccount. It is therefore also to the acquirer you specify which account your money should be sent to.

When a customer buys something in your webshop, the aquirer will receive card information from your payment service provider. Subsequently the acquirer checks whether there is coverage for the amount on the customers account and if the card is valid. Hereafter the aquirer forwards the information to the payment service provider, approving the payment in the payment window, so your customers can see the purchase has gone through. Once you have sent the item and approved the payment in your administration, the acquirer will withdraw money from the customer's account and pay the amount to you on the agreed settlement date.

 

2. HOW DO I GET STARTED WITH ONLINE PAYMENTS?

Now we know who the different actors are and what they do in connection with online payment.

But how do the tree actors work together and how does your webshop get started with online payments?

We explain it here in three simple steps:


1. Enter into an agreement with an aquirer

In order to manage payments online, you need an aquiring agreement. Nets is one of largest, and the only one offering Dankort. Please not it may take a long time to get an aquiring agreement, since the agreement requires credit approval of your business. 

Your payment service provider can help you with finding an aquirer who can support the exact payment methods you choose for your webshop. You must the submit an application to the acquirer to enter into an aquiring agreement.

Always remember to state in your application who your payment service provider is. Then the acquirer can send your business number to the payment service provider, and thereby it knows that your account is ready to be activated. 

Only when the aquiring agreement has been entered can your webshop accept payments from customers. while you wait for your acquiring agreement, you can enter into an agreement with a payment service provider and start integrating the payment solution in your webshop. 

 

 

2. Enter into an agreement with a payment service provider

Start by contacting a provider of payment services. It could for exampl be DIBS/Nets, one of the Nordic countries most experienced providers of online payment. 

The payment service provider will help you with choosing what payment methods are best for your online store. The advice is based on the market, the webshop operates in and how many payments you expect to receive. Payment service providers often have a lot experience in advising start-ups and know which payment methods are best suited to your market and customer group.   

Once you have signed an agreement with the payment service provider, the (PSP) creates a payment solution for the webshop. 

When the acquiring and payment solution agreements are in place, the selected payment methods will be activated in the payment solution. 

It may seem overwhelming to enter into agreements with both an aquirer and a PSP. Instead you can choose a all in one package, here you get aquiring and payment in one agreement. With an Easy solution from DIBS, you get aquiring and payment in one solution. Read more about the Easy solution here. 

 

3. Integration of payment methods in your webshop

You are almost good to go. You just need to integrate the payment solution on your website. 

Integrate means the payment window your customers enter their payment information in becomes a part of your website. When customers place items in the digital shopping cart and have to pay they must proceed to your payment solution, where they choose between the different payment methods.   

In other words, the payment solution must be linked to your webshop. 

If you have built your own webshop with, for example, Woocommerce for Wordpress, it is relatively easy to integrate the payment solution. Simply download the plugin your payment provider has made for the purpose and install it on your website. If you cannot find the right plugin or have trouble activating it, get help from your payment service provider.   

If you have got a web agency or a partner to design your webshop, the agency can integrate the payment methods in your webshop. Its a simple but important maneuver.  

You have now completed the three steps: 

1. Enter into an agreement with a payment service provider
2. Enter into an agreement with an acquirer
3. Integrated payment methods in your webshop

But what are the different payment methods you can choose between? And what are their strengths and weaknesses? 

3. WHAT ARE THE DIFFERENT PAYMENT METHODS?

 

Card payment

Card payment is the most widely used online payment method in the Nordic countries, so if you plan on targeting the Nordics it is important to offer card payment in your webshop. No matter what market or customer segment you are targeting. 

This is how card payments work: The customer writes her/his card information in a payment window provided by the payment service provider. The payment service provider sends the payment information to the acquirer who checks if there is coverage and if the card is valid. If this is the case, the amount is deducted from the customer's bank and the amount is send to the webshop account. 

