What is eCommerce?
What does the "geek-speak" of payment gateways, Internet Merchant Accounts and 3rd party credit card processors all mean to your business?
It is confusing when you start looking into the various aspects of E-commerce, so let's break this down. The process of online sales using credit cards:
- Customer visits your site
- Customer clicks on a "add to cart" button after reviewing sales copy
- The selection is added to the shopping cart.
- Once at the 'checkout', the customers' personal and financial details are recorded via a secure form.
- Details submitted from the form are transmitted to a payment gateway service, which is separate to your cart. The gateway service securely routes the information through the relevant financial networks.
- If the transaction is successful, the customers' credit card account is debited and your merchant account is credited.
- Once all funds have cleared, you are then able to transfer money to your ordinary business checking account.
Payment Gateway Services
A payment gateway is a separate service and acts as an intermediary between the merchants' shopping cart and all the financial networks involved with the transaction, including the customers' credit card issuer and your merchant account. Think of it as a Point-Of-Sale terminal in cyberspace. It checks for validity, encrypts transaction details, ensures they are sent to the correct destination and then decrypts the responses which are sent back to the shopping cart.
This is a seamless process and your customer does not directly interact with the gateway; as data is forwarded to the gateway via your shopping cart and a secure (SSL) connection. (An SSL certificate is used for the server authentication, data encryption, and message integrity checks. With a valid SSL certificate, your Internet communications are transmitted in encrypted form. Information you send can be trusted to arrive privately and unaltered to the server you specify, and no other). The shopping cart is configured via plug-ins to send information in a format that is acceptable to the particular gateway.
The proper choice of payment gateway is another vital element which will contribute to your success or failure as an online business.
Payment gateway issues
As with any other ecommerce element, shop around, compare prices and read the fine print. Here are some of the major points to consider when selecting a payment gateway service.
If you have already purchased a shopping cart package, ensure that the payment gateway service is compatible. If a service is not listed, contact the shopping cart vendor for clarification. Many shopping cart software companies are happy to support other payment gateway services if there is a demand for it.
If you haven't yet selected a shopping cart, get a list of supported applications from the payment gateway service provider. A payment gateway may offer great pricing, but if the range of shopping carts or storefront software it supports is limited, the whole process of setting up for taking online payments may cost a lot more than you think. We've noticed some gateways only support horribly expensive and restrictive shopping cart software packages and services.
AVS protection
Ensure the gateway at least offers AVS protection. The Address Verification System (AVS) AVS decreases the incidence of accepting fraudulent transactions by verifying the cardholder's billing address with the card issuer. Using AVS on your transactions may also benefit you by a reduction in fees charged by your Merchant Bank.
Check to see what other types of transaction protection is offered to you as a merchant. These will probably be 'premium' services, the charges added to the basic servicing fees, but dependent on your products may be absolutely necessary. If you are engaged in the sale of anything that is youth or technology oriented, it's probably a wise move to pay for the extra service as chargeback rates on fraudulent transactions can cost you around per incident!
Internet Merchant Accounts
Some type of Internet merchant account is necessary in order to have a place to receive funds from credit card sales. You must choose between setting up your own Merchant Account vs. an Online Credit Card Processing service.
Internet merchant accounts can be gained from most major banks. A word of warning - your bank will more than likely charge for such an account because of the "risk" involved. You should talk to your bank to determine their fees, especially if you are growing your relationship. It may be far less expensive to go with a third party credit card processor.
Third Party Credit Card Processors
A 'third party credit card processor' is a company that can accept credit card orders on behalf of you or your company. This makes obtaining a merchant account for your company unnecessary, although it could be worthwhile if you sell enough goods to warrant the expense involved. Third Party credit card processor companies own merchant accounts with the additional rights to use that merchant account to accept credit card orders on behalf of other companies. Generally it is illegal to obtain a merchant account for your company and then sell other companies goods through your account. Additional rights have to be bought to enable a company to accept credit card orders for another company or individual.
Another option for establishing your own Merchant Account are companies like Durango Merchant Services or Merchant Express who specialize in ecommerce and can tailor a merchant account/payment gateway solution to suit your needs.
