What is online payment processing?

Online payment processing is a way your guests can pay for their bookings online. This could be with their credit or debit card, a digital wallet, or other online payment methods. It’s all about making life easier for your guests by letting them pay for their stay whenever and wherever they want.

In today’s fast-paced, digital world, being able to handle online payments is a must for any hotel. More and more guests are choosing to book online, and they want the payment process to be as easy and hassle-free as possible. In fact, for many people who book their stays online, a simple and secure payment process is a big deal.

But online payments can sometimes be a bit of a headache. There can be issues like complicated payment steps, worries about security, and the need to keep up with all the rules and regulations. To tackle these challenges, you need a solid online payment processing solution that’s easy to use, super secure, and ticks all the legal boxes.

The good news is, with the right tools and know-how, you can set up an online payment system at your hotel that works like a charm. Not only will this make booking a breeze for your guests, but it can also make your life easier, improve your cash flow, and even help you get more direct bookings. So, understanding and getting on board with online payment processing is a smart move that can help you keep up with what your guests want and stay ahead in the game.

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How online payment processing works

Here’s a simplified step-by-step guide on how online payment processing works:

Step 1: Transaction Initiation

The process begins when a customer decides to make a purchase. They select the product or service they wish to buy and proceed to the checkout page. Here, they enter their payment information, which could be credit card details, bank account information, or digital wallet credentials, depending on the payment methods the business accepts.

Step 2: Payment Gateway Encryption

Once the customer submits their payment details, the information is sent to the payment gateway. The payment gateway is a service that securely transfers the payment details from the website to the payment processor. To ensure the security of the transaction, the payment gateway encrypts the data before sending it to the payment processor.

Step 3: Payment Processor and Card Network Authorisation

The payment processor receives the encrypted data from the payment gateway and sends it to the customer’s card network (like Visa or MasterCard). The card network then communicates with the customer’s bank to verify the transaction. This involves checking whether the customer has sufficient funds or credit and confirming the authenticity of the transaction.

Step 4: Transaction Approval or Decline

After the customer’s bank verifies the transaction, it sends a response back through the card network and payment processor. This response indicates whether the transaction has been approved or declined. If approved, the funds are earmarked for transfer from the customer’s account to the merchant’s account.

Step 5: Completion of Transaction

The payment gateway receives the response from the payment processor and transmits it to the merchant’s website. If the transaction is approved, the customer receives a confirmation message, and the order is processed. The funds are then transferred from the customer’s bank to the merchant’s bank, completing the transaction.

Online payment processing service for small hotels 

Accepting online payments is all a part of accepting online hotel bookings. It’s important that hotelier owners keep up with the changes in the hotel payments industry, because knowing how guests prefer to pay for their rooms is vital for maximising bookings at your property. 

A key aspect of operating a small hotel is developing an online presence that allows you to attract guests. In light of this, it’s critical that you offer your guests an opportunity to book with you directly on your website. But how do you get paid? 

Let’s start with the basics of online payment processing. In general, there are four parties involved in any online payment transaction:

  • Merchant – That’s you; a person or company that sells goods or services, such as rooms at a B&B or hotel.
  • Customer – Your guests; a person paying for goods or services, such as a room at your B&B or hotel.
  • The acquiring bank – Your bank account
  • The issuing bank – The customer/guest’s bank account

Online credit card transactions are typically processed in a matter of seconds. Here is what happens:

  1. A customer books a stay at your hotel using a credit or debit card.
  2. That information goes through a secure, encrypted payment gateway.
  3. The payment processor sends a request to the customer’s issue bank asking for the transaction amount.
  4. The issuer either approves or denies the charge.
  5. The payment processor informs you that the charge has been accepted and tells your acquiring bank to credit your account.
  6. The card issuer sends the funds to your bank, where the money is then deposited into your account.
  7. The payment is fully processed and the funds are available.

Special online payment processing concerns for hotels

As a member of the hospitality industry, many of your online transactions are considered “high risk” because you regularly conduct:

  • “Card not present” transactions: You are taking the payment information online or over the phone
  • A transaction amount over $1,000: Luxury or extended stay vacations may often cost over $1,000
  • The product will be delivered in the future: Guests pay for a service they won’t experience for several weeks, months, or maybe even a year

Online payment processing: UK & Europe

Online payment processing in the UK and Europe has undergone significant changes in recent years, particularly with the introduction of Strong Customer Authentication (SCA). SCA is a set of regulatory requirements that came into effect on 14 September 2019, designed to enhance the security of online payments and reduce payment fraud.

SCA introduces an additional layer of security when customers make an online payment. This means that property owners based in the EU need to ensure their payment processes are compliant with these regulations, or they risk not being able to receive online payments.

