How e-Commerce Transactions Work

E-Commerce or electronic-commerce merchants lack the benefit of having face-to-face customer interactions, which increases the risk for fraudulent transactions as well as communication glitches. But they have the benefit that sales transactions can occur over computer networks anywhere in the world.

Contrary to popular belief, e-commerce is not just on the Web. Prior to the Web, e-commerce took place in business-to-business transactions via EDI (Electronic Data Interchange) through VANs (Value-Added Networks). Modern e-commerce typically uses the Web for at least one part of the transaction's life cycle, although it may also use other technologies such as e-mail. The major different types of e-commerce are: business-to-business; business-to-consumer; business-to-government; consumer-to-consumer; and mobile commerce (m-commerce).

When you process transactions online, you need to decide from among immediate payments, deferred payments and authenticate/authorize payments. The first type are pretty simple. When a customer places an order, their card details are validated and availability of funds immediately checked and “shadowed.” so the customer can no longer spend the money they’ve committed to you and their bank would report a lower “available balance.” In differed transactions the “shadow” on the customers account will remain for up to six days, so deferred transactions are good for orders that you know you will be able to fulfill in a matter of days.

Authenticate/authorise transactions do not perform an authorization when the order is placed. Instead, the card and cardholder details are validated with a view to later authorizing the actual funds. Therefore, the customer’s bank is not contacted and no “shadow” is placed. You have 90 days to authorize or cancel the transaction.

In a card-not-present (CNP) situation, the payment card transaction occurs without the cardholder physically presenting the card for a merchant’s visual examination at the time that an order is given and payment effected, such as for mail-order transactions by mail or fax, or over the telephone or Internet. This type of transaction is a major route for credit card fraud, because it is difficult for a merchant to verify that the actual cardholder is indeed authorizing a purchase. If a fraudulent CNP transaction is reported, the acquiring bank hosting the merchant account that received the money from the fraudulent transaction must make restitution; whereas with a swiped (card present) transaction, the issuer of the card is liable for restitution. This greater risk has led some card issuers to charge a greater transaction fee to merchants who routinely handle CNP transactions. The card security code system has been set up to reduce the incidence of credit card fraud arising from CNP.

Interestingly, economists have theorized that e-commerce ought to lead to intensified price competition, as it increases consumers’ ability to gather information about products and prices. This is definitely a plus for buyers.