How Online and In-Store Payment Processing Differ

Online payment processing (card not present) differs from in-store processing (card present) in several ways, the most significant being that online processing costs more. This article explains why online transactions are more expensive to process and what factors contribute to the difference.

There are four main reasons online payment processing costs more than in-store processing:

• Card-issuing banks and card networks charge higher general fees for online transactions.
• Payment processors charge additional fees for the AVS service that verifies a customer's address.
• Payment processors charge additional fees for the CVV service that verifies the three- or four-digit code on the card.
• Payment processors charge additional fees to store customer credit cards for faster repeat ordering.

Credit Card Fraud and Why Online Costs More

The primary reason online processing fees are higher is credit card fraud. A stolen card number is easier to use online than a physical card is to use in a store. When a physical card is lost or stolen, the owner typically notices and cancels it, so a card swipe or chip read gives the issuer high confidence that the true cardholder is present, which poses little risk. An online transaction requires only the card number, expiration date, and similar details rather than the physical card, so the likelihood of fraud is higher. For that reason, card issuers (such as Chase and Bank of America) and card networks (Visa, Mastercard, Discover, and American Express) charge higher fees for online transactions, which carry more risk.

Fraud Prevention: AVS and CVV

Online transactions also cost more because of the measures used to prevent fraud. Submitting a card number and expiration date online is equivalent to a card swipe in a physical location, so processors offer additional verification for more secure transactions. There are two ways to verify a card online:

• AVS (Address Verification System): confirms that the customer's billing address matches the address on file with the card-issuing bank. A checkout page that asks for an address or zip code is using AVS. If it matches, the transaction can proceed.
• CVV (Card Verification Value): the three- or four-digit code on the card, verified with the card-issuing bank. Knowing this value indicates the card is in hand. If it matches, the transaction can proceed.

Processors charge additional fees for these services, neither of which is used in a physical location, which adds to the cost of online processing. For more detail, see How Card Verification and Authorization Work.

Saved Cards and Customer Convenience

Entering card details online, especially on a phone, adds friction. Customers ordering through Direct Ordering web and mobile channels can securely store cards in their accounts so payment information does not need to be reentered for each order. Combined with the Reorder option, saved cards let returning customers check out in very few steps, which supports both higher order volume and customer satisfaction. Processors charge additional fees for storing cards online, which is another reason online processing costs more.

Comparing Processing Costs

Online processing rates are always higher than in-store rates, which is important when comparing the two. Major e-commerce processors (Stripe and Braintree among the largest) commonly charge 2.9% plus $0.30 per transaction. On a small ticket, the flat $0.30 is significant: on a $15 order it adds roughly another 2%, bringing the all-in rate close to 5%.

Direct Ordering lets each restaurant choose the partner that processes its online transactions. A Direct Ordering contact can provide a list of suggested partners to help determine the best rate structure for a given business model. Unlike some restaurant technology partners, Direct Ordering does not collect any portion of these fees; the payment processing relationship is solely between the restaurant and its processor.