E-commerce payment methods and systems

Raúl Carrión

Written by Raúl Carrión

The success of an e-commerce store is greatly influenced by how easy we make it for our customers to pay for our products or services. The easier our payment system, the more we favour impulse purchases at our online store.

Let us begin with a definition of the “online payment” term:

This method enables money transfers between users who wish to acquire a product or service on the Internet.

Payment can be carried out through credit cards, savings accounts and cash.

Payment is channeled through a trusted platform, and each transaction is verified and validated, which helps to reduce risk of fraud.

In this post we are going to analyse the most common online payment methods for an e-commerce store:

Bank Transfer

Bank transfers allow us to move money from one bank account to another. It’s a way of transferring funds between bank accounts without physically handling the money.

When a customer places an order in an online store and chooses payment by bank transfer, they are sent an order number which must be detailed as reference.

Once the e-commerce store sees the payment on its bank account and its details match a current order, it checks the order as “paid” and proceeds to ship the goods.

This method is often preferred by users who are reluctant to introduce their credit card information on a website.

Advantages of bank transfers

  • Receiving money in advance.
  • No commission for the seller.

Disadvantages of bank transfers

  • Customers may delay the payment.
  • Depending on the conditions imposed by their bank, customers may face an additional fee for the money transfer.

Cash on Delivery (COD)

Payment is made upon receiving the goods. The customer wishes to receive the order before paying for it. When someone chooses this payment method, the online store generates an order reference with a summary of their order, and e-mails this information to the customer.

The Cash on Delivery method (also known as Collect on Delivery) usually involves an additional fee that is charged by the carrier. The online store can choose 1) to take care of this fee, or 2) to charge it to the end customer.

Advantages of Cash on Delivery

  • If the customer doesn’t pay for the ordered goods, they won’t be delivered.

Disadvantages of COD

  • If the customer doesn’t accept the ordered goods, the e-commerce store will be forced to pay for the return transportation costs.
  • It involves fees (from 2,2% to 5%).

Payment gateway

A payment gateway is an e-commerce service that authorises payments.

It is the online equivalent of POS (Point of Sale), used at physical establishments.

The selection of a payment gateway will depend on the bank entity an e-commerce store chooses to work with, and it is up to them to provide all the required documentation regarding the payment gateway in use.

The most common options in Spain include Redsys (previously known as Sermepa) for Servired network and Pasat 4B.

This is the most common online payment method.

Advantages of payment gateways

  • Receiving money in advance.
  • Immediate payment processing.

Disadvantages of payment gateways

  • It involves fees for the seller.

How do payment gateways work?

These are the steps followed by payment gateways:

  • A customer places an order.
  • The online store sends the order information to the payment gateway.
  • The payment gateway requests credit card information to the customer.
  • The payment gateway sends this information to the bank that issued the credit card.
  • The bank entity informs the payment gateway whether the operation has been authorised or denied.
  • The payment gateway passes on the information on whether the transaction was successfully completed or not.
  • The online store informs the customer if their order has gone through.


PayPalPayPal is an American company owned by eBay, and it’s become a very popular e-commerce payment method.

Depending on the country, PayPay works slightly differently, but in general terms it allows us to:

  • Work with money that’s been deposited on a PayPal account beforehand.
  • Work as a payment gateway, by requesting credit card information.

Advantages of PayPal

  • It’s secure, as customers’ financial information is not shared with the seller.
  • It’s fast, you only need your PayPal login information to make the purchase.
  • It’s flexible. You can put your money on a PayPal account using a debit or a credit card, bank transfer, or from another PayPal account. You can also use it as a payment gateway.

Disadvantages of PayPal

  • The seller has to pay fees depending on sales volume.
  • It involves exchange fees for the customer if they don’t use the same currency the online store does.

How to configure PayPal for your e-commerce store

If you want your customers to be able to pay with PayPal at your e-commerce store, the first step would be to create a PayPal Business account.

PayPal provides three service alternatives:

  • PayPal Payments Standard: no monthly fee, only pay for what you sell.
  • PayPal Payment Pro: €15 monthly fee + variable rate. It provides more powerful functionalities than those of the Standard option. For example, you can customise the design of the module so that it blends in seamlessly with your website’s layout, and it also provides sales protection to minimise fraud.
  • PayPal Express Checkout: perfect complement if you’ve already installed a payment gateway for credit cards. This button allows you to pay through PayPal with only three clicks.

Once you’ve signed up for one of their services, you will need to install a PayPal module (or develop it from scratch if your website was custom-developed) so that it allows you to connect to the PayPal service with your username and password.


Sagepay systemPayment gateway with anti-fraud control owned by Sage Group. As opposed to other payment gateways, Sagepay only charges a fixed €30 monthly fee and is limited to 1,000 transactions. In cases of larger sales volumes, the monthly fee is higher.

To evaluate whether this alternative is more profitable for your business (out of all mentioned in this post), you will need to divide the monthly fee by a month’s worth of completed transactions.

Here’s how Sagepay payment gateway works:

Payment processing

Sagepay goes through the following steps when a customer acquires a product:

  • Once the customer has completed their purchase, Sage Pay securely captures their credit card information.
  • If the customer is registered in the 3D Secure authentication process, they will be asked to introduce their Verified by Visa or MasterCard SecureCode password on the card issuer’s website (this is optional).
  • The merchant bank will send the credit card information to the customer’s credit card issuer, who will authorise or deny the transaction.
  • The merchant bank will return the transaction results to Sage Pay.
  • Sage Pay sends the authorisation results to the online store and to its customer, to confirm the transaction has been successfully processed.

Payment clearance

Every day Sage Pay will clear all payments made to the e-commerce store the following way:

  • At the end of the day, funds of processed transactions are sent to the merchant bank for their clearance.
  • Then, the merchant bank charges the funds to the card issuer and sends them to the online store’s bank account. The deposit of funds on the account varies from one bank to another.

Other e-commerce payment methods

Money order

Traditional money order service provided by the postal system. The customer pays for the service and the seller sends the merchandise on receiving the money.

Western Union

The customer takes the payment to a Western Union agency. The agency notifies the corresponding office in the city where the seller is located for collection of money.

When transfer is made, the customer receives a password they must send to the beneficiary (in this case, the seller) so that they can collect the payment.

Direct debit

Prior authorisation, the seller withdraws the needed amount directly from the customer’s bank account.

Prepaid chip cards

The customer puts money on a card through an ATM, and this money can be used any time for any purpose.

This “cash” system is ideal for small purchases, and they’re commonly known as “micro payments”.


Now that we’ve analysed all these e-commerce payment methods, I recommend you to at least include bank transfer and payment gateway payment options on your online store. And, if it’s possible, PayPal.

Raúl Carrión
Autor: Raúl Carrión

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