Third Party Credit Card Processing Service
If you want to minimize cost until your sales volume dictates your own merchant account, you may want to use a third party processing service such as Paypal or 2Checkout. These services are basically a payment gateway and merchant account rolled into one and operated by the same company. 360 Commerce supports several of these.
The advantages are that you simply link your products to the validation service who then accepts credit card payment on your behalf. They check the card, process the card and send you a monthly payment for the amount you are owed. Bingo! Your own e-commerce solution!
The main disadvantage is that you will pay for the service. Costs vary, but usually the credit card processor has to make a profit and so charges you a few extra percentage points on the transaction in comparison to having your own online merchant account.
Perhaps the best way to look at using a processing service is to see them as a stepping stone for your business. Initially you will pay more per order but with no setup fees. Then, if your business is a success, you will pay a large setup fee for your own online merchant account, but then pay less per order.
Advice for deciding on a bank or service
If you make inquiries with a 3rd Party processor company and they don't respond within 24 hours, or are somewhat vague in their responses - avoid them.
If you are anticipating serious sales volume, you should probably start with your bank. Banks are notorious for utilizing salespeople rather than those with hands-on product knowledge or an understanding the complexities of ecommerce. Ensure they explain all charges to you thoroughly by inquiring about the following rates:
Statement - the charge each month for issuing you statements on all transactions
Application fee - some institutions will charge you for the privilege of applying for an account, regardless of whether your application is successful or not.
Setup fee - once your application has been approved, there may be other fees associated with establishing the account.
Discount Rate - a percentage deducted for each product sold
Transaction - added to the discount rate, a flat rate on each transaction
Monthly Minimum - what you will be charge regardless of the level of sales each month
Reserve - some providers require you to maintain a certain level in the account to cover chargeback fees.
Chargeback - the killer fee which may cost you up to per fraudulent transaction (which includes any client disputing a transaction successfully).
Need micro-payment support?
Merchants with products costing just a couple of dollars are at a distinct disadvantage, with transaction fees gobbling up profit margins for micro-payments. In August 2005, Paypal has implemented a new micro-payment fee structure for payments under . More information is available by contacting Paypal at micropayments@paypal.com .
On August 31st, 2005, PayPal announced our new Micro payments rate of 5% + .05 per transaction-a discount for our valued merchants. The rate is available today to U.S. merchants who sell digital content to U.S. customers, when PayPal is the sole payment solution offered to customers for micro payments transactions. Merchants who wish to use PayPal's micro payments pricing will need to open a new PayPal account.
Merchants who receive both "macro" and "micro" payments should maintain two separate accounts:
1: to apply their standard rate to "macro" payments
2: to apply the "micro" payments rate to their micro payments.
Each PayPal account is associated with only one merchant processing rate. That rate determines the fee that's applied to funds received into that account (additional information on PayPal's Standard Fees is available at: http://www.paypal.com/cgi-bin/webscr?cmd=_display-fees-outside).
For example: if your Premier/Business Account rate for receiving funds is 2.9% + .30, using PayPal's 5% + .05 micro payments rate would reduce the total transaction fee charged to payments received below the value of (per payment). However, if you accept payments that are greater than , you would pay a lower processing charge by accepting the payment into the account set with the 2.9% + .30 rate.
New online business?
If you are a new business with an untested product range, consider using a well established third party credit card processor such as Paypal or 2Checkout while you test the waters, which will incorporate a payment gateway with a merchant account. Although their transaction rates are a little high, neither charge monthly fees, chargebacks or any of the other fees mentioned above. Rushed decisions in choosing your ecommerce applications, elements and third party services will dramatically increase the likelihood of your business failure. This is definitely an area where if you spend the time fully investigating all the options open to you - you'll reap the rewards after implementation.
Additional resources on this subject:
How To Prevent Your 3rd Party Merchant Account From Suspension
Anyone Can Accept Online Payments With A Professional Third Party Merchant Account!
Third Party Credit Card Processing Vs. Having Your Own Merchant Account
