Online card payments
An online card payment is when a customer purchases something online by entering their card information, similar to purchasing something in a physical store by entering a card into a card machine.
However, even though this seems simple, for card payments to work there are several different parties involved which all play a separate role in getting the money from the customer to your company.
What parties are involved?
The customer is the person who is making the end purchase of a product or service. They are the person who owns the payment card. In Billsby, we also call them Customers
The company is the party the customer is purchasing their product or service from. A company can also be referred to as a merchant. In Billsby, we often refer to them as Users. This is because they are using our software to provide products and services to customers. It’s important to note that some companies provide services or products to other companies, rather than individual people. (This is sometimes referred to as B2b or business-to-business sales)
The payment processing company is the party that processes payments for the merchant. They provide the merchant with a ‘merchant account’ which is a special type of bank account that accepts credit card/debit card payments so it can hold profit from customer purchases. An example of a payment processor is 5-star processing.
Regular bank accounts cannot directly accept funds from credit card/debit card sales so the merchant account provided by the payment processor acts as a middleman before the funds can be sent to another private bank account.
Some payment processing companies provide both a processing service and a
payment gateway service in a combined solution, like Stripe or GoCardless.
The Payment gateway is a software that handles an online transaction and securely sends the customer’s payment information to the company/merchant’s payment processing company.
Billsby integrates with payment gateways and works on top of them. Allowing customers to checkout an initial subscription, and then initiate re-occurring transactions (renewals)
You can learn more about the payment gateways Billsby supports and how to integrate them here
The customer’s payment card scheme is the network which the customer’s payment card is linked to. It provides a link between the payment processing company and the customer’s bank.
Banks work with card schemes to issue cards linked to specific brands of payment cards like Visa or Mastercard. By working with a certain card scheme, a bank has the right to issue cards for those schemes to their customers, and work with payment processors operating on the network of the card scheme.For example, a bank join’s Visa’s card scheme and can then issue customers Visa debit cards. Because the customer has a Vias debit card, they can go spend their money at any business whose payment processor accepts Visa cards.
The customer’s bank is the bank that holds their money in an account, and the one who issues them their payment card. Allowing them to withdraw or spend funds directly from their bank account.
The online payment journey
With an online card payment, the customer will enter their payment information e.g. debit card, or credit card details into an online checkout form, so they can purchase something.
The payment gateway will then encrypt that data and securely send it to the company’s payment processor.
The payment processor then sends that data to the card scheme (e.g. Visa, Mastercard) The card scheme then checks the customer’s bank. They will check if the card is blocked, has enough funds for the transaction, and other similar things. If the customer’s bank flags an issue, the card will be declined.
If the payment is authorized by the customer’s bank, the money will be taken from the customer’s bank account and put into the company’s merchant account with their payment processor.
The payment gateway will then confirm the sale to both the customer and the company
After the sale, the payment processor will send the money to the company’s merchant account. This normally takes 2-3 working days.
Pros & cons
As there are multiple parties involved in taking an online card payment, it can start to rack up additional costs for your company. As well as Billsby’s service charge, you'll incur fees from your payment gateway of choice for handling the transaction, fees from your payment processor for processing their sale, and any other fees for things like chargebacks, early cancellation, security fees, etc.
However, the sale portion of the journey is extremely fast. Instant communication between the payment gateway, processor, card scheme, and customer bank means that the payment gateway receives final confirmation of the sale in milliseconds. Both the company and the customer will know the outcome of whether the transaction was successful or not in real-time.
Whilst being a little more costly per transaction, this method of payment is great for businesses that offer plans that renew weekly, bi-weekly or monthly, who utilize stand-alone one-time purchases, or who experience higher numbers of customer churn.
No mandates or direct debits means that customers can cancel their own subscriptions quickly and immediately without much manual intervention from your business. Plus, instant confirmation of a transaction's status lets you optimize your automated dunning flow.
