6 Online Payment Systems Explained
Key Concepts
- Credit Card Processing
- Digital Wallets
- Bank Transfers
- Cryptocurrency Payments
- Third-Party Payment Gateways
- Mobile Payments
Credit Card Processing
Credit Card Processing involves the electronic transfer of funds from a customer's credit card to a merchant's account. This system includes card authorization, transaction processing, and settlement. For example, when a customer makes a purchase online using their Visa card, the transaction is authorized by the card issuer and processed through a payment processor.
An analogy for Credit Card Processing is a toll booth on a highway. Just as a toll booth collects fees from passing vehicles, a payment processor collects funds from credit card transactions.
Digital Wallets
Digital Wallets, also known as e-wallets, are virtual wallets that store payment information and enable users to make online payments without entering their card details each time. Examples include PayPal, Apple Pay, and Google Wallet. For instance, a user can store their credit card information in Apple Pay and use it to make purchases on supported websites with a single tap.
An analogy for Digital Wallets is a physical wallet. Just as a physical wallet holds cash and cards, a digital wallet holds payment information and facilitates transactions.
Bank Transfers
Bank Transfers involve the transfer of funds directly between bank accounts, either through online banking platforms or wire transfers. This method is often used for large transactions and international payments. For example, a business might use a bank transfer to pay a supplier in another country.
An analogy for Bank Transfers is a direct deposit. Just as a paycheck is directly deposited into a bank account, funds are directly transferred between bank accounts.
Cryptocurrency Payments
Cryptocurrency Payments use digital currencies like Bitcoin, Ethereum, and Litecoin to facilitate transactions. These payments are decentralized and use blockchain technology for secure and transparent transactions. For instance, a customer might pay for a product using Bitcoin, with the transaction recorded on the blockchain.
An analogy for Cryptocurrency Payments is a digital ledger. Just as a ledger records financial transactions, blockchain technology records cryptocurrency transactions.
Third-Party Payment Gateways
Third-Party Payment Gateways are services that facilitate online payments by acting as an intermediary between the merchant and the customer's bank. Examples include Stripe, Square, and Authorize.Net. For example, a small business might use Stripe to accept credit card payments on their website.
An analogy for Third-Party Payment Gateways is a bridge. Just as a bridge connects two sides of a river, a payment gateway connects the merchant and the customer's bank.
Mobile Payments
Mobile Payments involve using a mobile device to make payments, often through apps like Venmo, Zelle, and Samsung Pay. These payments can be made via SMS, mobile web applications, or near-field communication (NFC). For instance, a user might use Venmo to send money to a friend for dinner.
An analogy for Mobile Payments is a digital handshake. Just as a handshake confirms an agreement, a mobile payment confirms a transaction between two parties.
Understanding these six online payment systems—Credit Card Processing, Digital Wallets, Bank Transfers, Cryptocurrency Payments, Third-Party Payment Gateways, and Mobile Payments—is essential for anyone involved in online business. Each system offers unique advantages and is suited to different types of transactions.