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What is Stripe? How does it work to process payments?

11 min read
Lindsey Fogle

Offering convenient, secure payment processing is a critical component of any online store, but it can be difficult to evaluate the different options available to small businesses today. In this article, you’ll gain a deeper understanding of what is Stripe, how it works, how to set it up, its key features and benefits and how it compares to other options. After reading, you should have a clear understanding of how Stripe works and whether it's the right payment processing system for your small business. 

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What is Stripe?

Stripe is an online payment processor and payment gateway that lets customers securely pay online for products and services. When customers are ready to make an online purchase, they can submit their payment through Stripe, which processes the payment, communicates the success or failure of the transaction back to the customer, and ensures that the funds are properly transferred to the business.

Stripe has developed integrations with popular ecommerce website builders (such as WooCommerce and Shopify) and also offers a suite of tools and APIs to allow businesses more flexibility in how they integrate its payment functionality into their site. Stripe is a popular payment processing system that is used by businesses of all sizes, from Atlassian and Lyft to small ecommerce stores.

Payment methods accepted by Stripe

Stripe supports a wide range of payment methods, so it’s a very convenient option for your customers. Stripe accepts:

  • All major credit and debit cards (e.g., Visa, Mastercard, American Express, Discover, etc.)
  • ACH payments (i.e. bank account transfers)
  • Digital wallets (e.g., Apple Pay, Google Pay, etc.)

It can also support buy now, pay later style services (e.g., AfterPay). Stripe payment methods work both online and in-person, so it is a great choice for businesses that have online and brick-and-mortar storefronts.

How does Stripe work to process payments?

Because Stripe acts as both a payment processor and a payment gateway, it covers everything you need to process payments online. Here’s a brief overview of how Stripe works:

1. Customer submits payment information.

The customer shares their credit card, debit card, or other payment information details, either on your online store’s checkout page or using a POS terminal (e.g., a card reader) at an in-person retail location.

Related: What is a POS

2. Stripe securely transmits payment information to the acquiring bank.

Once the customer submits their payment information, Stripe encrypts these sensitive details and securely sends them to the bank that will process the transaction (i.e. the acquiring bank). Stripe uses several different acquiring banks, such as Wells Fargo. Merchants don’t need to have a dedicated account with the acquiring bank — you can benefit by using Stripe’s merchant account for these transactions.

3. Acquiring bank connects with the issuing bank.

When the acquirer receives the payment request, it connects with the issuing bank associated with the customer’s payment method (for example, if your customer has a Visa card from Citi, then Citi is the issuing bank).

4. Issuing bank approves payment and transfers funds to the acquiring bank.

If the customer has available funds, the issuing bank approves and authorizes payment, transfers funds, and communicates this back to the acquiring bank.

5. Stripe communicates success to the customer.

The acquiring bank communicates success to Stripe, which passes this message along to the customer (e.g., customer sees an “Order successful!” message on the checkout page). From the customer’s point of view, this entire process takes only a few seconds.

6. Stripe transfers payment to your bank account.

Once the issuing bank finalizes its approval (often the same day), Stripe will payout to your business bank account, minus its payment processing fee. It can take a few days for funds to hit your bank account, and some merchants use payout schedules that transfer payments on a regular basis (e.g., weekly).

How to set up and use Stripe payment processing

Now that you know how Stripe works, let’s cover how to use Stripe as a merchant. We’ll primarily cover how to set up Stripe for an ecommerce website.

Step 1: Sign up for a Stripe account

If you haven’t already done so, you’ll need to start by signing up for a Stripe account. This is a relatively simple process where you provide some basic contact details, business information, and banking details. Once your account is verified, you can continue on to step 2, or spend some time configuring additional settings, such as two-factor authentication.

Step 2: Integrate Stripe with your online store

Integrating Stripe with your online store will vary based on your ecommerce platform. Fortunately, Stripe has pre-built integrations with most major ecommerce platforms, such as WooCommerce, Shopify, BigCommerce, and more. This means that you can start using Stripe on your online store with just a few clicks, without the assistance of a developer.

If you have a completely custom site not built on an ecommerce platform, you’ll need the help of a developer (if you’re not comfortable coding) to build a direct integration with Stripe on your site. Stripe offers extensive developer documentation to support custom builds.

Step 3: Run a test transaction.

Before deploying Stripe to your customers, it’s a good idea to run a test transaction to ensure that everything is working correctly. The steps here can vary based on your ecommerce platform, but you’ll likely be able to enable a test mode to see if Stripe can connect and communicate correctly without actually processing a live transaction. Alternatively, you can test a live transaction and then refund yourself from your store dashboard.

This will give you a chance to experience what it’s like to use Stripe as a customer, as well as see how those payments show up in your Stripe Dashboard.

Step 4: Start selling!

