By: Matt Mickiewicz and Jim Conley

August 1st, 2001

Reader Rating: 7.5

There's a myriad of different ways to go about processing online payment, and it's very easy to get confused. This guide considers the following payment acceptance solutions in detail:

• Credit Cards
• Online Checks & Debit Cards
• Digital Cash & Micropayments
• Escrow Services

The guide was put together to help you understand in detail how online payments work, so that when you decide to purchae a solution for your site, you know what to look out for, and what questions to ask.

Commonly Used Words

Throughout this guide you’ll see some words and phrases that might confuse you. For the sake of clarity, we’ve defined some of those commonly used words here.

Merchant Account Provider: This is the company that helps set you up with the proper merchant account, and provides the software and equipment you'll need in order to perform credit card transactions. They may also be able to provide other payment acceptance services, such as debit card processing and online checks. Merchant Account Providers are also known as Independent Service Organizations (ISO) or Agents.

Secure Gateway Provider: Ensures that the connection between the Merchant Website and the Merchant Processor are secure.

Merchant Processor: Actually process the credit card or check transaction.

Virtual Terminal: This is the "online terminal" that allows you to manually type in credit card orders via your Web browser. It usually comes with a Real-Time processing solution.

Credit Cards

Credit cards are almost universal. Whether you’ sell memberships over your Website, widgets over the counter, or office supplies through a catalog, you should accept credit cards.

Accepting credit cards can enlarge your user base in two ways. Firstly, it lends credibility to your business, which is of the utmost importance if you want to close the sale. That credibility stems from the fact that people believe that you have to be a 'real' or reputable company in order to accept credit cards. And secondly, shoppers feel safer buying this way, as credit card companies only hold consumers liable for the first $50 if fraud occurs.

However, because of the nature of Internet transactions, there is no physical credit card present for you to swipe, nor is there a customer to sign for the purchase. This means that ecommerce purchases fall into a higher risk category known as Mail Order/Telephone Order (MOTO) transactions, or "Card Not Present" transactions. Due to the higher risk of these transactions compared to their in-store counterparts, fees are higher than purchase situations in which a card is present.

The Merchant Account

A Merchant Account is an account at a financial institution that allows you to accept credit cards. You may find that you can acquire a Merchant Account directly from your local bank, or you may decide to use one of a number of Merchant Account Providers that can be found through your favorite search engine. Not all Merchant Accounts can connect to the Internet, and those that can may be limited to a particular Secure Payment Gateway, so be sure to determine how this account will connect to your site if you're a Web Merchant.

A Merchant Account Provider will open an account for you at a financial institution (a bank with whom they're partnered) that can handle Internet transactions, and approves your credit history. Be aware that there are a lot of Merchant Account Providers out there who aren't reputable, so make sure you check them out before you commit to one. Avoid all the hype and terminology, and don’t pay more than a $100 processing fee to get the account. Most merchant Account Providers will offer you equipment and software with which you can process credit card transactions, but remember: you don’t have to buy from them if their prices aren’t within your budget.

All Merchant Accounts will have some kind of set up or application fee, which is usually at least $99. Where there is not an initial fee, you can be sure that the Provider will try to make up the difference on a software or equipment sale, or by otherwise marking up the transaction and service charges.

International Merchant Accounts

If you live outside the US, you may encounter quite a few problems obtaining a US Merchant Account, not least of which will be the cost of the account itself. Essentially, you have three options:

• Go with a 3rd party processing company (more on this a little later),
• establish a US presence or
• use a company that specifically deals with foreign firms.

To establish a US presence, you’ll need to incorporate your company in one of the 50 states. Nevada and Delaware are both popular choices, with over 50% of the Fortune 500 companies being incorporated in one or the other due to their low fees and business-friendly regulations. The best way to go about incorporation in the US is to seek out a firm that will set up a mailing address with mail forwarding, and telephone number for you, and who will fill out all the incorporation papers on your behalf, which might cost up to $1000. You’ll find a list of incorporation services firms here [1].

The other option is to work with a Merchant Account Provider that specializes in foreign firms, which is a very good alternative if you plan to complete a large volume of credit card transactions. One of the best and most reputable firms for international Merchant Accounts is PlanetPayment.com [2] -- they don’t require you to hold a US bank account, and they allow you to accept Visa, MasterCard and American Express payments. However, if you're a non-US corporation, don’t be surprised if you encounter extra fees. Two other companies that set up international Merchant Accounts are MerchantService.com [3] and iTransact.com [4].

Real-Time vs. Deferred Processing

The decision of how you'll accept credit cards essentially boils down to two choices:

• real-time processing and
• deferred processing.