The SCA rules apply when a payer initiates an electronic payment transaction, accesses their payment account online, or carries out any action remotely that may imply a risk of payment fraud, unless an exemption applies.

The SCA rules require at least two of the following three factors to be verified: something the customer knows (like a password), something the customer has (like a mobile phone), and something the customer is (like a fingerprint).

It’s important to note that there are several exemptions to SCA, including low-value transactions, certain types of recurring payments, and transactions where only one party is in the EU. However, the responsibility for compliance with the SCA requirements cannot be outsourced and property owners remain fully responsible for the compliance with the requirements in PSD2 and the Regulatory Technical Standards (RTS) on SCA.

In addition, as of March 2022, changes to the SCA-RTS have come into effect, introducing a new exemption under Article 10A which, if adopted by Account Servicing Payment Service Providers (ASPSPs), means customers will not need to reauthenticate when they access their account information through a Third Party Provider (TPP). Instead, TPPs will be required to obtain explicit consent from customers at least every 90 days. 

Moving from offline to online payment processing for small businesses

Are you processing bookings and payments via offline methods? You’re missing out on a whole world of opportunity. Consumers are increasingly willing and able to shop for nearly any product or service online – including hotel rooms. They trust this medium and prefer the convenience online shopping affords them.

Naturally, this means that they are also more willing to provide their credit card or payment information online. This level of consumer comfort and confidence has led to a direct increase in online bookings for hotels across the globe, via direct websites and online travel agencies (OTAs) like Booking.com.

You might be thinking, “Why should I change from my current offline system? My payment terminals already work.” Here’s a glimpse of what your hotel looks like with and without online payment processing:

Without online payment processing…

When taking the payment, you begin the process by requesting the credit card information from your front desk, and then you are sent an access code. You have to log into your email address to retrieve it.

Once you have the access code, you can view the details of your guest’s credit card. At this point, you are able to process the payment using your payment gateway or physical card terminal. Once the payment has been processed, you must record it yourself in your front desk management system.

And that’s not all. When your guest checks out, any remaining balance to be paid has to be processed through the same set of steps – all over again!

With online payment processing…

You begin the process by logging into your property management system to process the payment.

Also, since credit card details are already stored securely in your front desk system, all you need to do is choose the card you have on file and process the remaining balance when your guests check out.

Your property management system (PMS) has an integrated payments solution, or is fully integrated with a payment gateway, which automatically records it into your front desk.

What is online payment processing software?

Online payment processing software – more commonly known as an online payment system or online payment gateway – are third party services that process card payments on behalf of your hotel.

They will usually take a small percentage of each reservation for the use of their service. Examples include: Stripe, PayPal Express Checkout, PayPal Payflow Pro and Payment Express.

But while your standard online payment processing system or gateway might be sufficient for some small businesses, property owners have a unique set of challenges, and using a third party solution can only do so much.

You need a way to make the online transactions import straight to your front desk to truly be effective. That’s where an integrated payment system comes in – a tool that allows transactions from credit or debit cards or mobile payments to be processed directly within your property management system.

This means there is no need to swipe cards or manually enter transaction details into a terminal. Payments can be processed at the click of a button, with the details securely saved in your PMS.

As part of an all-in-one software solution for small properties, Little Hotelier enables owners and operators to streamline payments, processes, and more. Our integrated payment processing software allows you to create rules that automatically schedule and charge your guests’ credit cards at predefined dates and times.

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Why should you use online payment processing platforms?

Still not convinced? Then let’s delve into three good reasons to make the transition:

1. Save money and time

The reality is that the lower headline percentage processing rate you pay for your current POS terminal is not the full picture. Your current terminal is, in fact, more expensive than using an online solution because of the hidden costs. It is important not to just focus on the processing cost represented by that headline figure. 

The higher percentage for an online system also includes fees for new services that are crucial in saving you money in the long term such as card data storage. So consider what the total cost of ownership really is.

If you are still stapling receipts at reception then that means the manual consolidation of these accounts in your back office is ripe for change and huge cost savings can be made.

Although there is plenty of money to be saved, it is important to remember that these savings are not as direct and tangible as those eye-catching processing commission rates, which entice you to make like-for-like comparisons.

2. Increase your revenue

Switching to an online payment platform can be a game-changer for your hotel’s revenue. Offering more payment options means you’re catering to a wider range of guests. Some people prefer paying with their credit cards, others might want to use digital wallets, and some might even want to use cryptocurrencies. By accommodating these preferences, you’re making it easier for more people to book with you.

But it doesn’t stop there. Features like pre-payment and quick payment can make the booking process so smooth for your guests that they’ll be more likely to go through with their booking. No one likes a complicated checkout process, right?

