Online Payment Processing:

What you need to know

EDITION 2
 Online Payment Processing:
What you need to know

© 2009 PayPal, Inc. All rights reserved.

PayPal, Payflow, and the PayPal logo are registered trademarks of PayPal, Inc.
Designated trademarks and brands are the property of their respective owners.

Notice of Non-Liability
PayPal, Inc. and the authors assume no liability for errors or omissions, or for damages,
resulting from the use of this guide or the information contained in this guide.

2 Online Payment Processing

 TABLE OF CONTENTS

Introduction .................................................................................................................................................4

Online Payment Processing Basics . .................................................................................................... 5

Understanding the Payment Processing Network.

How Online Payment Processing Works.

What You Should Know About Internet Fraud ................................................................................. 7

Stopping Fraud Before it Starts.

Dealing with Chargebacks.

Choosing an Online Payment Processing Service ..........................................................................9

With PayPal, Choosing a Payment Solutions Doesn’t Have To Be Complicated ................. 10

Website Payments Standard

Website Payments Pro

PayFlow Payment Gateway

Express Checkout

Virtual Terminal

Which PayPal Solution is Right for You? ........................................................................................... 11

Online Payment Processing 3

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Introduction

Want to Make More Money? Start Selling Online.

Taking your business online is a smart way to grow your revenue, boost profits, reduce overhead,
and reach new buyers. That’s because more people are shopping online than ever before. And new
technology is making it easier, safer, and more cost-efficient to sell online. Consider this:

• 2009 web sales are expected to be more than $156M, or roughly 6% of total U.S. retail sales—
this represents an 11% growth over 2008.
• This growth is distributed across all product categories. 1

As you can see, despite fluctuations in the strength of the economy, e-commerce not only continues
to grow, but it’s also an opportunity for retailers to capture market share from competitors.

More Reasons to Sell Online.

An online store allows you to be open for business 24 hours a day, seven days a week. Plus, you
don’t have to hire a large staff to manage orders because the latest payment processing tools can
handle transactions automatically. What’s more, an online store can help you reach new markets
across the country—or around the globe.

The Importance of Getting Paid.

It goes without saying, but one of the most critical steps in establishing an online store is ensuring
that you can accept customer payments for single or recurring transactions. For merchants, it’s
about getting paid quickly and easily while protecting against fraud. For customers, it’s about the
convenience and flexibility of paying by credit card and debit card, and having payment alternatives,
such as bank account balances or PayPal.

Knowledge is Earning Power.

This guide will provide what you need to know about the essential elements of online payment
processing:
• Online Payment Processing Basics
• The Payment Processing Network
• How Payment Processing Works
• What You Should Know About Internet Fraud
• What to Look for in an Online Payment Processing Solution
• PayPal’s Payment Processing Solutions – Easy, Secure, and Reliable

1
Forrester Research: The State of Retailing Online 09, May 5, 2009

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ONLINE PAYMENT PROCESSING BASICS

It takes just a few clicks for consumers to complete most online

purchases. But for merchants, the typical transaction weaves A payment processing
through a web of banks, processors, and other institutions to service provides the key
ensure customer payment information is routed reliably and connections between
securely. It’s not something most people ever think about. But to merchants, customers,
earn and keep customer confidence and trust, working with an and banks to enable
experienced and secure payment processing service is essential. secure transaction of
Choosing the right one requires basic knowledge of all the players online payments.
involved in settling your online payments. And it all starts with the
payment processing network.

Understanding the Payment Processing Network.

In a nutshell, this is a group of connected entities that links together sellers, buyers, and banks.
It also facilitates the secure and reliable execution of online transactions. All the entities are
interdependent of one another. For example, if you want to accept payments over the internet, you
need an internet merchant account with an acquiring bank so you can accept customer credit
cards electronically. Your customers, in turn, need a bank that issues credit cards and verifies their
credit limit and available cash balance for purchases. In addition to the individuals (you and your
customers), the other entities that make up the payment processing network include institutions,
processes, and services—which are all defined below.

Individuals

Merchant: Someone who sells goods or services (in other words, you).
Customer: The holder of the credit card or other payment instrument (your customers).

Institutions

Customer Issuing Bank: The institution providing the customer’s credit card.
Please do not use the Express Checkout button to communicate that you accept PayPal. It‘s used only in checkouts.
Acquiring Bank: Provides the internet merchant accounts required to enable online card authorization
and payment processing.
Credit Card Associations: Financial institutions that provide credit card services in concert with credit
card associations such as Visa and MasterCard.
Processor: A large data center that processes credit card transactions and settles funds for
merchants. A processor can be either a bank or a company dedicated to providing these services.

Processes and Services

Authorizations: The process of verifying that customer credit cards are active and have sufficient
available credit limits.
Settlements: Processing authorized transactions to settle funds into a merchant’s account.
Payment Processing
*Q1 2006 Service:
PayPal phone survey Aand
of small- service thatbusinesses
medium-sized connectswithmerchants,
at least $120,000 customers, and banks involved in
in annual sales online.
** MarketLive Performance Index, Q1 2007 and PayPal internal data on Express Checkout transactions.
online transactions. Sometimes it’s referred to as a payment gateway.

