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Understanding Online Payments
By: Robert Levings, Thu Aug 31st, 2006
UNDERSTANDING ONLINE PAYMENTS By Robert Levings, President,
EasyPay123
Internet Payment Options
There has been much talk about how the Internet is becoming an
important channel for buying and selling products and services.
Companies are looking to exploit the Internet in a variety of
ways to increase sales to both existing customers and to
customers in new markets.
To make these initiatives work in practice requires the
application of a range of technologies, from servers to
software. An increasingly-critical piece of the e-commerce
equation is the ability to pay for goods and services using
Internet-based applications.
Internet-based payments offer the benefit of convenience to
customers who can pay for their products or services and receive
immediate feedback on the status of their payment. Well
thought-out payment interfaces will address the payment needs of
the bulk of your customers, and offer them valuable features
such as electronic receipts, recurring billing options and more.
For merchants, online payments can mean that bad debts are
reduced and cash flow is improved, improving the bottom line of
your business.
The type of payment that you choose will be dependent on your
customers’ needs and the type of business that you operate.
E-Commerce Payment Types
Many types of payments can be used in online transactions (here
we refer to those transactions that use the Internet as the
communications channel). The major types include:
EFT: Electronic Funds Transfer (EFT) is a system of transferring
money from one bank account directly to another without any
paper money changing hands. It provides a means of transferring
funds to and from customers and business partners. Electronic
cheques: Different types of electronic cheque services are
available, but all essentially provide a mechanism for paying
over the Internet by enabling purchasers to use their existing
chequing accounts to transfer funds to another party. A secure
infrastructure ensures that confidential information is not
compromised in transit.
Debit cards: Wildly popular for “bricks and mortar” purchases,
they have not caught on as a mechanism for Internet purchases
because the banks and payment processors have only certified a
limited number of devices for transmitting the PIN Number
associated with a debit card over the internet. Limited pilots
are underway using wireless debit card devices for applications
such as pizza deliveries and taxis.
Credit cards: Still the dominant online payment type, it is
popular because of its ubiquity and the familiarity that
customers have in using them in a variety of settings.
Internet banking: Some businesses (typically large ones such as
telephone companies) enable customers to transfer funds from
their bank account to pay bills. Online bill payments are
usually facilitated by the major banks where you can log on and
pay your bills at your convenience.
Alternative payment types: A large number of niche payment types
have arisen over the past few years (typically with minimal or
no success). These include stored value cards, Internet
(digital) cash, pseudo-currencies (e.g. Flooz) and others. No
doubt at some point one or more of these payment types will gain
a foothold, but none have sufficient critical mass at this time
to be a viable alternative for most merchants.
For the purposes of the rest of this article, we will focus on
credit card payments, which represent a substantial amount
(95%+) of the payments being processed over the Internet today.
Getting Started with Credit Card Processing
If you are a merchant that is looking to accept credit card
payments, there are a few steps that you should follow to ensure
a successful implementation. None of them are difficult, but
some can take time to complete. It is recommended that you
follow each of the steps in sequence to avoid compatibility
issues between your application and the financial network.
Let’s examine each step in order:
1. Determine the Right Payment Interface
The payment interface is the application that you are going to
use to process credit card payments. There are many options
available to you, and the right choice will be dictated by the
type of business you have and the requirements of your
customers. Some of the more popular interface options include:
Shopping cart _______
Useful When …Your customers may be purchasing multiple items
from you in a single purchase Make Sure That … You understand
the features that you need and that you purchase from a
reputable vendor ________
A shopping cart enables merchants to accept payment for multiple
items in a single transaction. Most online retailers that offer
a variety of products use some type of shopping cart
application. Shopping carts typically provide customers with a
number of convenient features, such as an electronic “shopping
basket” to “hold” their goods until purchase.
Shopping carts offer a wide range of possible advantages to
merchants as well, such as automated shipping and tax
calculation; “back-office” tools for payment and inventory
management; reporting tools; coupons and discount functions and
control over individual and store-wide sales.
Shopping cart software can be purchased and “hosted” by the
merchant on a server of their choice, but most merchants choose
to use the services of a shopping cart service provider. Costs
typically include set-up fees and monthly fees, in addition to
your payment gateway fees. Many shopping cart providers offer
different levels of feature packages, with fees based on the
chosen feature level. Before you invest in a shopping cart
application, understand what features are important to you and
to your customers. Make sure that the service provider is
reputable and is going to be around for a while. Switching
service providers can be expensive, time consuming and
frustrating. Your research will pay off in the long run.
“Buy Button” ___________
Useful When … You only have a few products to sell or your
customers only purchase one product or service at a time Make
Sure That … The customer buying experience is “seamless” and
secure ___________
A “buy button” is similar to a shopping cart, but typically
facilitates the purchase of only one product (or service). It
generally consists of simple html code that you insert into your
site that displays an order form with associated product
information. Customers click on the buy button, and an order
form appears with the relevant order information in it.
Customers enter their shipping and credit card information in
the form, press “submit”, and their order is processed.
Be aware that some buy button applications force customers to be
“transported” to another page that has a different look and feel
from your site. Some customers are uncomfortable with this, and
may abandon the sale if this happens. Again, shop around. Talk
to your payment gateway provider. It will pay off.
