Payment Gateways and Internet Merchant Accounts

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Merchant accounts, payment gateways, shopping carts – it all gets pretty confusing when you start looking into the various aspects of e-commerce

In our previous articles, we examined points to consider in setting up your e-commerce site and also hints and tips on choosing shopping carts.

Payment Gateway - secure transaction

Let’s briefly recap the nuts and bolts of the process of online sales using credit cards.

  1. Customer visits your site
  2. Customer clicks on a “buy me” button after reviewing sales copy
  3. The selection is added to the shopping cart.
  4. Once at the ‘checkout’, the customers’ personal and financial details are recorded via a secure form.
  5. Details submitted from the form is transmitted to a payment gateway service which securely routes the information through the relevant financial networks.
  6. If the transaction is successful, the customers’ credit card account is debited and your merchant account is credited.
  7. Once all funds have cleared, you are then able to transfer money to your ordinary business checking account.

Payment gateways

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 EFTPOS 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. The shopping cart is configured via plugins 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.

Gateway compatibility

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, and usually at no extra cost. 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. I’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 are 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 US$30 per incident!

Internet merchant accounts and third party credit card processors

Some type of Internet merchant account is necessary in order to have a place to receive funds from credit card sales. Internet merchant accounts can be gained from most major banks. A word of warning – your bank will more than likely charge like a wounded bull for such an account because of the risk involved. You’re probably better off utilizing the services of companies such as Durango Merchant Services or Merchant Express who specialize in e-commerce and can tailor a merchant account/payment gateway solution to suit your needs. Another option may be to use a third party processing service such as Paypal or 2Checkout, which are both basically a payment gateway and merchant account rolled into one and operated by the same company.

Selecting an Internet merchant account provider or third party processor

Shop around and then shop around some more – this is a very confusing section of e-commerce. If you make enquiries with a company and they don’t respond within 24 hours, or are somewhat vague in their responses – run like hell away from them. Banks are notorious for utilizing poorly trained salespeople rather than those with hands-on product knowledge or an understanding the complexities of e-commerce. Ensure they explain all charges to you thoroughly by enquiring 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 US$30 per fraudulent transaction (which includes any client disputing a transaction successfully).

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. Both Paypal and 2Checkout also incorporate shopping cart applications and other free tools as part of the deal.

Rushed decisions in choosing your e-commerce 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.

(c) Michael Bloch
Taming the Beast

Payment Gateways Information

Alex Mayer
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