One of the more frustrating and potentially expensive aspects of opening an on-line store is being able to take credit cards for payment. Taking credit cards is not always essential to a successful on-line store operation, but it sure helps.
A look at four approaches.
1) Use an intermediary.
2) Use a third party processor.
3) Process transactions in-house.
4) Use an Application Service Provider.
1) INTERMEDIARY Letting someone else take payment for you, can be executed in either of two ways: direct service and e-mail service.
The direct service method authorizes the customer’s credit card payment in real time, on-line. The funds transfer to the service company which in turn pays the merchant. Depending on the provider, this can be an entirely transparent process from the customer’s viewpoint.
With this process, the customer’s credit card statement will show the name of the service company as the billing party. This can cause customer confusion and result in charge back requests unless the order forms and order confirmations provided by the direct service company keep the customer well informed.
E-mail intermediary transactions require the customer to visit another Web site for the purpose of supplying credit card information. They are usually asked to join a list. After the customer’s credit card is successfully processed, the funds are credited to the merchant’s account. The merchant receives an e-mail notice of the payment and must visit the service provider site to claim the money.
The intermediary e-mail solutions are usually reserved for auction sites where there is a single unique transaction for a single item. E-mail type services do not integrate well with shopping carts where a customer may want to select several items in varying quantities and pay in one transaction.
The viability of either of these two services for taking credit cards at your store will depend on the policies of the service provider and your particular selling situation.
Direct service providers may charge anywhere from 4.5% to 15% of an order total and may not remit full payment to the merchant for 90 days or more. The provider may also have lenient return and charge back policies and apply large charge back fees. Customers may routinely be able to reverse a charge even after 120 days. With some providers, you may have no rights to dispute customer claims.
E-mail type intermediaries are the most recent entry to the processing market. They are initially very inexpensive, some charging as little as 1.9% of the transaction. Common sense, however, will reveal that some of these providers are operating below cost, so expect dramatic changes in pricing. For the merchant desiring a fully e-commerce enabled Web site e-mail type services may not be suitable. They can discourage purchases by requiring too many actions on the part of the customer. E-mail payment services inherit the same risks to the merchant as direct service.
PARTY PROVIDER In this instance the provider’s primary function is to host the gateway software interface that will transfer the customer’s credit card information to the financial networks. This is a service often provided by the ISP (Internet Service Provider) where your Web site is hosted. Out sourcing will offer some measure of control over returns and charge backs because the payment is made directly to your own merchant account and usually gets settled within 72 hours following the sale.
Out-sourcing requires that you have a Merchant account from an acquiring bank. This is the account where transactions are settled. It is separate from your checking account. However, settled transactions will credit or debit your designated checking account. A Merchant account can be costly to maintain relative to a low sales volume. Monthly fees can range anywhere from $20 to $80 plus 2% to 4.5% of each sale plus 30 to 60 cents per transaction.
The availability of out sourced supplemental services and the cost of these services will vary widely with the provider. Supplemental services may include a virtual terminal for manual card processing, making returns and credits, and voiding transactions. These services are billed separately in addition to your Merchant account costs. Minimal “process only” service charges may range from “included with your Web site” to $39 per month.
Interfacing your storefront software with the service provider is always an issue when out sourcing. You will have to provide the forms for gathering the customer’s credit card information. If your merchant account is an authorize only type (terminal capture), you will also need a method to batch and commit transactions for settlement. This capability is usually available with the gateway software provider, but requires that you access a separate web site to complete those transactions.
The cost of out-sourcing often involves a larger than normal per transaction fee, a monthly fee, and a setup fee. These fees will be in addition to the general discount and reporting fees charged by the Merchant account acquiring bank. You can expect a total of fixed costs around $100 per month for minimal services.
3) IN-HOUSE PROCESSING In-house processing is done from your own domain on a dedicated or shared server using your own gateway connection. You will need a merchant account from an acquiring bank and the payment gateway software or a gateway API (Application Programming Interface).
You almost never connect direct to financial networks, but process through the payment gateway. A payment gateway provider supplies software for installation to your server or instructions for connecting to their server which in turn is connected directly with the financial networks. For instance, CyberCash is a gateway provider. They supply you with a Merchant Connection Kit (MCK). This is software that you configure to work with your storefront and is compatible with their gateway.
Getting set up for in-house processing will require software coding with installation to your server. However, this also gives you the freedom to decide what back office capabilities you want to incorporate. Back office operations almost always include order logging to a database. They can also include sales log analysis, e-mail operations for promotional purposes, a virtual terminal operating from order log information, order tracking, and a host of other functions.
Your cost of using the in-house approach will largely depend on the cost of available coding personnel. There will also be gateway and the merchant account charges and as always, the cost of software upgrades and maintenance. The gateway charges may be billed direct to you or through your Merchant bank and will range from $20 to $80 per month.
4) APPLICATION SERVICE PROVIDER The Application Service Provider (ASP) is often the best way to achieve on-line, real time, transparent, credit card processing capability integrated seamlessly with back office solutions. The ASP has done all of the software configuration and usually includes a virtual terminal where you can conduct the various card credit, return, void, batch, etc. transactions while operating from a dedicated Merchant Management Console. The application can be running in a shared environment or it can be running as a unique instance from a domain you control on a shared server. The latter case is similar to leasing the software. This is a Web based, browser viewed application.
The obvious advantage to using an ASP over creating your own application is that costs are fixed and software upgrades and maintenance are included. The disadvantage is that you may have trouble finding an ASP that provides all of the back office functions you require at the price you want to pay. You may also need to address the issue of interfacing your storefront with the application. However, many ASPs make this a seamless process by providing the storefront software as part of the package. You will need to maintain your own Merchant account when using ASP services.
The cost of ASP services can vary widely depending on the functions included with the software. Expect to pay anywhere from $40 per month up to thousands of dollars. There may also be a healthy setup fee.
IN CONCLUSION
Direct Intermediary If you’re just getting started with an on-line store, direct intermediary payment through a service provider may be for you. The bottom line of letting someone else transparently process the payment and remit to you, where sales volume is initially low, can significantly lower your costs and trouble.
E-Mail Intermediary Processing Currently a very economical solution for the sale of a single item from a Web site or auction site. Not suitable for making sales from a shopping cart.
Out-sourcing is a good method for small operations but usually provides little in the way of back office capabilities and may require visiting the gateway site to settle transactions.
In-house credit card processing potentially provides the most flexible approach to taking credit cards for payment over the Internet. However, this will require in-house coding expertise and ongoing maintenance.
An Application Service Provider is probably the best all around solution to processing credit cards on-line and providing back office management control. As usual there will be tradeoffs between the services you want and the price you’re willing to pay.
PROVIDERS
INTERMEDIARIES
PayPal http://paypal.com/
ImagineNation http://imaginenation.com/
ASPs
ImagineNation http://imaginenation.com/
GATEWAYS
CyberCash http://cybercash.com/
Mel Davey is the creator of ImagineNation (http://imaginenation.com/), a full service E-Commerce Application Service Provider, offering Storefronts, Order Management Utilities, and 3rd party credit card processing.