Online direct debit payments
Unlike online card payments, direct debits don’t work by charging a customer’s payment card. Instead, it’s a direct transfer between one bank account to another. To pay through direct debit, a customer needs to provide the details for their bank account. The company must then collect a mandate from the customer which gives them the authorization to debit the customer’s bank account.
Even though this is a direct transfer there are still several important parties involved in making direct debit payments.
Since each country has its own method of regulating and processing direct debits, there is no one standardized payment journey, and the exact parties involved differ for each country.
What parties are involved?
The customer is the person purchasing goods or services. In Billsby, we also call them Customers
The company is the party the customer is purchasing those goods and services from. As mentioned above, A company can also be referred to as a merchant.
The direct debit scheme is the body that regulates direct debit payments for the country. Each country will have a different scheme that sets the rules and regulations all parties must follow when dealing with direct debits. For example in the US, the regulating direct debit scheme is known as ACH, whilst in the UK it’s known as BACS.
The direct debit bureau/ sponsor bank is the institution that moves funds between the customer’s bank account and the company’s bank account on behalf of the governing direct debit scheme for the country. These banks are sometimes referred to as clearing houses.
The Payment gateway is a software that handles an online transaction and securely sends the customer’s
payment information to the direct debit bureau/sponsor bank.
Billsby integrates with payment gateways and works on top of them. Allowing customers to checkout an initial subscription, and then initiate re-occurring transactions (renewals). Because Billsby only works on top of payment gateways, we are only able to facilitate direct debits through payment gateways that support them. This is most often gateways that offer a complete solution such as Stripe.
You can learn more about the payment gateways Billsby supports and how to integrate them here
The customer’s bank is the bank that holds their funds in a private bank account.
The company’s merchant/bank account is the account that holds the companies funds
The online payment journey
With an online direct debit payment, the customer will enter their payment information e.g account holder name, account number, sort code, routing number, etc. into an online checkout form, so they can purchase something. They will be shown a mandate form and asked to authorize debits on their account.
The payment gateway will then securely send the authorized mandate with the details and amount to the direct debit bureau/sponsor bank and set up a direct debit on the customer’s bank account.
The payment gateway will then confirm the direct debit has been set up with the customer and the company
The direct debit bureau/sponsor bank then checks the customer’s bank to take payment. They will check if the account has enough funds for the transaction if the mandate is still active, and other similar things. If the customer’s bank flags an issue, the transaction will be declined.
If the payment is authorized by the customer’s bank, the money will be taken from the customer’s bank account and sent to the direct debit bureau/sponsor bank.
direct debit bureau/sponsor bank will send the money to the company’s gateway & processor.
The payment gateway will then confirm the sale to both the customer and the company. This notification takes a different amount of time depending on the country and its direct debit scheme system and regulations.
After the sale, the gateway & processor will send the money to the company’s merchant/bank account. Again, the payout time it takes to deposit the money in the company’s merchant/bank account is different depending on the country and its direct debit scheme system and regulations.
Pros & cons
Similarly to taking credit card payments, there are multiple parties involved in taking an online direct debit payment however, they do not have to go through expensive card schemes, and the cost of using direct debits over credit card payments is generally cheaper. By debiting a customer’s bank account directly, you can capture cost savings on transactions and dispute fees compared to cards. The larger your company base, the more you’ll save on per-transaction costs.
However since Billsby can only integrate with payment gateways that facilitate direct debit payments, you'll still need a payment gateway software.
Another bonus to using direct debits is that In countries where SCA applies, direct debit transactions do not need customer authentication and are not subject to SCA.
Since direct debit payments take a long time to process, we will not know the outcome of the transaction for several business days. This means that accepting direct debit payments may not be the best payment method for businesses that offer short-length reuccring plans.
Customers are also required to give prior notice to a company before canceling their direct debit. Depending on your company's business practice, this notice period may be up to 30 days or more, making direct debit payments less suitable if you experience high amounts of customer churn.
Direct debit schemes by country
At the moment, Billsby only supports direct debit payments in the US (ACH) through Stripe, but each country has a different direct debit scheme, which means different processing times for direct debit payments in each country.
You can read more about ACH in Billsby here