Ready to start an online store? Congratulations on taking the plunge!
Learning about dropshipping payments before you build an online store will help you understand the journey of your customer’s money.
For example, how to accept payments from your customers and how to make payments to your suppliers.
Don’t worry! We’ll explain everything you need to know about dropshipping payments in this guide.
You’ll learn how dropshipping payment works, and we’ll also share payment method recommendations to help you get off the ground quickly.
Dropshipping payment terms you should know
You might have heard the terms “payment gateway” and “payment processor” while reading about dropshipping payments.
They sound similar and are often used interchangeably, but there’s a clear difference between them.
A payment gateway is a software that encrypts a customer’s sensitive information.
It’s essentially a bridge between your store and the company which processes your payments.
When a customer enters their payment information on the checkout page, the payment gateway steps in and sends the transaction details to the payment processor over a secure channel.
A payment processor is a financial institution that handles transactions between a merchant and a customer. It acts as a channel between the customer, merchant, issuing bank, payment gateway, and acquiring bank.
Once your customer makes a purchase, the payment gateway approves or declines the payment depending on several factors. If it approves, it transfers the data to a payment processor, who then processes the payment.
Here’s a table that shows the difference between a payment gateway and a payment processor:
|Features||Payment Gateway||Payment Processor|
|Use||Allows you to make online transactions through different payment methods.||Processes payments and acts as a mediator between your customer, the customer’s bank, the payment gateway, you, and your bank.|
|Benefit||It’s a third party that conducts secure and safe transactions between the customer’s bank and your bank.||It approves transactions and ensures the timely transfer of funds to you.|
|Examples||Authorize.net, Stax||Square, Braintree|
Although payment gateway and payment processors perform different tasks, many companies provide both solutions as a single package. Examples of such companies are PayPal and Stripe.
Besides, it’s best to choose such providers because they handle the entire transaction from start to end.
How do dropshipping payments work?
The dropshipping payments system is pretty simple. When you, the store owner, receive an order from a customer, you simply contact the supplier, who then ships the products directly to the customer’s doorstep.
But who pays first: you or the supplier? Let’s start from the very beginning to understand how dropshipping payments work.
To quickly understand it, here’s a great infographic:
1. You accept payments from your customers
When a visitor wants to buy a product from your online store, they add the product to their cart and initiate checkout.
During checkout, they add their shipping address and pay for the order using a credit card, PayPal, or a similar payment option.
The payment gateway and payment processor make sure the customer’s payment information gets to the bank safely.
Depending on your customer’s payment option, it can take one to five business days for the payment to reach your bank account.
Although some banks take two to three days to process payments, most credit card companies process payments almost instantly!
Tip: Interested in learning more about how to use a credit card when dropshipping? Check out our other article here!
2. You pay your dropshipping supplier
After you receive payment from your customer, it’s time to buy your customer’s products from your dropshipping supplier.
For that, you need to pay your dropshipping supplier.
Most payment systems don’t transfer money to your supplier automatically when you receive an order. So you need to pay your supplier separately.
Now, you might wonder: when to pay your dropshipping supplier?
Should you wait till you receive the customer’s payment in your bank account or make payment as soon as the customer places their order?
Well, you want the customer to receive the order quickly. Thanks to Amazon Prime, most customers now expect a delivery time of one to two business days.
While such short shipping times may not be possible for you, placing your customer’s order with the supplier as soon as possible makes more sense!
This is because the supplier won’t process your order until they receive payment.
Now that we have established that you must order products from your supplier before your customer’s payment reaches your account, it’s time to learn how to pay your dropshipping supplier.
Most dropshipping suppliers accept credit cards, but you should still check with them to know their preferred methods.
If you’re using a local supplier, you can pay with your credit card or PayPal account. As you know, bank-to-bank transfers have a high processing time, so it’s best to avoid them.
If you’re on friendly terms with your supplier and make regular orders, you can ask them to set you up with a credit account. Then you can place orders and pay for them at once at the end of the month.
Now, if your supplier is not in your country and you need to transfer money abroad, you can use Wise (formerly TransferWise) or Payoneer. Both give great exchange rates, which can help you save a lot of money.
3. You pay other business expenses
Once you’ve paid your supplier, you need to set aside some money for your other business expenses.
It might seem like, as a dropshipper, there aren’t major expenses. But the truth is, even minor expenses can add up very quickly.
Common business expenses for a dropshipping store include advertising, transaction fees, website maintenance, ecommerce platform costs, plugins, and taxes.
You can learn more about how much money you need to run a dropshipping store in our article here.
4. You keep the profit
The amount that remains after all the expenses is your profit!
If you aren’t profitable after paying for all expenses, then you need to strategize to reduce your costs and increase your revenue.