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How Online Payment Processing Works.

The payment
Online payment processing consists of two principal steps:
authorization process
authorization and settlement. Authorization verifies that the card is
engages multiple
active and the customer has sufficient credit to make the transaction.
institutions and
Settlement is the process of charging the customer’s card account and
services to verify that
transferring money from the customer’s account to the merchant’s
sufficient credit is
account.
available to complete
the transaction.
First step: Processing Authorization.
During authorization, a bank verifies that your customer paying via
credit card has sufficient credit or funds to make a purchase. The
graphic below illustrates all the steps involved.
1. Customer decides to purchase online and inputs credit card information.
2. Merchant’s website receives customer information and sends it to the payment processing
service.
3. Processing service routes information to processor.
4. Processor routes information to bank that issued customer’s credit card.
5. Issuing bank sends authorization (or declination) to processor.
6. Processor routes transaction results to payment processing service.
7. Processing service sends results to merchant.
8. Merchant decides to accept or reject purchase. (Here, the merchant should take additional
precautions to ensure the credit card is not stolen and that the customer actually owns this
card. See “What You Should Know About Internet Fraud” below.)

1 2 3 4

Customer Merchant Processing service Processor Issuing

bank

8 7 6 5

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Next step: Payment Processing Settlement.

Once the merchant has shipped the physical product or The merchant
authorized the download of digital content, the merchant initiates the payment
may request that the payment processing service settle the settlement process
transaction. During settlement, funds are transferred from once the product has
the customer’s account to the merchant’s bank account, as been shipped to or
illustrated below. downloaded by the
1. The merchant informs the payment processing service to customer.
settle transactions.
2. The payment processing service sends transactions to
processor.
3. The processor checks the information, and forwards settled transaction information to
the card association and card-issuing bank.
4. Transactions are settled to the card issuers and funds move between the acquiring
bank and issuing bank. Funds received for these transactions are sent to the merchant’s
bank account.
5. Acquiring bank credits merchant’s bank account.
6. Issuing bank includes merchant’s charge on customer’s credit card account.

Credit Card
1 2 association

Processing
service
3
4
Issuing
Merchant Processor
bank

6
5 4
Acquiring
bank

Customer

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WHAT YOU SHOULD KNOW ABOUT INTERNET FRAUD

When a customers shops at a store, a physical credit card is

swiped or entered, and the merchant can verify that the customer Choose a payment
is who he says he is. Unlike a face-to-face transaction, when solution that includes
customers shop online, a credit card is obviously not present. basic and advanced
As a result, credit card associations hold merchants liable for antifraud features to
fraudulent online transactions. protect your business
against fraud.
Many merchants don’t know that they are liable for fraudulent
credit card transactions online. Credit card associations can
impose stiff penalties for fraud—expenses on top of the stolen goods and related shipping costs.
Fortunately, there are ways to protect an online business against fraud. The most important thing
you can do is choose a reliable and secure payment solution that includes basic antifraud features,
and offers more advanced ones for merchants who want them. But before you learn how to fight
fraud, it helps to understand the most common fraud-related risks facing online merchants.

Product Theft: This is when a criminal uses stolen credit card information to purchase goods and
services for themselves or for resale.

Identity Theft: This occurs when stolen credit card information is combined with readily available
Social Security numbers and address information to open new credit cards under the criminal’s
name and address.

Cash Theft: This is when criminals access a virtual cash register by stealing merchant account
access information and impersonating the merchant to issue credits or payments to themselves. Use
of industry-standard data security and encryption technology virtually eliminates this possibility.

Stopping Fraud Before it Starts.

A reputable payment processing service will provide you with a minimum level of antifraud features.
An example of this type of technology includes the card security code—the three- or four-digit
number printed on the back of the physical card. Another example is something called an address
verification system, which cross-references the address supplied online by the credit card holder to
the address on file at the issuing bank.

Both of these antifraud features should execute during the payment processing authorization phase.
In addition, your processing service should include options to upgrade to advanced fraud protection,
essential for high-value, high-volume, and international transactions.

Dealing with Chargebacks.

Mistakes happen. That’s why chargebacks—when a cardholder disputes a credit card purchase—are
an inevitable part of doing business online. During such disputes, the card-issuing bank initiates a
chargeback against the merchant to retrieve funds for the sale from the merchant’s bank account.
Chargebacks can cost the merchant the value of goods, services, or shipping provided, or cost
the merchant time and expense to prove that the disputed transaction was legitimate. The most

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common type of chargeback occurs when a customer states that he or she:

1. Didn’t receive the item ordered
2. Didn’t receive the item believed to be ordered
3. Had his or her credit card stolen and used by the thief
4. Stole merchandise or services through the fraudulent use of a chargeback

Your payment processing services should provide you with online access to an account detailing
each transaction. So in the case of a chargeback, you have an online record of all payment,
settlement, and shipping details. This information helps you easily and efficiently address any
chargebacks that may occur.

