April 25, 2024

What Is Payment Processing & How Does It Work In an Online Store?

Nadya Bakhur

Researcher, Technical Writer


What is payment processing?

Nadya Bakhur

Researcher, Technical Writer


What is payment processing?

Payment processing is probably the most intimidating piece of the whole “online selling” puzzle when you’re just getting started. And this is completely understandable.

After all, that’s part of the job – since you’re launching a new online store – where you start working with your customers’ financial information such as credit card numbers, sensitive personal details, etc. And as an ecommerce store owner, you bear the full responsibility for ensuring the security of your customers’ data first and foremost.

Luckily, payment processing isn’t that hard to figure out, you just need to get started. And we start now!

When Does The Payment Processing Start?

The list of the essential items you need to get as an ecommerce professional includes the following:

  • Domain name;
  • Quality ecommerce platform (for example, Magento);
  • Web hosting (hosting is included in platforms like Shopify, but not in systems like WordPress/WooCommerce);
  • Secure payment processing system.

The first amazing thing about processing a payment is that it works independently of your ecommerce store. It is essentially a separate system that only activates when your customer is ready to pay.

When running a standard ecommerce store, you have your main store’s platform/system (like Magento or Shopify) to power your store’s website – showcase your products, allow customers to view them, and place orders. The actual payment process usually takes place outside the office. Your store only connects to the payment processing solution and sends all the necessary data to complete it.

This is done for several reasons. First, it is a much more secure model. In it, the payment processing platform must worry about security issues and ensure a secure payment process. If not for this external payment processing, all this work would have to be done by you.

The second reason is that the various payment processing mechanisms, rules and regulations tend to change and update from time to time and it would be difficult (if not impossible) to keep up with them if you were to do it yourself. Again, you have a payment process system that does the job.

Finally, it is also a more reliable setup from a customer’s point of view. For example, we’re sure you’ll be much more confident entering your credit card details in to PayPal than at some random online store you don’t yet trust.

Now, all things considered, the biggest benefit of this external setup with taking payment online is that you – the store owner – simply don’t have to worry about any credit cards and you can just leave it to the professionals.

You can focus on running the business and increasing sales while someone else makes sure all payments are processed correctly.

In doing so, there are three main elements of an ecommerce payment processing system. They are:

  • Payment gateway;
  • Payment processor;
  • Merchant account.

All three elements work together to move money from the buyer to the seller (you), but it helps to understand what each of them does throughout the process:

eCommerce Payment Process: store-gateway-processor-merchant account

Once a customer has chosen a product and is ready to pay, each of the three elements of the electronic payment process performs its unique task:

  • The payment gateway takes care of sending the transaction request to the appropriate payment processor or credit card company issuer;
  • The payment processor processes the payment, as you would expect, making sure that the customers have funds at their disposal and that all payment details were sent correctly.
  • The merchant account is where the funds are deposited after the successful completion of processing.

Everything goes from payment gateway → payment processor → merchant account.

It’s also good to keep in mind that in some settings, all three elements are hidden under one parent company. In other words, a store owner usually doesn’t have to deal with three separate entities but instead may work with one company that acts like all three.

What Is A Payment Gateway for eCommerce?

A payment gateway is an intermediary between your online store and the payment processor that receives the payment from your customer.

When customers enter their payment details on your website (this could be their credit card number or data necessary for any other payment method), the payment gateway securely sends that information to the payment processor.

Here are some of the main benefits of using a payment gateway in ecommerce payment processing:

  • Security

The most significant advantage of payment gateways is the security they offer to your ecommerce store, which in turn ensures that your customers can shop on your website with confidence.

When it comes to cyber-attacks, ecommerce is a very vulnerable industry due to the sensitive format exchanges on websites. 32.4% of all cyberattacks take place on ecommerce sites.

What a payment gateway does is take care of all security-related aspects of the transaction and ensure that the funds arrive safely at their destination without any leaks.

The gateway encrypts all data and sends it over SSL. It then works with the payment processor to determine if the payment is legitimate.

  • Easy integration

Payment gateways integrate seamlessly with popular ecommerce platforms such as Shopify, WooCommerce, BigCommerce, and Magento.

Amazon Payments is also a great addition to your ecommerce website. It automatically receives payments and shipping that are stored by Amazon, which speeds up the checkout process and increases your conversion rate.

  • Operates 24/7

The great thing about selling online is that you don’t have to be in front of a computer while selling. It all works mostly on autopilot – but you already know all that.

The story is similar to payment gateways. They work around the clock and can process customer payments no matter when they make a purchase.

  • Several payment options are available

At a basic level, your payment gateway should accept both debit and credit card transactions. However, you may need something more complex that can support PayPal payments, as well as gift certificates and possibly other methods.

Also, check if your payment gateway supports “point of sale”. You may be able to get a free card reader so you can accept payments on the go at events or in a retail store.

  • Works with multiple currencies

If you are planning to sell to clients abroad, then it is worth considering a gateway that supports and accepts foreign currencies.