Feeling lost? Don’t worry! We have tons of resources to help you minimize your expenses and improve traffic to your dropshipping store:
- Dropshipping Profit Margin: All the Stats You Need to Know
- Dropshipping Pricing Strategy: The Definitive Guide (2023)
- 8 Amazing Ways to Get Free Traffic to Your Dropshipping Store in 2023
And don’t forget to use our profit margin calculator by clicking this link here — or on the image below:
How do you get paid as a dropshipper?
As a dropshipper, your store must offer a variety of payment methods to make it easy for customers to pay for their orders.
Besides bank transfers, credit card, or debit card payments, there are many more payment options you should offer on your website.
This is because 50% of customers will cancel an order if their preferred payment method is unavailable.
The easiest way to offer multiple payment options is to set up a payment gateway. Here’s a breakdown of the different payment gateways and methods that you can use for your dropshipping store.
PayPal is probably the most popular payment gateway for dropshippers and customers. It’s accepted and available in more than 200 countries, making it the ideal choice for your dropshipping store.
PayPal supports all major credit cards such as American Express, Mastercard, and Visa. You can use PayPal by itself or combine it with other payment gateways such as Stripe and Apple Pay.
Which PayPal account is best for dropshipping?
You must always choose a business account over a personal account to accept dropshipping payments.
Since dropshipping is a business model, you’ll be accepting payments from different customers online. Plus, you’ll likely encounter disputes and chargebacks in your dropshipping journey.
That’s why having a business account provides legitimacy to your business, which helps you minimize such issues.
How can I avoid getting banned from PayPal?
To avoid getting banned from PayPal, you must use a business PayPal account instead of a personal account.
Other than that, set up a company and provide documentation when registering for your PayPal account.
You should also upload tracking numbers to PayPal for all your orders. This is one of the ways to let PayPal know you’re legitimate.
Last but not least, keep in touch with your customer, send shipping updates, and let them know when they should expect the delivery.
Your customers will be less anxious about their orders and won’t file chargebacks when they receive regular updates. This further reduces your chances of being banned from PayPal!
If you want to know how to correctly use PayPal for dropshipping, feel free to read our article: Using PayPal for Dropshipping: How to Not Get Banned in 2023.
Stripe is another popular payment gateway that is used by small businesses as well as corporations. It’s available in 25 countries and offers Shopify and WooCommerce integration.
Like PayPal, Stripe supports all major credit cards and is quite popular in Australia, Canada, and the UK.
Does Stripe allow dropshipping?
Stripe allows dropshipping only if your business is based outside Asia-Pacific (APAC) or Europe, the Middle East, and Africa (EMEA) region. If your business is located in the US, Stripe accepts dropshipping payments.
So why doesn’t Stripe allow dropshipping in certain regions? There are two reasons for this:
- Stripe considers businesses such as dropshipping and selling cell phones financially risky.
- Businesses from APAC and EMEA regions receive more chargebacks.
How can I avoid getting banned from Stripe?
To avoid getting banned from Stripe, you must prevent customer disputes as much as possible.
Follow these steps to avoid chargebacks and decrease the risk of getting banned from Stripe:
- Choose good suppliers. The best dropshipping suppliers dispatch orders on time using fast couriers to avoid any delivery delays.
- Provide stellar customer service. Customers file chargebacks when they don’t receive orders on time or receive incorrect orders. That’s why you must keep in touch with your customer throughout the shipping process.
If you’re interested in using Stripe as your payment gateway and processor, read our guide on Dropshipping With Stripe: Everything You Need to Know (2023).
Shopify Payments is Shopify’s very own payment gateway that allows Shopify merchants to accept credit card payments online.
Shopify Payments is easy to set up but is only available in the following seven countries:
- United Kingdom
- United States
Can you use Shopify Payments for dropshipping?
You can use Shopify Payments for dropshipping since Shopify actively encourages the dropshipping business model!
You just need to be a Shopify merchant and operate your business from one of the supported countries. That’s it!
Does Shopify Payments hold your money?
Shopify Payments doesn’t hold your money. You receive a customer’s payment in your bank account the same business day.
However, you have the option to schedule your payouts. Once you change your payout schedule, pending payouts are delayed until your next scheduled date.
There are two countries that have different payout schedule rules:
- Shopify stores in France can’t customize their payout schedule.
- The payouts for Japanese Shopify stores are scheduled on Fridays by default, but they can choose to be paid weekly or monthly.
Want to know how to use Shopify Payments? Read our article Shopify Payments: The Definitive Guide (2023), for more information.
A bank transfer is the simplest way to get paid as a dropshipper. However, it is generally preferred for larger transactions.
Most customers these days use payment methods like PayPal, Amazon Pay, and credit cards over direct bank transfers.
Should you use a bank transfer for dropshipping?
You should avoid using bank transfer for dropshipping since the payment doesn’t get credited immediately and takes anywhere between one to three business days.
If you’re paying your dropshipping supplier using the bank transfer method, your customer’s order will only be dispatched upon receipt of payment.
This will delay dispatch and delivery time, leading to a poor customer experience.
