This article is part of the Secrets of Creating and Growing an Online Business series. All week you will find articles that demystify what’s involved and what the secrets are to success.

When I first started selling online I only offered PayPal and cheque payments. Credit card processing was a mystery to me that I could not wrap my head around. I held the misconception that I would somehow have to get the credit card numbers myself and pass them on to the merchant software, something that I really didn’t want to do. Eventually I learned what kind of options really are available, and through some good old fashioned experience I learned what works and what doesn’t.

I’m going to spare you some mistakes and research by outlining your payment processing options and how to go about putting it all together.

Three Common Ways of Accepting Payments

There are many ways to accept payments, but a typical online business will find itself examining the following:

• Credit Cards
• PayPal
• Cheques & Money Orders

Which should you use? As e-commerce continues to evolve the popularity of using credit cards for everything will inevitably increase. However people are rightfully wary of using their credit card number on just any site, which puts small unknown businesses at a disadvantage. It is in your best interest to offer payment options through trusted third parties known to your customer.

Until last year my orders for CustomBar were split roughly 50/50 between PayPal and credit card. This year the number of credit card orders has far outweighed PayPal, leading me to believe that people are both more willing to use their credit card numbers online these days and that the length of time that CustomBar has been on the net has increased trust. I have received a total of only two cheques for this product, and with a $19.95 price tag I can see people not wanting to pull out their checkbook. I was hoping that with the cheque option I would hit the younger market which doesn’t have credit cards. I was proven wrong; young people are using parent’s credit cards, PayPal, pirating the software, or are just plain not interested in it.

My experience with cheques was very different when it came to my web hosting business. I have many clients that pay by cheque, and many of them are businesses in Ontario. It can be easier for a company to pay by cheque than credit card due to how the purchasing process is setup. I also encouraged cheque payments since the money saved on each transaction was significant.

Processing Credit Cards Using a Payment Gateway and Merchant Account

This is the holy grail of accepting money online, allowing customers from around the world to buy your goods and services with just a credit card. You require two components for this to work, but you can often get both at the time time. A merchant account is the entity which allows both online and brick and mortar stores to accept credit cards and other forms of electronic payment. Virtually everything you do with this account has a fee attached to it, including a monthly fee, a fee for processing transactions, a fee for chargebacks, and potentially much more. In addition to a merchant account you need a way to actually obtain credit card information and have it charged to your merchant account. In traditional stores this is handled through the point of sale terminal. The online equivalent is a payment gateway, which takes care of the pesky problem of entering the credit card number and having it processed. This of course includes more fees.

Risks: fraud is a major concern when processing credit cards and this setup offers you little isolation from the effects. Credit card companies tend to be consumer biased in handling fradulent transactions, which means that if a stolen credit card is used (or the customer claims that you have not honored your side of the transaction) you will likely have to refund the money. What’s worst is that unless you are highly proactive in this area you risk the customer initiating a chargeback, which when ruled in their favor will cost you a hefty fee (about $20-$40). If too many chargebacks occur you run the risk of losing your account.

I found out the hard way that it’s very difficult to choose a reputable provider. In my first experience with obtaining a merchant account I had unknowingly chosen a reseller for another payment provider. None of this was mentioned until the forms were supplied. This provider tried to slip in new fees after documents were signed and denied having ever sent the previous documents (which we had received, signed, and faxed back!). After hours of talking on the phone I found myself passed from person to person until I was back to the person who had originally answered my call. The blatant lieing was amazing. Luckily the reseller offered a 30 day money-back guarantee and was honest enough to honor it. Otherwise that would have been over $300 lost.

Minimizing Risks: most payment gateways provide you with some say in how credit cards are verified. You may have the option to turn on additional verification procedures, ban cards from countries with high fraud rates, disable free e-mail accounts, and other risk mitigation functionality. Each of these has the potential to cost you sales, and it’s up to you to find the right balance of fraud and lost legitimate sales. In the case of shipped items you may wish to require the billing address to be the same as the shipping address or to verify every order received by phone. You can also refund orders that appear suspcious and not provide the product, which is a great way to avoid a likely chargeback later on.

Be very careful in choosing payment processors. When I finally selected my first non-fradulent payment gateway I actually hunted down approximately 20 merchants that were using the service and e-mailed asking for feedback on the service. Nearly everyone responded and was happy to help me out. With the positive reviews from people actually using the service I was much more confident in signing-up.

Cost: depends on the deal you get and the product type that you are selling. Due to the amount of fees and the reluctance of vendors to disclose them all, your best weapon is knowledge. I have already explained the merchant account/payment gateway relationship, and how each will result in costs to you. Here are the kinds of fees you need to check before putting ink to paper (by the way never sign this kind of contract without fully reading and understanding it). Remember that most fees can come from the merchant account and from the payment gateway. I have listed common ranges.

• Setup Fee ($50 to $400)
• Monthly Fee ($0 to $80)
• Transaction Fee (2%-5% + $0.10-$1.00): may vary based on credit card used
• Withdraw Methods and Fees (be very careful here, a $40 wire transfer could really hurt)

Popularity: young people aside, credit cards are extremely popular in North America and represent the e-commerce standard. However in other countries it is less unusual to not own a card so make sure you do some research on your intended market.