However, it is worth noting that these transactions may cost you more than payments in your country.

  • Insightful reporting

Payment gateways can offer you real-time reports so you can get an idea of ​​how your business is performing down to the minute.

This is great when you want to see how your promotion campaign turned out or what you can do to increase seasonal sales.

How Do Payment Processors Work?

Payment processors are financial institutions that work in the background to provide all the payment processing services used by an online merchant. These companies usually have partnerships with other companies that deal directly with consumers or merchants.

The payment processor connects to both the merchant account and the payment gateway, quickly transferring information back and forth, keeping it secure and almost instantaneous for the end user.

Simply put, the payment processor receives the transaction information from the payment gateway, validates it, executes it, and then transfers the funds to the trading account. It also notifies the payment gateway if the transaction was successful.

As we mentioned earlier, the choice of your payment processor is not a decision that depends solely on the person who will be in charge of the finances. The payment processor is vital to ensure a good conversion rate, so you shouldn’t make this decision lightly.

There are many payment processing services to choose from, but we’ve narrowed them down to the best:


Payline is especially known for its fair selling practices and overall transparency. Well, it might not be the cheapest payment processor on the market, but you can bet that what it promises is what it ultimately delivers. Admittedly, Payline’s exchange pricing structure is more transparent than the standard cost schedules offered by other solutions.

Payline gives you the advantage of knowing the payment fees and rates your business will incur upfront. Hence, you will be able to plan your sales processes accordingly to minimize transaction costs over the long term.

However, Payline is a holistic processor that goes beyond online payments to facilitate in-store payments as well as mobile payments. Payline Connect is an e-commerce payment application that integrates with more than 175 platforms. This allows you to securely process electronic and card payments in a wide variety of online stores.

It’s also worth noting that Payline offers the option to pay by subscription for free. So of course you can use it when it comes to recurring fees for membership, services or products.


Since its inception in 1998, PayPal has become one of the most reliable ecommerce payment solutions and the biggest player in the payment processing game. The company currently operates in over 200 countries and supports over 25 different currencies.

PayPal can be directly integrated with your ecommerce website and is highly trusted due to its familiarity with customers all over the world. The flexibility of PayPal is really great. You can process payments not only through your online store but also within the app and even in your physical store.

If you need a reliable PayPal payment integration solution for your Magento-based ecommerce website, consider PayPal Express for Multishipping. This module created by NEKLO experts resolves the lack of in-built PayPal Express during checkout.


Stripe describes itself as “developer-focused”, which is a very appropriate term, as Stripe’s biggest advantage is its customizability. The Stripe API allows you or your developer to experiment and create conditions that are perfect for your business.

Stripe is available in 20+ countries and allows you to accept over 135 different currencies! This means that you can withdraw funds from customers in their local currency while still receiving funds in yours. And of course, Stripe allows you to process both debit and credit card payments.

Typical Payment Process On an eCommerce Website

Earlier, we showed you a simplified model of an ecommerce payment process:

eCommerce Payment Process

Now, we can overview the whole process step-by-step.

  • The customer buys the goods

Customers enter an online store, find the products they wanted and decide to buy using any ecommerce payment method offered. They click on the “Buy” button and wait a few seconds. After these seconds, the following steps in processing payment are quickly performed:

  • Client transaction details are sent through the payment gateway

The customer’s personal and credit card information is sent through the payment gateway. Transaction details are transmitted securely from the gateway to the payment processor, referring to the merchant ID and passing the merchant account’s transaction details.

As you can see, all three (gateway, payment processor and merchant account) are used in this step.

  • The merchant’s payment processor also receives the details of the transaction

In addition to sending the transaction details to the merchant account, the payment processor can also contact the Issuing Bank of the credit card that was used. This check is necessary to ensure that the customer has sufficient funds and that the card is legitimate.

More specifically, there is a credit card network that acts as an intermediary between the payment processor and the issuing bank. The credit card network is what finds the necessary bank.

  • The issuing bank of the customer’s card accepts or rejects the payment

Whether the payment is accepted or declined, this information is returned through the credit card network to the payment processor.

  • The merchant’s payment processor sends the results back to the payment gateway

Let’s say the deal was approved. The payment processor sends the information to the payment gateway, which then stores the results so that the merchant’s website can complete the transaction.

  • The merchant is paid

The bank that issued the customer’s card transfers funds to the merchant’s bank. After a short settlement period, the seller’s bank releases this money into the seller’s account.

Alternatively, the payment processor will drop the funds into their merchant account and then allow the merchant to withdraw those funds to their standard bank account.


Understanding the payment processing meaning as well as the basic details of how payment processing works is essential if you want to run an effective ecommerce store.

The exact differences between all the payment process components are not as obvious as they may seem. However, the visuals and explanations above should give you a good idea of how the whole process works.

If you have any questions regarding the ecommerce website integrations with payment gateways, ask NEKLO experts for help – just fill in the form on our website and together we will find the best solution.