Money, Money, Money...makes the world go around!

Do you understand how your money moves between payment providers, credit card issuers and banks?

Why do you need to know the answers?

Knowing what happens when somebody pays you for your products or services is important. Why?  There are various reasons, for instance, if you give a refund to a customer and the money is not in their account immediately, or you don't know why you only get paid in 3+ days when you have made an online sale, or if there is a fraud alert on a sale where does that originate from. These are just a few examples.

Here are some statistics for the retail trade 12,4% failed in the first year, 38.1% in 5 years, and 60.6% in 10 years.

Here’s the full list of the top reasons startups fail from CB Insights:

• Ran out of money/couldn’t raise new capital: 38%
• Lack of market need: 35%
• Beat by competition: 20%
• Wrong business model: 19%
• Regulatory/legal hurdles: 18%
• Didn’t properly price things: 15%
• Wrong team members: 14%
• Bad timing for products: 10%
• Flawed product: 8%
• Friction among team/investors: 7%
• Failed pivot: 6%
• Burned out/no passion: 5%

Getting Paid - Shopify Help Center Explanation:

"When you set up a payment provider to accept credit card payments, each payment must be processed. There is usually a delay between when the customer pays for their order and when you receive the payment. After the payment is processed, the purchase amount will be transferred to your merchant account (the account you have delegated in your Shopify Payment section).

Other payment providers, such as PayPala, will have their own ways of getting funds from your customer to your bank account. You will have to transfer funds manually from your PayPal account.

Check with the service you are using to find out how they will pay you.

You can accept manual payments outside of your online checkouts, such as money orders or bank transfers. Unless you activate Shopify Payments as your payment provider, you'll be charged transaction fees for all orders that aren't brokered financially by Shopify. This includes all orders that go through Shopify's checkout system."

THE FINANCIAL PROCESS FROM END-TO-END

I will show you how the whole financial process works between your Store, the credit card company, and the banks so you have some knowledge of how the money moves around.

Step-by-Step: How A Credit Card Payment Gets Processed

When a customer pays for their online order using a credit card, the payment has to be processed before the funds are added to your merchant account. Credit card processing is done for you by your payment provider, in this case, Shopify Payments.

WHO IS INVOLVED IN THE TRANSACTION?

The Merchant: The Processor or Payment Provider

The processor will provide a number of functions to the merchant. First, they will register their business with the various card networks so that they can accept all the payment types required.

The processor will also arrange for the processed funds to be deposited back to the merchant, typically within a few business days. The processor will provide the merchant with the equipment, software or platform needed for them to accept credit cards.

The Issuer: Credit card holder’s financial institution

The issuer is the bank that actually underwrites, extends the credit, and backs the card/credit that is extended on behalf of the Card Network. The issuer is the bank of the customer.

The Acquirer: Merchant’s financial institution

An acquiring bank (also known simply as an acquirer) is a bank or financial institution that processes credit or debit card payments on behalf of a merchant.

The acquirer allows merchants to accept credit card payments from the card-issuing banks within an association. (Wikipedia)

The Card Network: Visa, MasterCard, Discover. Etc.

Credit card networks are the bridge between merchants — the shops that accept your credit card — and the banks that issue the credit cards themselves.

A payment network is an intermediary between all of the various elements that comprise a transaction, from the cardholder all the way through to the settling of transaction funds. They make sure the authorization and funds movement are properly directed to ensure money is appropriately distributed.

The payment process has the following four stages:

1. Authorization
2. Capture
3. Clearing
4. Funding

1. AUTHORIZATION

Step 1.

A cardholder (customer) uses their credit card for their order in your store. The payment provider (for instance, Shopify payments) you've set up checks with the issuer (the bank of the customer - Chase, BOA, etc) to make sure the credit card is valid. If the card is valid and has enough funds, then the issuer authorizes the payment. No funds are transferred at this stage.

Step 2.

The payment terminal (Shopify, POS) communicates with the credit card processor (Shopify/Stripe, PayPal, Amazon) and sends information about the transaction. Information includes the credit card details and the amount to be processed.

Step 3.

The processor (Shopify Payments/Stripe, PayPal, Amex) will detect what type of credit card it is and communicates with the appropriate card network (such as Visa, MasterCard, etc).

Step 4.

The card network (like Visa, MasterCard, etc) determines the issuing bank (such as CitiBank, Chase, etc - the bank of the customer) and communicates the transaction to them.

Step 5.

The issuing bank (such as CitiBank, Chase, etc. - the bank of the customer) ensures that the card is valid, has not been flagged for fraud, and that the funds are available. If so, it provides a response back to the card network (like Visa, MasterCard, etc.) with an APPROVAL CODE.

Step 6.

The card network (like Visa, MasterCard, etc) responds back to the processor (Shopify Payments) with the approval information.

2. CAPTURE

Step 7.