And here’s another thing: with an online platform, cross-selling becomes a piece of cake. You can easily offer other products and services during a guest’s stay. Think spa packages, room upgrades, or special dining experiences. These can all add to your revenue and enhance your guests’ stay at the same time.

3. Improve your guest experience

Everyone loves options. With online payment platforms, your guests can pay however they want and in their own currency. It’s all about making things easy and convenient for them.

And here’s the best part: once your guests pay for their room, they’re all set. No more bothering them for card details. They can just kick back and enjoy their stay. It’s all smooth sailing from there.

Plus, online platforms are super secure. They’re like a digital vault for your guests’ card information. So, while some places are still emailing, faxing, and photocopying credit cards (yikes!), you can give your guests peace of mind knowing their info is safe and sound.

Now that we’ve (hopefully) convinced you on the why, let’s look at the how of processing online payments at your property.

Why your hotel needs an integrated online payment processing solutions

We are at a point now where businesses that aren’t implementing the latest technology are at a distinct competitive disadvantage. One such area is payment processing.

To automate your accommodation’s payment processing system and provide guests and staff with a hassle-free way of making payments, you need an integrated payments solution.

Offering guests a payments solution that allows for smoother checkouts and frees up staff resources is one of the most important new standards for your property. An integrated payments solution is a critical business tool that will streamline transaction processes at your property.

The biggest benefits of an integrated payment solution (meaning one that is built in to your PMS) at your small hotel are:

1. There’s no double handling of your payments

The integration of a payment solution with your PMS allows for full automation of payments, saving you time and minimising human error. Everything is taken care of from one convenient location, which minimises your risk of losing information during the process – either charging the wrong amount, or failing to reconcile payments made.

Plus, there’s minimal risk of human error thanks to an integrated payment solution’s ability to provide you accurate, error-free verification and data entry.

2. Your cash flow becomes more efficient

There are far fewer errors in an automatic payment processing system, which means that you receive the money that you both need and deserve in your accounts. 

Plus, the time it takes for the payments to reach your bank account speeds up significantly, providing you with your income as quickly as possible. 

3. Cut costs

Not only will you not have to hire a staff member to monitor transactions, verify financial data, or maintain bookkeeping, you’ll also be free of bank merchant fees. 

An integrated payment solution will offer a dashboard with detailed reporting that allows you to become even more financially efficient, while you can also intelligently manage potential fraud and disputes to reduce losses from them.

You don’t need to spend time dealing with your local bank or set up a payment solution yourself and have a finance person sort through difficult to read financial reports. This empowers your organisation and finance team and, as your hotel scales up, you won’t need to hire additional finance people.

4. Cancellations and refunds are a LOT easier to process

Without an automatic payment system, it can be difficult – and expensive – to process cancellations and refunds. In fact, some banks charge you a fee to process refunds. This ultimately takes its toll on your hotel’s bottom line. With an automated system, refunds and cancellations are a quick and efficient process that costs less.

5. You provide a better guest experience

Perhaps the biggest benefit is that you’ll be delivering better customer service. The integrated payments solution helps you provide a faster, smoother, guest checkout experience.

Instead of asking guests repeatedly for payment details, you can process transactions and send receipts with a click of a button using the card details saved securely on file.

This provides your guests with an unmatched experience in which they receive the exact results they are looking for, and thus improves your brand image and reputation within the travel industry.

6. You only have to deal with one provider

Another benefit of an integrated platform is that you have a unified experience with only one point of contact for help. With separate systems, interactions can be riddled with delays and complexities on account of having to deal with multiple parties. An all-in-one PMS with an integrated payments solution is the way to go!

7. You don’t have to deal with merchant accounts

Merchant accounts. They’re like that middleman you never asked for. They sit between your business and the credit and debit card companies, making sure everything runs smoothly. But, boy, do they love their fees. Transaction fees, monthly fees, setup fees – you name it.

Here’s the good news: with an integrated payment solution, you don’t need merchant accounts. This means you get to keep more of your hard-earned cash, instead of handing it over in fees.

And let’s not forget about the time you’ll save. No more haggling over terms, drowning in paperwork, or wasting precious hours on account management. With an integrated payment solution, you can focus on what really matters – making your hotel the best it can be.

Without a merchant account, your payment process also becomes a whole lot simpler. This means less headaches for your team and fewer chances for mistakes to creep in.

Some integrated payment solutions even come with cool features that you don’t usually get with a standard merchant account. We’re talking detailed reports, tools to help you fight fraud, and the ability to accept payments in different currencies. These can help you keep a closer eye on your money and make your guests’ experience even better.

Integrated online payment processing system vs. merchant account

A merchant account is an account that allows businesses to accept credit or debit card payments. If you do decide to go the merchant account route over an online payment system, there are a few things you need to know.