As a webshop, you should preferably offer the payment cards your customers use in their everyday lives. In 2017, 74% of Danes responded they prefer to pay by card when shopping online. As a Danish webshop, it is therefore a good idea to offer Dankort/ Visa-Dankort, as well as the international Visa, Mastercard, Maestro and Visa Electron Card. With this combination of payment cards, your webshop is covered very well.   

You must be aware that it is necessary to enter into two acquiring agreements to offer the entire payment card palette. NETS is aquirer on Dankort, while Teller and others are aquirer on the international payment cards. You must enter into an aquirer agreement with at least two aquirer if you want the above combination 

 

Advantage: 
The big advantage of card payment is that the form of payment is extremely widespread. 

Everyone has a payment card, so no matter what will the vast majority of your customers be able to pay. Therefore, card payment is an obvious place to start when you launch your first webshop.  

Disadvantage:
Card payment, viewed from the customer's point of view, is a little intricate way of paying - especially from the mobile phone. 

A lot of card information must be entered and it can be experienced as a cumberstone process if it is a purchase the customer often makes. Especially for cheap products and small purchases it can be intricately to enter all the information every time.  

It is an advantage if your payment service provider is able to store the customer's card information. You can learn more about this important feature at your payment service provider. 

 

 

Invoice payment

After card payment, invoice is the most popular payment method for online shopping in Norway. Consumers prefer invoice primarily because it is perceived as safe. Invoice payment gives customers the opportunity to get the goods delivered before paying. If your trademark is not so familiar, it may be smart to offer invoice in addition to cards so customers who do not know your online store feel safe to shop. 

When you offer invoice payment, you can either choose to bill yourself or go through a billing partner. There are also payment solutions where billing and handling are included in the solution, so you do not have to sign multi-party agreements. The advantage of going through a partner or choosing a checkout where the invoice is included is that you can concentrate on your sales while the invoice partner takes responsibility for unpaid bills, reminders and purring. Additionally, you may not need to wait for the invoice due date before you receive your money. Usually you receive payment from the supplier regularly - for example every five business days. 

 

Advantage:
Combined with card payment, you cover most consumers preferred and most widely used online payment methods. Providing multiple payment methods increases the chances of completed purchases and thus higher conversion rates in your online store.

Disadvantage:
Invoices are not perceived to be as quick and easy as for example card payment and digital wallets like Vipps. Often, the customer needs to fill out a lot of information to pay, so if you want to offer invoice payment, choosing a payment provider can offer a solution that allows customers to store their address and delivery information.

 

Total solution

There are payment solutions that contain multiple payment options - allowing the customer to freely choose his preferred form of payment - whether it's card, invoice, or digital wallet, for example.

When such a solution is embedded directly in the online store, it is called a checkout. With such a solution, you can choose which payment method you want to offer to your customers. Upon initial purchase, the customer registers his delivery and payment information as card or invoice details, and may choose to store the information allowing one-click payment on repurchase.  

This reduces the risk of the customer being disturbed at the point of payment and the shopping experience will be quick and seamless. DIBS offer such a payment solution: Easy

 

Paypal

Paypal is one of the world's best-known e-commerce services. The company makes sure to transfer payments between customers and online stores, and between private individuals.

Private people enter the paypal.com website and create an account. He or she can then use the account to pay in the online stores that offer Paypal as a form of payment. 

This is a smart solution for the customer. He or she has linked their payment card and their card details to Paypal and does not have to enter a lot of payment information in connection with a purchase. The customer only needs to log in to his Paypal account and print purchases, and no need to enter name, address, date of birth, e-mail address, card details and so on.

As an online store, you can create a business account at paypal.com. Then it's easy to integrate the payment form into the online store. Most popular e-commerce platforms have direct integration with Paypal, making integration even easier. Some payment service providers also have the option of integrating your Paypal account so all payment methods are collected in a payment window.

 

Advantage:
Paypal is a convenient form of payment that makes it easy and fast for the customer to shop online and for the webshop to charge for payment.

Customers do not have to enter payment information. It is free to create a business account at Paypal and there are no monthly costs.

Disadvantage: 
Paypal is easy, but not many people use it in the Nordic countries. Paypal is larger in other countries.

