Accepting credit card payments for digital products

Selling digital products is an entirely online process – there’s no physical inventory, no exchange of cash, and no shipping of physical goods. And when it comes to digital product sales, the vast majority of transactions are made with credit cards.

When was the last time you heard of someone mailing a check for an eBook? 🙂

In the simplest terms, you can’t run a digital product store without accepting credit card payments.

But what payment processor should you choose? Should you be concerned about fraud? How do international transactions work? What site security measures should you take? How does customer confidence affect everything?

These are all important questions that we will address in this post. So, without further ado, let’s get into the basics of accepting credit card payments for digital products!

Payment processing

Choosing the right system to manage your online transactions is one of the most fundamental parts of accepting credit card payments, and it’s a decision that affects your entire business. But, with so many different factors to consider, it’s no wonder that it can feel a bit…daunting.

So, how do you even begin to make the decision? What is a payment processor vs. a payment gateway anyway?

First, let’s define the terminology:

• Payment gateway – The technology, software, or tool that securely communicates the payment data (and the approval or decline of the credit card transaction) to the payment processor. In other words, a digital point-of-sale terminal that is used to accept payments for digital goods and services.
• Payment processor – The company that facilitates / executes the transaction. Payment processors transmit data between the customer and the merchant, as well as the customer’s bank (issuing bank) and the merchant’s bank (acquiring bank).
• Customer – The individual making the credit card purchase.
• Merchant – The entity being purchased from.
• Merchant account – A bank account for businesses who want to accept credit card payments.
• Acquiring bank – The merchant’s bank / the financial institution that receives the payment information and sends it to the issuing bank, requesting funds. Also known as the acquirer or merchant bank.
• Issuing bank – The customer’s bank / credit card provider / the financial institution that transfers the requested funds to the acquiring bank. Also known as the issuer or consumer bank.
• Payment authorization – The process of determining if the issuing bank has sufficient funds and approving or declining the credit card transaction.
• Clearing – The process of transmitting the payment data from the acquiring bank to the issuing bank, calculating any transaction fees, and converting transaction amounts into required currencies.
• Settlement – The process of calculating and transmitting the final cleared transaction data and transferring the funds from the issuing bank to the acquiring bank.
• Chargeback – A process initiated when the customer files a dispute with the issuing bank over a suspected fraudulent or invalid purchase, resulting in a fee that must either be accepted and paid by the merchant, or disputed.

Next, let’s look at how the credit card purchase process works:

1. The customer submits their payment information to you (the merchant) via the payment gateway using their credit card 💳
2. The payment processor securely transmits this payment data to the issuing bank for authorization, requesting the appropriate funds 🏦
3. Once the payment is cleared, these funds are transferred from the issuing bank to the acquiring bank and the transaction is settled 💰

Every credit card transaction involves the customer, the merchant, the issuing bank, and the acquiring bank. So, in order to accept credit card payments, you’ll need a payment gateway / processor that facilitates transactions between these parties.

Choosing a payment processor

Stripe and PayPal are by far the most widely recognized payment processors worldwide, and both are easy to sign up for and manage. While a variety of other options exist (like Square, 2Checkout, Authorize.net, and SecureNet, for example), Stripe and PayPal are the true industry standards when it comes to digital product stores.

It’s not just because they are bigger names; Stripe and PayPal are much more well-known by consumers (which helps customers feel more comfortable buying from you), and they also offer the most streamlined checkout experiences, support for digital products, and other handy eCommerce features like the ability to accept subscription payments.

It’s easy to sign up for a Stripe or PayPal business account – all you have to do is enter your personal details and verify your bank account to get up and running. Once your account is confirmed, you will have access to a variety of tools to manage transactions on your digital product store, all within one organized central platform.

It’s important to note that PayPal only allows one account per email address or per bank account, and you cannot have more than two PayPal accounts total (one personal account and one business account). Stripe, however, allows users to add multiple accounts to one profile and easily switch between them in the user dashboard.

Stripe is also known for having an attractive and minimal interface, more flexibility, and high-quality documentation for developers that makes customization a breeze.

Fees and features: A side-by-side comparison

One of the biggest factors in choosing a payment processor is the fees associated with transactions. Digital product stores tend to be unique in that products are very easily distributed worldwide, in comparison to physical products, which require import/export fees, international shipping costs, etc.

As we discussed in our post about the digital product purchase process, Stripe and PayPal have some notable differences in fees when it comes to international transactions. As you can see in the chart below, PayPal charges a significantly higher fee for transactions outside the U.S. with fewer currencies supported in comparison to Stripe.

However, PayPal business accounts are available in far more countries than Stripe, and it also has a long-standing reputation for security, buyer protection, and seamless use on different devices.

The right processor for you all depends on your specific business needs and preferences!