Virtual Point of Sale (VPOS) ___________
Useful When … You are processing payments that are coming in by
phone, fax or email Make Sure That … You have a mechanism to
reconcile VPOS payments to bank deposits ___________
A virtual point of sale application (VPOS) is a replacement for
traditional hardware-based POS terminals that you may be
familiar with at restaurants, bars and other places where credit
cards are accepted. The application is either installed on your
PC, or is accessed through a secure web connection (much like an
online order form). VPOS lets you authorize, settle, credit and
delete transactions, and may perform other functions such as
reporting.
VPOS is used by businesses that want to process payments that
arrive by phone, fax or email, such as call centres and mail
order businesses.
Wireless ___________
Useful When …You are processing payments in remote locations
(e.g. pizza delivery, flea markets, etc.) Make Sure That … Your
data transmission is secure. The wireless connection should be
digital to protect data. ___________
Many wireless devices are emerging now to satisfy the needs of
mobile workers. Digital cell phones, Personal Digital Assistants
(PDA’s, such as Palm Pilots) and specialized hardware can now be
used as mobile payment devices. With a “WAP-enabled” cell phone
or browser-based PDA, you can enter the basic information
required to process a transaction.
Wireless payment processing is useful in situations where
traditional or PC-based point of sale devices cannot be used.
Swipe Card ___________
Useful When …The customer is present and when you need to give
the customer a signed receipt for their payment Make Sure That …
Your merchant account is configured to take advantage of the
lower discount rate (i.e. credit card fee) ___________
Swipe card applications are ones where the credit card can be
“swiped” through a card reader, and the customer can sign the
receipt. The swipe device can typically be connected to a PC, or
specialized devices are available for use (such as traditional
POS terminals).
The merchant account fees for swiped (“card present”)
transactions are lower than “card not present” transactions.
2. Get a merchant account
A merchant account gives merchants the right to accept credit
cards for payment. A merchant account is required for each
credit card you wish to accept. This step can be the most
time-consuming and frustrating for merchants, and it will also
be the component that most influences your costs of doing
business online. Researching your merchant account options,
understanding the merchant account process, knowing how merchant
account providers assess merchants, and “shopping around”, will
pay off dramatically.
Merchant accounts have several fees associated with them,
including a set-up fee ($200-$500), monthly statement fees
($5-$10), a monthly minimum fee ($20-$30) and a discount rate.
The discount rate is a percentage of your sales revenue that the
banks levy, and it varies by how “risky” your business is
perceived to be (many factors enter into this, such as your
credit history, the type of products you sell, your sales
volume, average order size, etc.).
When enquiring about merchant accounts, start with your bank
first. Then shop around. Fees vary significantly from
institution to institution. In fact, they sometimes vary within
an institution, depending upon the merchant account
representative you speak with. Depending upon your sales volume,
shopping around can save you a lot of money over time.
If you wish, EasyPay123 has relationships with several merchant
account providers, some of which have online applications that
are available online on EasyPay123’s website. We’d also be happy
to advise as you work through the process of obtaining a
merchant account.
For more information, see EasyPay123’s article entitled “Getting
a Merchant Account” available by sending us a request through
our online contact form at www.easypay123.com.
3. Select a payment gateway
The payment gateway is the service that connects your payment
interface to the financial network. Gateways take the payment
information from the application, ensure that the data is valid,
format it appropriately, and send it on to the financial network
for authorization, settlement, etc. Gateways typically also
offer advanced features such as reporting and transaction
management.
When you select a gateway, make sure that they can connect to
your interface of choice (some gateways may also offer their own
payment applications that you can take advantage of). Also make
sure that they can connect to your merchant bank (so that funds
can be deposited to your account). Finally, determine what other
features you are looking for in a payment gateway, such as
recurring payments, ability to process in multiple currencies,
email notification of orders, fraud screening, etc. Shop around
and ask lots of questions. Once you connect to a specific
gateway, switching can be expensive and time consuming.
4. Payment-enable your application
Once your gateway has been selected, someone needs to connect it
to your payment interface and customize it to meet your needs
(if it is customizable). This is typically the job of your
developer. Make sure that the developer has done this kind of
work before, and will be around if you need changes in the
future. Be explicit about your requirements and document them so
that they are unambiguous.
5. Test and Launch
Since it’s your money that is being processed, be meticulous
about testing the application. Use a real credit card (for each
credit card type your are accepting) and process a small
transaction (e.g. $1.00) to make sure that the payment is
authorized properly and that it settles to your bank account.
Once you launch, problems are difficult to fix without affecting
your customers.
Summary
Offering convenient payment options to your customers is a good
way to secure their loyalty and reduce your operational costs. A
variety of payment methods are available, and various interfaces
can be used depending upon the needs of your customers and your
business. When evaluating payment processing options start with
your customers’ needs and document all of the features that you
wish to have in your payment solution. Take the time to shop
around, and make sure that the service providers that you choose
are ones that you will be happy with in the long run.
About EasyPay123
EasyPay123 is a leading supplier of payment processing solutions
to businesses across North America. Offering world-class
solutions at affordable prices, EasyPay123 helps merchants
simplify the process of acquiring, launching and using payment
applications to improve the way they do business. Visit us at
www.EasyPay123.com.
For a description of some of the e-commerce terms used in this
article, please visit our online glossary at www.EasyPay123.com.
© 2003 EasyPay123 All Rights Reserved. This article may not be
copied, reprinted, published, translated, hosted, or otherwise
distributed by any means without explicit written permission
from EasyPay123.
About the author:
Robert Levings is President of EasyPay123, a leading provider of
online payment solutions to companies across North America.