Most merchant account providers will include basic services that are necessary for accepting and processing secure credit card payments online. To get started, you’ll need a merchant account provider to connect your guests’ accounts with the business account for your small hotel.

Options include:

1. Banks

You can get a merchant account through a bank, but they tend to charge higher fees for businesses with a high possibility for returns and refunds.

2. Credit card companies

Many small accommodation providers get merchant accounts through their credit card companies instead of their business bank.

They’ll either set up merchant account processing, or ask you to use a third party processor (in the case of Visa and MasterCard).

Some credit card processing companies require that you maintain an account in their bank before you can process cards.

3. Deferred payment processing

You can skip the merchant account and used a deferred payment processing system in conjunction with your point of sale (POS) system.

Plus, you need to find a merchant account provider that offers the following:

4. A PCI Compliance certification

PCI Compliance means that the merchant account has met a set of safety standards that are required for processing financial transactions online. A merchant account that is PCI compliant will have a secure server that allows you to process the payments.

5. An order form

The order form allows your guests to input their payment information. It should be as simple as possible, and hosted on a secure server.

6. An online payment gateway

The payment gateway processes the payment information and ensures that you receive the payment on your end.

Online payment processing costs associated with merchant accounts

Regardless of which merchant account provider you select for your small hotel, you will have to pay several types of fees. These can include:

  • Application fee – Required when you apply, whether you get approved or not.
  • Transaction fees – Nearly every merchant account will require transaction fees for every transaction.
  • Monthly or yearly minimum fees – Some merchant account providers require you to process a certain amount of money each month. If you do not hit the minimum, you may have to pay it anyway.
  • Discount rate – This is the fee that merchant account providers pass on to you as a result of the fees they incur for processing credit card transactions. They’re usually between 2-3% of every sale.
  • Refunds – There is often a fee charged if a customer requires you to refund their payment that was processed online (it can be several dollars or more). These are usually charged per occurrence.

Your fees may be influenced by:

  • The age of your business
  • Your personal credit rating
  • The percentage of phone or internet sales
  • The type of business you’re in
  • The total amount of sales per month
  • The average dollar amount of each sales transaction
  • Services fees tacked on by third party providers

As you can see, setting up a merchant bank account is a time-consuming and expensive process. A huge benefit of integrated payment solutions is that they help small businesses avoid the headaches of setting up and maintaining a merchant bank account. Instead, they offer hotels the ability to be set up and start accepting payments in mere minutes with much more transparent, transaction-based pricing. 

Integrated online payment processing system vs. online payment gateway

Now we’ll look at the other online payment processing option that we touched on earlier: online payment gateways. 

You can implement an online payment gateway in order to accept credit card payments on your website – but like merchant accounts, it won’t come for free. There are three costs you need to consider when setting up an online payment gateway:

1. Set up fees

Many online payment gateway providers require bed and breakfast owners to pay set-up fees. The set-up fee should not deter you from setting up a payment portal for your small hotel, as this fee is nominal and is charged by most gateway providers.

2. Ongoing fees

It is common for these providers to also charge monthly fees for continued service. Ongoing fees are the largest fees associated with implementing an online payment gateway.

Most providers offer several levels of service, allowing you to select an option that fits your business and your budget. You will pay more per month for value-added features, such as fraud detection or 24-hour customer support.

3. Transaction fees

Transaction fees are the norm. Transaction fees may require you to pay a certain percentage to the payment portal for every transaction (about 2% to 5% per transaction) or they may require a flat fee per transaction.

Verify that the payment portal accepts your currency and inquire about any fees for currency conversions. Refund fees are also required by some payment gateway providers, regardless of the reason for the refund.

In the event of identity theft or fraud, they may insist on a higher refund fee. It’s important to get an outline for all fees prior to selecting an online payment gateway provider for your small hotel.

There are several premier online payment gateway providers available, such as Stripe, each with their own fee structure, so costs will vary. This is a worthwhile investment, but an integrated payment solution is a superior – and cheaper – option. 

This is because it allows for payment transactions from credit/debit card or other electronic payments (such as internet or mobile) to be processed directly within your PMS when a sale is made.

It does away with the need to swipe cards or manually enter payment transaction details into a clunky terminal by allowing you to process payments with a click of the button, using the card details saved securely within the PMS. This saves valuable time, reduces labour costs, and eliminates the possibility of human error.

By Dean Elphick

Dean is the Senior Content Marketing Specialist of Little Hotelier, the all-in-one software solution purpose-built to make the lives of small accommodation providers easier. Dean has made writing and creating content his passion for the entirety of his professional life, which includes more than six years at Little Hotelier. Through content, Dean aims to provide education, inspiration, assistance, and, ultimately, value for small accommodation businesses looking to improve the way they run their operations (and live their life).