	PayPal Business Account	Stripe
Pricing within the U.S.	2.9% + $0.30 per transaction	2.9% + $0.30 per transaction
Pricing outside the U.S.	4.4% + fixed fee per transaction	2.9% + $0.30 per transaction
Currencies supported	200+	135+
Countries available	25	25
Digital products protected	No	No
Digital services protected	No	No
Account management	Yes	Yes
Volume discounts	Yes	Yes
Dedicated support	Yes	Yes
Migration assistance	Yes	Yes
Balance transfers (bank account)	Free	Free
Balance transfers (debit card)	1% of amount transferred	No
Currency conversion	1-4% per transaction	Varies per transaction
Card authorization	$0.30	Free
Fraud tools	Yes	Yes
Advanced fraud protection	$10 per month + $0.05 per transaction	Free
Dispute/chargeback fee	$20	$15 or $0
Embedded checkout	Yes	No
Hosted checkout	Yes	Yes
Custom invoices	Yes	Yes
Buyer protection for digital products	Yes	Yes
Seller protection for digital products	No	No
Tools, reports, and analytics	Yes	Yes
Apple Pay	No	Yes
Google Pay	No	Yes
Bitcoin	No	No
E-checks	No	Yes
API integrations	Yes	Yes
ACH	No	Yes
AliPay	No	Yes
Company loans	Yes	Yes
Split/adaptive payments	Select partners only	Yes
Mass payments	Yes	No

A note about international transactions

When consumers make purchases across country borders, they tend to be on higher alert for anything risky, suspicious, or seemingly illegitimate. So, if you want to sell to customers worldwide (most digital product sellers do), you’ll want to take this into account.

Some international shoppers might even abandon their carts altogether if they aren’t convinced that you’re going to process their payment data securely, or if they can’t pay in their preferred currency, for example. The good news is that PayPal and Stripe both allow payments to be made in the customer’s local currency, so there’s another benefit to using one of them as your payment processor.

Customer confidence

As we’ve discussed before, customer confidence is essential when it comes to actually converting digital product sales, and there are some things you can do to make sure your customers feel comfortable using their credit cards on your site.

Visual trust cues like site security badges, SSL certificates, and payment gateway logos are basic elements that help customers that extra sense of security they need to trust you with their sensitive data. However, it’s also worth considering making improvements to your social proof, social media presence, and brand visibility.

All of these things combined contribute to giving customers the confidence that your brand is trustworthy and that their credit card information will be safely used if they decide to buy your products.

Fraud concerns

Unfortunately, fraud affects a significant portion of digital businesses that accept credit card payments, large and small. Some estimates suggest that 50% of all small businesses experience fraud at some point – and with digital products, it’s no different.

When fraudulent orders come in, it can be frustrating as a digital product creator and store owner. Not only do you have to deal with the loss of revenue that comes from refunding the order; Payment processors also charge you extra fees when customers initiate chargebacks (some of which can be $30 or more) on suspicious orders.

This can all be disheartening, to say the least. To top it off, if you get too many chargebacks, you also risk losing your Stripe or PayPal business account. Yikes!

So, what are you supposed to do? To some degree, fraud comes with the territory. If you want to run a thriving digital product store, you will likely encounter it at some point.

However, there are measures you can take to protect yourself, your company, and your customers against fraud:

• Use fraud detection plugins like FraudMonitor. Orders are automatically flagged according to common fraud criteria, but you can also manually approve them once customers verify their purchases.
• Monitor customer transactions every day:
  • Make sure customer account information matches the payment method used. Sometimes there may be a mismatch for legitimate reasons, like when customers borrow credit cards from friends or family to make purchases. It can be hard to tell, so you just have to try and use your best judgement. Regardless, it may be worth asking these customers to verify their purchases, just in case.
  • Make sure that the IP address where the purchase was made matches the IP address where the product was downloaded. Sometimes customers travel, use VPNs, or have multiple devices – but as a general rule, the country of purchase should match the country of download.
  • Check customer account information for obvious misspellings, profanity, or fake names. It’s rare for a well-meaning customer to sign up for your site with anything other than a legitimate name.

Fraudulent orders are often cases of identity theft, where people make purchases with stolen credit card information, but they can also be cases where perpetrators gain access to customer login details and take over accounts via phishing or similar tactics.

In addition to taking the proactive measures listed above, payment gateways like PayPal and Stripe will usually alert you if something looks unusual (in the case of identity theft), but when it comes to account takeovers, the best thing you can do is use standard site security practices.

Which brings us to…

Site security

Accepting credit card payments online comes with a higher level of responsibility – after all, you’re handling sensitive personal data that could end up being detrimental to the wellbeing of your customers if compromised.

While it’s true that no online store is ever 100% protected against malicious forces, you can reduce your risk as much as possible. When it comes to the nature of fraudulent orders, here are a few practical steps you can take to make customer accounts less vulnerable:

• Require strong passwords. Long, randomly-generated passwords with a mixture of numbers, letters, and special characters are harder for perpetrators to guess. Require strong passwords, or encourage customers to adopt these methods when signing up for your site.
• Use two-factor authentication. If you can, add two-factor authentication to your customer login process, so that they are notified of any unusual login attempts, and protected against brute force attacks.
• Consider doing away with customer accounts altogether. If you don’t absolutely need customer accounts, consider not using them at all. This reduces the risk of account takeovers to about zero.

In conclusion

While it comes with its own set of risks and complications, accepting credit cards is a must when it comes to selling digital products.

Understanding how credit card payments work helps you choosing the right payment processor for your needs, but it’s also important to be aware of how customer confidence influences the consumer’s willingness to pay for your digital products with their credit card, and be prepared to handle fraud and mitigate customer account security risks by using the best site security practices.

Credit card payments will continue to be the standard for digital goods and services, so the more informed you are, the better! But, remember that there’s no perfect solution that suits every type of digital product, every market niche, or every digital product business out there. Set up your credit card payments according to your individual business needs and goals!

What insights do you have to share when it comes to accepting credit card payments for digital products? We’d love to hear your thoughts, so leave us a comment below!

Illustration by Jessica Johnston.