In the Nordic region, only a quarter of the customers use Paypal. It's hard to succeed as an online store if you only offer Paypal as a form of payment.

Paypal takes a relatively high fee per sale, about 3.5 percent of the sales price.

 

Split payment online 

Split payment is a relatively new form of payment allowing customers to purchase on installment. 

The customer buys a product, but instead of paying the full amount immediately, the price is divided into small parts paid over a period of time. This form of payment can be used anywhere from buying a cheeseburger to a brand new computer.

The attractive thing about split payments online is that you as an online store get the full amount paid right away. You get the money on account a few days after the transaction is completed (the number of days will depend on your agreement with the bank) as with any other form of payment.  

Its the providers of split payments that take responsibility for claiming monthly payments. They actually lend customers money to buy something in your online store. You can offer payment without the web shop running any financial risk. The price for creating a corporate account with a lender depends on the online store's annual sales.

Example: At Viabill, Denmark's largest split payment service provider, it costs 2995 kroner to create an account if the net sales turnover is less than NOK 250,000. Viabill does not charge any transaction fee for the individual trade so that the costs will be the same as for regular card payments.

For customers, split payment is a favorable service since loans up to 2000 kroner are both interest-free and free of charge. In return, Viabill costs 39 kroner each time a monthly payment fails. This is where the lender earns the money.

 

Advantage:
The online store can offer payments to customers without incurring any financial risk.

There is no extra transaction fee on the individual trade. You only pay your regular redemption and transaction fees.

Disadvantage:
It is not all customers who want to make use of split payment, especially if its small amounts.  

Therefore, it is an insecure solution to offer split payment as the only form of payment in the online store.

 

 

Link payment - payment via email and sms

Link payment is most common in B2B (business-to-business), call centers and cross-border trade. This payment solution allows companies to receive online payments even if the company does not have an online store.

By a link payment, the company sends an e-mail or SMS with payment link to the customer. When the customer clicks on the link, whether it's on PC, mobile phone or tablet, a payment window opens. Customers see which order it is about, amount and reference number, and enter their card details to pay.

The company creates payment links in an administration system that can be accessed from a regular browser. Here the order number and amount are entered and a payment link is sent to the customer. Once the payment is completed, both customer and company receive a receipt by email. Unlike other payment solutions, link payments do not need to be integrated with website or online store. It's easy and an excellent alternative to the somewhat more expensive old-fashioned invoice.

With link payment, a business can usually accept the same payment methods as with a traditional payment solution for an online store. The payment solution requires agreements with a payment service provider and an acquirer. Then you are ready to send payment links and accept online payments. Simple as that.

 

Advantage:
Easy to set up. You do not even need a webshop or website to get started with link payments, but you must have your trading terms online, for example in Dropbox, so you can link to them in the payment solution.

Link payment is convenient for foreign trade since companies avoid bank transfers. Bank transfers can be complicated due to differences in registration and account numbers.

Link payment makes it easy for customers to pay online.

Disadvantage:
It is not particularly suitable for businesses that make many small sales. It can be a lot of administrative work to send out the payment links.

 

Call center payment

In a call center payment, the company receives payment directly on the phone. The payment solution provider sets up a secure online management system. The customer will hear a «robot voice» and enter his payment information on the phone.

The account information is transferred to the administration system and the payment is registered immediately while the customer is on the phone. In the same way as link payment, call center payment is particularly suitable for B2B and foreign transactions. And then the payment solution is easy to get started with. It only requires agreements with a payment service provider and an acquirer. Technical integration with the company's website is not necessary.   

 

Advantage:
It's easy to get started with and requires no technical integration.

Simple administration in an easy-to-use management system for your employees.

Fast payment process for both business and customer.

Disadvantage:
Some customers will be unsure whether it is safe to provide payment information over the phone.

If the company makes a lot of small sales, call center payment is a demanding form of payment purely administrative. Dialings will quickly swallow many of the employees' working hours.

