Internet Merchant Accounts and Payment Gateways: How Does Online Credit Card Processing work?

How does online credit card processing
work with e-commerce stores?

One of the most confusing credit card processing concepts for online merchants is the difference between the “payment gateway account” (the online card processor) and “internet merchant accounts”. Though these are two seperate components of credit card processing, they are both necessary and work together to handle payments automatically.

Commercially available shopping carts will typically have configuration settings allowing a number of gateway choices. An internet merchant will usually want to select the shopping cart and web site hosting company and then order their merchant account based on the gateways that are available in the shopping cart. The following information diagrams the typical payment process from the time the order is placed in the shopping cart to the funds being deposited in the merchant’s bank account.


Internet Merchant Accounts are seperate bank accounts for the merchant that are approved and capable of receiving credit card payments from credit card providers. Internet merchant accounts typically do not hold funds for an extended period of time such as your typical bank account but usually transfer payments to another bank account designated by the internet merchant on a daily basis.The Payment Gateway Account is the online credit card processor or transaction handler which is capable of hooking into credit card accounts belonging to the online shopper and the merchant’s internet merchant account (above). The payment gateway handles the verification and transfer requests. The term account when used with “payment gateway” is not a funds holding account but rather a “service account” that typically has a log in where you can configure your payment gateway settings.Alternative Payment Methods include person to person payment services such as PayPal. Click here for more information on PayPal type of services.

Credit Card Processing – Standard Routine

Credit Card Processing – Standard Routine

1) The consumers complete their orders via the merchants web store. This should be done on a secure web page so that the consumer’s personal information including banking information (credit card or check) is encrypted so that it can’t be intercepted and read by third parties while being transferred over the internet. Secure pages should always be used while handling credit card processing online.

2) The shopping cart program on the web host computer gathers the order information, compiling it into a form that the credit card processing company expects.

3) The shopping cart transmits the formatted order from the web host to the credit card processor (payment gateway). The credit card processor checks that the information it received about the order to be sure it has everything it needs to continue processing the transaction. It then determines what company manages the customer’s credit card and transmits a request for the card to be charged.

4) The customer’s credit card company validates the card and the account. If everything checks out correctly and the credit card is clear for purchases the credit card company sends an acknowledgement back to the card processor that the amount requested can be transferred. If the credit card company denies the charge it sends a code back to the credit card processor indicating what the problem was.

5) The credit card processor now tells the shopping cart program at the web host whether or not the transaction was successful (the shopping cart then can tell the customer whether or not the order was complete and send the order on to the merchant for delivery of the product or service). The credit card processor initiates a funds transfer (settlement request) to the merchant account company for deposit into the merchant’s bank account that it has on record.

6) Internet merchant accounts collect the funds for a specified period of time and make scheduled transfers to the merchant’s regular bank account and the credit card processing transaction is complete.


Internet Merchant Account and Payment Gateways

These pages are a series of articles devoted to expanations of merchant account and payment gateway related topics.

Topics include how internet merchant account work, understanding fees (including payment gateways), and alternatives such as P2P and 3rd party payment processors. We also provide our internet merchant account recommendations.

Payment Gateway
Quick Tip:

Determine the payment gateways that your shopping cart is capable of using for credit card processing and see if your prospective internet merchant account provider can work with one of those gateways.

Some providers of internet merchant accounts, such as those in our recommendation list, can also order the payment gateway account. This greatly simplifies the setting up your credit card payment processing and assures that all of your shopping components work properly together.

Alternatives to Internet Merchant Accounts:

There are a number evolving payment methods with rising prominence on the internet. One of the most popular is the PayPal model or person to person payment system. In this payment processing model the payment processor (paypal) acts as the payment gateway, the merchant account, and the bank account for the merchant.

See our alternate payment methods documents for more detail on various payment alternatives to internet merchant accounts.

OurShop Note:
Because we are dedicated to simplifying the process of getting your e-commerce site online, our recommendation list includes only merchant account providers that can also provide payment gateway accounts.