Cash on delivery
Cash on delivery lets customers pay directly via cash to the courier. This was the go-to payment method a few years back, as this provided a sense of security to the customer.
However, since online payment methods now offer better protection against fraud, most customers don’t use cash on delivery.
In fact, most dropshippers don’t provide cash-on-delivery payment methods in their stores since the transfer can take time and is less safe.
What are the risks of cash on delivery in dropshipping?
One of the biggest risks of cash on delivery in dropshipping is fraud. Fraudulent customers can cancel orders when the order is on its way or out for delivery.
At such times, you have no other option but to accept the cancellation and pay for return shipping out of your pocket.
Other than that, courier companies charge extra fees for cash on delivery payment methods since they accept payments on your behalf.
How do you choose the best payment method for your dropshipping store?
To choose the best payment method for your dropshipping store, you must consider ease of use, transaction fees, payout times, payment options, and multi-currency support.
Let’s go through each one of those factors to understand them better:
Ease of use
The whole point of having a payment gateway is to make the checkout process as smooth as possible.
If you integrate a gateway that isn’t convenient for your users, you’ll see fewer sales and increased abandoned carts.
Related article: Interested in inspiration for your checkout process? Check out these 9 checkout page examples!
One of the most important factors you need to consider when using a payment gateway is the total cost you incur, as it can eat into your profits.
Most payment methods charge a setup fee, a monthly fee, and a transaction fee. So it’s best to compare pricing models of different payment gateways before choosing the right fit for your business.
A customer’s payment may be approved immediately, but the money can be held for a few hours to days before it reaches your account.
This payout time varies for each payment service provider. Many of them also allow you to set a payout schedule. So it’s best to research before you integrate a payment method.
Types of cards allowed
Almost all payment gateways accept Amex, MasterCard, and Visa credit cards.
However, big payment gateways like Stripe and PayPal also accept lesser-known card types such as a Diner Club card or UnionPay card.
Make a list of cards your target audience commonly uses and check whether the payment gateway you shortlisted accepts them.
For instance, if you’re selling in Germany, make sure the payment provider accepts Klarna payments.
If you’re selling globally, choosing a payment provider that supports transactions in several currencies is crucial.
That’s why make sure the gateway you choose allows customers to pay in their local currency.
Which is the safest payment method for dropshipping sellers?
Almost all the popular payment providers are safe for your dropshipping store. But it’s possible that some will reject your application once they know that you’re a dropshipper.
This is because these payment gateways consider dropshipping a risky business as the chances of chargebacks are high. That’s why it’s best to do your due diligence before finalizing a payment provider.
If you’re selling restricted products, the chances of rejections are even higher. To find out what restricted products are and how to advertise them, you can read our article here.
That said, safe payment methods for dropshipping sellers, in our experience, are Stripe, Shopify Payments, Amazon Pay, Skrill, and Authorize.net.
Since there are many options, you can use multiple payment gateways. Find out which are the best payment gateway combinations for dropshipping here.
FAQs about dropshipping payments
Do you have any more questions about dropshipping payments?
If so, check out these FAQs below:
Do you have to pay for the dropshipping products before selling them?
You don’t need to pay for dropshipping products before selling them. Only when a customer places an order in your store, you pay the supplier for the dropshipping products. The supplier will then pack and ship the order to your customer.
Who pays for shipping when dropshipping?
The owner of the dropshipping store pays for shipping. The supplier packs and dispatches the order using a pre-discussed courier company and bills you for it.
Alternatively, if the supplier permits, you can arrange a private courier instead of using the supplier’s courier.
What are the benefits of using a credit card for dropshipping?
The main benefits of using a credit card for dropshipping are convenience, credit building, and rewards. Using a credit card for paying your dropshipping bills can help improve your credit score, which in return will increase your credit limit.
You’ll also receive cashback, hotel points, airline miles, and other rewards when you use your card frequently.
Can you start dropshipping with a debit card?
If you don’t have a credit card, your next best option is to dropship using a debit card. But you won’t receive any rewards or any of the benefits of a credit card.
That’s why you should use a debit card as a starting point and apply for a credit card once your business starts growing.
Before we go to the conclusion, we’ve created a quick summary of this article for you, so you can easily remember it:
- Payment gateway and payment provider are two different technologies. But choose a payment provider that offers both solutions.
- Dropshipping payment steps: you accept payment from your customers, then you pay your supplier, and finally, you keep the profit after the expenses have been accounted for.
- Stripe and PayPal are two of the most popular payment gateways.
- Choose a payment provider that’s easy to use, has low transaction fees, quick payout times, more payment options, and has multi-currency support.
Learning how dropshipping payments work can feel overwhelming in the beginning. That’s why we have explained all the basics in this guide.
If you’re ready to take the next step and choose a payment gateway for your ecommerce store, read our article describing the 7 Best Payment Gateways for Dropshipping Stores in 2023.
If you have any questions or feedback for this article, then let me know by commenting below or contacting me directly by pressing the “Contact Us” button at the top!
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