If your test transaction went off without a hitch, you’re ready to start processing payments with Stripe. Disable any test mode you might have turned on for the previous step, and start selling!

Benefits of Stripe

Now that you know how Stripe works and how you can set it up on your online store, let’s explore a few of Stripe’s key benefits for your small business.

Integrations with ecommerce platforms and website builders

As previously mentioned, Stripe has integrations with many popular ecommerce platforms and website builders. This is a huge advantage for small businesses since it means you can get up and running with Stripe on your site without touching a single line of code. In addition to the speed of setup, this also means you can expect great support and continued quality-of-life improvements as those integrations are improved over time.

Endlessly customizable and developer-friendly

While there are many pre-built Stripe apps and plugins, there may come a time when you need to tweak Stripe to meet your site’s specific needs. In those cases, you’ll be pleased to know that Stripe is well-known for being developer-friendly and open to customization. Stripe has great documentation, which makes it easier for a developer to customize Stripe to your specifications.

Seamless payment experience

Your site’s payment experience can have a marked impact on your conversion rates (i.e. the rate at which customers make a purchase on your site) — a seamless experience can improve conversions, while a clunky or slow process can cause customers to abandon their purchases. Stripe provides a streamlined and user-friendly payment experience, ensuring that more customers who start checkout are able to complete it successfully.

Fast onboarding and extensive reporting

As you likely noticed during the setup instructions, it’s easy to onboard as a new Stripe customer. Most notably, Stripe customers don’t have to go through the lengthy and difficult process of setting up a merchant account with an acquiring bank — they’ll automatically use Stripe’s own merchant account for their payment processing. This is a huge time saver for small business owners!

Stripe users also benefit from its extensive reporting capabilities through the Stripe Dashboard. You’ll be able to clearly track your payment activity, transaction fees, and payouts with Stripe’s reporting, giving you greater clarity into the health of your business.

Are Stripe payments safe?

Stripe has extensive security and fraud prevention features, making it one of the safer options for accepting payments on your store. Stripe is a certified Level 1 PCI Service Provider, which means it adheres to the PCI Compliance requirements set by the PCI Security Standards Council. You can feel confident that your customers’ payment information is safe when processed by Stripe.

Online fraud is a real problem for ecommerce stores, but Stripe offers advanced fraud detection through its Stripe Radar service. This feature, built directly into Stripe, can proactively identify and prevent fraudulent charges, which protects your customers and your business. Additionally, Stripe can support features like:

These bring even more powerful fraud prevention, but please note that utilizing these features may impact your transaction fees.

Is Stripe right for your business?

Not all businesses are created equal! There are a number of factors that will determine if Stripe is the right payment processing solution for your business. Stripe is a great fit for small businesses that:

  • Use popular ecommerce platforms. Stripe’s direct integrations with WooCommerce and Shopify make it a great option for businesses built on those platforms. You won’t have to spend any of your valuable time or resources building or maintaining a connection with Stripe.
  • Have security or fraud concerns. If you’ve been the victim of fraudulent charges and bad actors before, you know how costly it can be to your business reputation and bottom line. Stripe’s sophisticated fraud prevention and top-notch security make it a great choice for security-conscious merchants.
  • Sell internationally. Stripe is supported in over 40 countries, so it is a smart option for businesses with international sales.
  • Care about customization. Because Stripe is so developer-friendly, it will be attractive to businesses that want the option to customize Stripe to meet their store’s specific needs.
  • Want to give their customers options. Stripe supports a wide variety of payment methods (credit cards, debit cards, ACH payments, digital wallets, buy now / pay later, and more) so it gives customers a lot of flexibility around how to pay for your products and services.

However, Stripe isn’t right for everyone. Stripe cannot be used for selling certain high-risk products (check out their list of restricted businesses to ensure your products and services are supported by Stripe). Additionally, Stripe charges a processing fee of 2.9% + 30¢ which is significant compared to other payment processing companies.

How does Stripe work together with GoDaddy?

GoDaddy users will be pleased to know that Stripes integrates seamlessly with GoDaddy’s website builder and online store solutions. With just a few clicks, you can add Stripe as a payment processor and gateway on your GoDaddy site or storefront. Click here to learn more about connecting to Stripe, managing Stripe orders, and more on your GoDaddy store.

What are some Stripe alternatives?

While Stripe payment processing is a popular and reliable solution, there are alternatives that might be a better, more affordable fit for your business. These options vary based on their transaction fees, customizability, support for international sales and integrations with other apps used by your online store. Some examples include:

When considering a payment processing system, be sure to consider these transaction fees as well as which features are most important to your business. Ideally, you’ll choose a payment processing system that offers the features you need at a great rate, so that you aren’t overpaying for capabilities that aren’t important to your business.

Disclaimer: This content should not be construed as legal or financial advice. Always consult an attorney or financial advisor regarding your specific legal or financial situation. 

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