The processor (Shopify Payments) responds back to the merchant's equipment (your Shopify store), which then displays the approval message in your Shopify Admin > Orders. After the payment is authorized, the payment has to be captured. When a payment is captured, details about the payment are sent to the acquirer. If you have set your payments to capture automatic, you do not have to do anything. But if you set your payments to capture manually, you have to manually go to Orders and capture the payment yourself. If you want to be able to get paid quicker, I would suggest setting your payment options to automatic.

3. CLEARING

Step 8.

The acquirer reviews the payment details and then requests the necessary funds from the issuer who then processes the customer's credit card. The credit card company sends the transaction information to the issuer. The issuer subtracts a small fee from the total transaction amount, and then sends the remaining amount back to the credit card company. The card company subtracts their fee, and then sends the remaining amount to the acquirer.

4. FUNDING

Step 9.

The acquirer subtracts a small fee from the amount and then transfers the final amount to your merchant account.

So in the end, the card network will transfer the funds from the issuing bank (such as CitiBank, Chase, etc. - the bank of the customer) to the processor (Shopify Payments), which will then transfer the funds to the merchant (YOU and your Shopify store).

What's amazing about the above is that most transactions go through these steps in less than a second, providing real-time authorizations to merchants across the world. Visa alone processes thousands of transactions per second across its network, serving over 150 million transactions between cardholders and merchants worldwide every day.

HOW OFTEN DO YOU GET PAID?

If you are using Shopify Payments, then you can check your pay period to see when you'll receive payouts from credit card orders. Other payment providers have their own rules on when you receive payouts for credit card orders. Check with your provider to figure out how often you will be paid.

After the payout is sent, it might not be received by your bank right away. It can take a few days after the payout is sent for it to be deposited into your bank account. This depends on your bank and its system. Check with your bank if you find your payouts are being delayed.

TIP: Remember, banks are closed Saturday, Sunday, and Holiday. Processing will not occur on these days.

FEES

If you have Shopify Payments enabled, then you won't be charged transaction fees for any orders made on your online store. Instead, you'll pay a card rate (discount rate) which depends on your Shopify plan. If you are using a third-party payment provider with Shopify, then Shopify will also charge you a fee for each transaction.

TIP: You can avoid transaction fees by activating Shopify Payments; Shopify's own payment provider.

Generally, you can be charged with several transaction fees for online transactions. For credit card transactions, the issuer, the acquirer, and the credit card company all charge a small fee for using their services.

A quick overview of fees that you might be charged with:

Processing/discount rate, transaction fees, authorization fees, return fees, address verification (AVS) fees, and gateway fees. Per item fees, communication fees, wireless fees.

You will always pay a processing fee (2.9%, 2.4%, etc.) when you initiate a credit card transaction. This is also called a Discount rate or just rate. Included in this fee structure, you will also pay an authorization fee (.10, .15, .30, etc.) and the amount depends on volume and payment provider.

The rest of the transaction fees depend on the payment provider you choose. Shopify does not always provide a Shopify Payment option in different countries. You will have to use a third-party payment provider. Shop around to get the best rate and fees and check the small print.

RESOURCES:

In this next article, I have gathered information from banks, credit card companies, and Wikipedia. I have added the resources at the end of the chapter, but I have tried to create an excellent comprehensive information section for you.

Manual Payments

https://help.shopify.com/en/manual/payments/shopify-payments/testing-shopify-payments

Helcim

https://support.helcim.com/article/merchant-services-guide-to-getting-started-payment-industry-overview-the-credit-card-ecosystem/

Acquiring bank

https://en.wikipedia.org/wiki/Acquiring_bank

https://www.finder.com/credit-card-networks-vs-issuers-difference

Read more about GDPR: https://eugdpr.org

What is next?

How To Set Up Your Checkout Your Shopify Store #4

There are several articles dedicated to all of the Shopify ‘Settings’ section to set up your online business.

1. How Important Is Your Business Information In Shopify #3

Business information for your Shopify store is the foundation of your online store to keep your protected.

2. Setup Your Financials In Shopify.

Payment options, checkout and understanding of your money is important. Here are 4 articles dedicated to the 'Payment' options in your 'Settings' in Shopify.

• How To Set Up Your Financial Information In Shopify? #4
• How To Set Up PayPal Express & Amazon Pay In Your Shopify Store #4
• How To Get Paid From Your Payment Provider In Shopify? #4
• How To Set Up Your Checkout Your Shopify Store #4

3. How To Set Up Your Shipping & Distribution Locations In Your Shopify Store #5

Set up your locations and rates of your store so the process is seamless.

4. How To Set Up & Optimize Your Automated Email Notifications in Shopify #6

Personalize your email notifications with your brand and voice.

5. How To Set Up All Your Legal Requirements In Shopify #7

Your legal documentation for your eCommerce store to protect your business.

Find my Shopify TOOLS PAGE for more information.

FOLLOW VERONICA:

You can join our Facebook group to engage and learn more about Shopify and how to get more customers to your Shopify store. This is a free group.

Ecommerce Success Group - Search for Ecommerce Success Group on Facebook.