Vendors: your first stop should be your bank. With e-commerce maturity some banks do actually offer reasonable electronic payment processing packages for small businesses. This will help you avoid out-right dishonest companies, but you still have to watch carefully for hidden fees and terms.

If you do not choose a bank that’s perfectly OK. There are many other payment gateways out there. You want to select one that is in your own country (to avoid expensive withdrawing of money) and which has been in business for a long-time. Be sure to speak with other customers of the service before signing up.

I’ve decided to not intentionally list specific services, except to say that I’ve had good results with InternetSecure. I don’t think it’s fair to comment on a payment service that I haven’t used.

Accepting Credit Cards Without a Merchant Account

Another class of payment processor has arisen that is a middle ground between credit card processing directly and PayPal. This arrangement consists of a service that has its own merchant account and which “resells” your product for a commission (or uses some other terminology to get around not using separate merchant accounts). These tend to be more expensive and have stricter terms, but they also have their own unique and useful features. Such services are popular amongst shareware authors and sellers of information products, where simplicity of getting started is highly valued.

Risks: there is a history of such services have their merchant account closed due too many abuses and consequently collapsing. If this happens you are generally out of luck and will likely not receive any owed money. If this isn’t a well-known and trusted vendor then you are potentially opening up yourself and your clients to the risk of stolen financial information.

Minimizing Risks: choose a well-known vendor with a very long history of being in operation and strict controls to minimize the abuse of the service. To keep operating they must be able to protect their merchant account.

Cost: Varies on the vendor and services. Expect anywhere from 5% to 20% of the transaction, which makes it very expensive if you have high volumes. There are often no monthly fees however, and the start-up fees can be low or non-existant.

Popularity: shoppers can still pay with credit card, and often times cheque and PayPal processing are included as well. Some services even offer phone orders!

Vendors: some examples of services are 2checkout.com (reseller style), eSellerate (for shareware), and iKobo (PayPal style). I don’t have significant experience with any of these services so I can’t provide any rating.

Using PayPal

PayPal has a tremendous user base in its own right, and it happens to be full of people that want to shop online but don’t want to give their credit card number out all over the place (or they don’t have a credit card). I get enough sales through it to justify using it, and the process as a whole is pretty painless. If you sell primarily to corporate customers then this may not be useful to you, unless they are smaller online companies too.

Risks: there are many stories on the net about PayPal locking accounts for arbitrary reasons and making it difficult or impossible to recover any funds in the account. PayPal is also not a bank and thus doesn’t have the government regulations that would normally apply.

Minimizing Risks: do not keep large amounts of money in your PayPal account. Avoid having PayPal as your only payment processing option or a locked account can stop your business cold.

Cost: PayPal rates at the time of this writing are 2.9% + $0.30USD with discounts available for high volume sellers.

Popularity: very dependent on your target market. You are likely to get good results amongst people that shop online frequently and purchase products from smallers online vendors. PayPal is the preferred e-Bay payment method, so e-Bay shoppers are immediately a great source of users.

A Note on Google Checkout

Google has recently released its own checkout service, promising low rates that are further discounted for AdWords users. I haven’t had a chance to try it out and for now I can’t as it’s US only. Still it requires mention as an option because with Google behind it there will definitely be an effect on the e-commerce world. Feel free to post comments with your own experiences with Google Checkout (or other providers).

Putting it All Together

All electronic payments tend to work the same way. The customer selects an item from your site and through some sort of order form is presented with a checkout option. Pressing checkout takes the customer to the payment service which then handles the tricky business of securely taking funds from the customer’s chosen form of payment. This means that a lot of the work is done for you, but you still need that checkout button to connect your site to the payment gateway. You will typically have three options to do this:

Copy Paste HTML Code: most payment services provide a way to create products within your account and to generate HTML code with this information that can then be copy-pasted to your website. This is the easiest way to handle payments and great for sites with a very limited amount of products.

Shopping Cart Software: many paid and free shopping cart products provide built-in support for certain payment services including popular credit card payment gateways. Your payment service may also provide a shopping cart, but this may lock you into only using that service. Shopping carts are important to have if you wish to allow the customer select from a wide range of products in your catalogue and to purchase multiple different items at a time.

Custom Coding: if you have the programming talent this is a great way to go. You can create exactly the order procedure that you desire and have it work seamlessly with your existing site. If you go this route I highly recommend adding functionality to perform A/B split tests and to track areas in the order process that are losing you many potential sales (something could be causing people to change their mind about the purchase).

Never Store Credit Card Numbers Yourself

With the wealth of affordable and fully-featured payment processing options available there is no excuse for a small merchant to store credit card numbers. Doing so exposes you to tremendous liability, hurts the security of your customers’ data, and has disaster written all over it.

Happy selling!

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This entry was posted on Friday, July 7th, 2006 at 8:58 am and is filed under Business, Websites, e-Commerce, Startups. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.