CHOOSING AN ONLINE PAYMENT

PROCESSING SERVICE

Now that you know how online payment processing works, it’s just a matter of finding a reliable,
secure, and flexible payment processing solution for your business. Based on all the information
we’ve presented, a payment processing solution should be:

Secure
• Backed by an established, trustworthy company
• Comply with the Payment Card Industry (PCI) Data Security Standard
• Provide comprehensive and standard antifraud features
• Stores customer financial information with state-of-the-art encryption
• Supply password-protected account management

Reliable
• Provide reliable and cost-effective acceptance and processing of a variety of payment types
• Authorize credit cards in real time
• Scale to thousands of transactions to meet peak demand
• Based on a fault-tolerant network of redundant servers to ensure uninterrupted operations

Easy to use
• Provide easy, flexible integration with your website
• Scale rapidly and seamlessly as transaction volume increases
• Provide an easy-to-use tracking and reporting system
• Store transaction records securely
• Process offline transaction through a virtual terminal
• Process recurring billing payment for services
• Offer upgrade options to accommodate future growth

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WITH PayPal, CHOOSING A PAYMENT SOLUTION DOESN’T

HAVE TO BE COMPLICATED

When it’s time to take your business online and you need to accept credit cards and other online
payments, PayPal makes it easy and affordable. In fact, we’ve got a variety of solutions that can help
just about any size business handle all—or a portion—of its payment processing needs. As you begin
to explore your options for a payment processing solution, determining which PayPal product is right
for you is a matter of asking a few simple questions:

Looking For an Easy, Affordable Way to Accept Credit Cards Online?

Our easiest, most popular way to accept credit card payments is a solution called Website Payments
Standard. You can literally create a payment button in about 15 minutes with no programming skills
required. Additional benefits include:
• No monthly fees and no setup or cancellation fees
• Your customers do not need a PayPal account to pay you
• You only pay a small percentage of each payment you receive
• You get built-in fraud screening at no additional charge
• Since PayPal hosts the checkout pages, you don’t have to worry about PCI compliance or
customer data security

Want an All-In-One Credit Card Processing Solution?

Higher-volume businesses prefer Website Payments Pro. It provides the convenience of an internet
merchant account and payment gateway all in one—plus customers never leave your site to pay
you. You also get low, simple pricing and one point of contact for your payment processing needs.
Additional benefits include:
• No set-up fees, no hidden fees, and no long-term commitments
• Comprehensive fraud screening and account reporting at no additional charge
• You get the option to accept recurring payments, add additional fraud filters, and accept PayPal
payments in addition to all major credit cards.

Want to Connect an Existing Banking Relationship to Your Online Store?

Our Payflow Payment Gateway connects your online store to any major payment processor, bank,
and card association. Additional benefits include:
• Choose from an option that is fully integrated into your site or one that provides PayPal-hosted
check out pages
• You get built-in fraud screening at no additional charge
• Optional extended fraud protection, recurring billing, and support plans available

Want to Give Your Customers More Ways to Pay?

If you already accept credit cards online, you can also accept PayPal by adding our Express Checkout
button. It gives buyers another way to pay, and it complements your existing payment solution. In
fact, businesses reported a 14% average increase in sales after adding Express Checkout in a PayPal
survey of 100 merchants.

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Want to Accept Credit Card Payments for Mail, Phone, or Fax Orders?
Don’t spend $300 on a card swipe machine, use Virtual Terminal and turn any online computer into
a credit card terminal. Virtual Terminal is included in our Website Payments Pro solution, but can be
used separately anytime, anywhere you have a computer and an internet connection.

Don’t Have Website, But Still Want to Get Paid Via Email?
Put an end to “the check’s in the mail. With PayPal Online Invoicing, you can send customers
invoices by email that include their own payment button. These invoices are easily generated from
your PayPal account—Quickbooks and Quicken, too. And customers just click a button and pay you
online.

WHICH PayPal SOLUTION IS RIGHT FOR YOU?

I need to accept credit I need to get paid for orders I already sell online
cards on my website taken via phone, fax or mail but want to accept
PayPal payments

Website Website Email Virtual Express

Payments Pro Payments Invoicing Terminal Checkout
Standard

Where customers On your website On your website Varies with Varies with On your website
Shop: your business your business

Where customers Your website or Checkout pages PayPal Phone, fax or PayPal
checkout: on PayPal hosted on PayPal mail

Customers need a No No No No Yes

PayPal account

Internet merchant Included Not needed Not needed Not needed Not needed
account:

Shopping cart Yes Yes Not required Not required Yes

support:

Technical skills: APIs HTML Not required Not required APIs or HTML

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Need additional information?

If you have questions about PayPal’s payment processing services With PayPal you
and assistance deciding which one is right for you, we’re here to get professional
help. Call us at 1-800-311-6949 or visit the PayPal Merchant Services integration support so
section of the PayPal website at www.paypal.com/merchants. you can scale quickly
and seamlessly as
your business grows.

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www.paypal.com EDITION 2, Oct 2009