 

4. ONLINE MOBILE PAYMENTS

Online payment with mobile phones is becoming more and more popular in the Nordic countries. In Denmark, MobilePay is the leader in the field. In Sweden there is Swish, and in Norway it is VIPPS, which is the largest online mobile payment method.

But how does online mobile payment work? And why is the form of payment so popular?
We will look into this now.

 

How does online mobile payment work?

Online mobile payment is an add-on purchase for your existing payment solution.

This means that you, as a webshop, must enter into agreements with a payment service provider and thus also an acquirer. Only then can you offer online mobile payment to your customers.

The form of payment is such that the customer selects for example MobilePay in the webshop payment window. Subsequently, the customer is forwarded to a new window where he or she has to enter their phone number. Afterwards, the customer receives a notification on their telephone. The customer clicks on the notification, swipes a single time, and then the purchase is complete. Not having to enter a lot of payment information. 

You must be aware that mobile payment only works with the payment cards that you already offer. If a customer has a payment card associated with their mobile payment account, which your webshop does not support, mobile payment will also not work for the customer.
And then we're back at the beginning: If you want to offer online mobile payment, be sure that your webshop is adequately covered on payment cards.

 

Advantage:
Online mobile payment is a popular form of payment that is easy for customers to use. Customers do not have to enter payment information at each purchase - and thereby conversions increases.

This means that, as a webshop, you can expect to have more completed purchases if you offer online mobile payment. Your customers more often have the mobile phone at hand than their debit cards.
If you already offer payment via a wide selection of payment cards, it's easy to add online mobile payment to your webshop.

Disadvantage:
You must offer payment cards before you can offer online mobile payment.
You must have an agreement with a payment service provider and an acquirer before you can offer mobile payment.

 

 

What will be the future of online mobile payment?

The benefits that characterize online mobile payment are the future of e-commerce.
Customers would prefer not to spend too much time clicking through long payment flows and entering a lot of payment information. That's why payments such as MobilePay and Swish have become extremely popular in a short period of time.

As online mobile payment grows bigger, more players will enter the market. Apple Pay is a good example of this. The form of payment has existed since 2014, but was first launched in Denmark, Sweden and Finland in the autumn of 2017.

Basically, Apple Pay works like the mobile payment solutions that consumers already know. The customer creates an Apple Pay account with his payment card and can subsequently pay with one click on the webshops offering Apple Pay as a form of payment.

 

The development continues

It's exciting to see if Apple Pay can grow into a popular form of payment in the Nordic region in the long term. Mobile payment forms like MobilePay and Swish sit heavily on the market in Denmark and Sweden, respectively.

But in the future it may be that the balance of power will shift or a third form of payment will change the way e-commerce takes place. Consumers want easy and secure online payment. The form of payment that delivers the best product on the two parameters will sit on most of the online shopping.

5. SECURITY FOR WEBSHOPS

As a webshop, it is crucial that your customers' payment information is secure when shopping in your webshop.

It is therefore good news that customer payment information is already secured through your collaboration with a payment service provider. Payment service providers should always be PCI DSS certified. PCI DSS stands for the Payment Card Industry Data Security Standard. It is a common safety standard, which is issued by VISA and Mastercard. The standard guarantees the payment service provider handles payment information in a safe and reliable manner.

When you enter into a collaboration with a payment service provider, as one of the first questions, ask if the company is PCI DSS certified. Then you know with certainty that your customers' payment information is in good hands.

 


 

 

CONCLUSION

Online payment is one of the most important things to get to know when you want to start your own online store.

It may seem very technical, but in reality, online payment is about finding good business partners: Payment service providers and acquirers.

They will help you find the types of payment that best fit your market. 

Good luck! 

If you want more inspiration to create your own webshop, read DIBS' blog. You can find it here: /https://www.dibspayment.com/about-ecommerce

 

Got a lot of questions - or perhaps just one?
Related to DIBS
DIBS Payment Services AB
Kungsgatan 32
111 35 Stockholm
Telefon: +46 (0)8-527 525 00