Real-time processing means that the card is immediately approved. With deferred processing, the order is sent to you, the merchant, who than processes the order. Let’s examine the advantages and disadvantages of both methods.

Real-Time Processing

The biggest advantage with real-time processing is that the customer sees the results immediately. If you sell something that can be delivered over the Internet within minutes, such as software or information, real-time processing will let you fill the order on the spot. This processing method also allows you to automate your business, which is critical if your time is limited and you feel that the more tasks you can automate, the better.

A key advantage of Real-Time processing is that it allows you to process your orders automatically or manually. For instance, lets say someone visits your site, and find something they like - but they decide to call in the order instead of making the purchase online. In this case, all you have to do is open your Web browser, log into your Real-Time account’s Virtual Terminal, and manually type in the customers credit card information. And if your business requires recurrent billing, like an ISP or Web Host does, then you’ll be grateful for an option that allows you to automatically charge customer accounts at certain pre-set time periods.

Real-Time processing also helps eliminate customer errors in the purchase process, as it provides your shoppers with immediate feedback on whether or not their card has been approved. If they make an error while entering their information - for instance, they type an incorrent expiration date - they'll receive immediate notice of the error, which means they can correct it immediately. Although this is not likely to happen in more than 2% of your orders, it can make a difference to your sales figures. Customers are unlikely to return to your site a few hours after thier initial purchase to re-enter all their details if it turns out that they made a mistake the first time. Real-time processing avoids this situation, as it eliminates the possiblity of user error from the pruchase process.

Secure Payment Gateways

To have your transactions processed in Real Time, your Website and Merchant Account will need to be linked via a "Secure Payment Gateway". All these companies do is provide a secure connection between your Web Site and your Merchant Processing Account provider. The largest companies of this type are not Merchant Processors, so you may need to obtain an account with a Secure Payment Gateway, and a separate Merchant Account from a compatible provider.

Some of the big name Real-Time processing gateways are AuthorizeNet [5], CyberCash [6], and VeriSign [7] (formally Signio). If you’re interested in a Real-Time processing solution, check with the Merchant Account Provider of your choice for details. These gateway companies all charge a substantial software and/or licensing fee when you start, as well as a monthly gateway access fee of $15 to $25 per month. Typically, a "Real-Time Processing" software package will cost around $495, but you can save money if you identify Merchant Processors who own or include gateway services and Real-Time software at no additional charge.

It's only by virtue of the fact that these big players spent millions of dollars on advertising and affiliations that they now dominate the market, and unfortunately, many people now believe that their services are required for Real-Time Web transaction processing. However, there are many more smaller players that can provide these same services, so shop around.

Deferred Processing

If you don't deliver your products over the Internet, deferred processing - or Offline Sales - may be the options for you. The big advantage of deferred processing is that you can manually examine your orders (and correct them if necessary) before you ship. If you send your products to distant countries, you may find that the credit card issuer’s' network is often down. Deferred processing will allow you to call and authorize a transaction rather than declining it, which is what would happen in this situation if you used real-time processing.

Deferred processing allows you to use POS (Point Of Sale) software or terminals to handle transactions manually, over the Internet, or by Mail Order/Telephone Order (MOTO). However, a disadvantage of deferred processing is that you must securely download your orders, which requires daily attention on your behalf. It also means that, until you download your orders, they'll be stored on the server –- you must ensure that they're encrypted, so that no unauthorized parties can make sense of the information, even if they do gain access to it.

Don’t be fooled into taking the cheapest solution - hardware (a swipe terminal). You’ll be forced to enter all your transactions manually, which can be a huge drain on your time. And make sure you don’t pay more than $400 for a software solution: in most cases you can get a POS software solution for less than $200. Lastly, don’t pay for any programming or software setup services.

There are several POS software programs on the market that will meet your deferred processing needs - PC Authorize and ICVerify are among the most popular. For information and downloadable demos of these programs, visit MerchantSeek [8]. These programs connect you to your Merchant Account just like a POS Terminal would, so unless you receive a huge volume of orders, software processing will work just fine - just make sure you verify the credit card information before you ship. If you carry out real-time processing, you can simply use the Virtual Terminal instead, and everything will be operated from your Web browser.

If your business sells merchandise by retail (storefront, trade shows, etc.) in addition to making sales over the Internet, it would be in your best interest to not only invest in a Real-Time solution for Internet and Mail/Telephone orders (or a POS software solution if you prefer to process cards manually), but to also obtain a POS swipe terminal along with a Retail (Card Present-type) Merchant Account. This will allow you to save money - by processing your retail (face-to-face) transactions through the swipe terminal you'll pay lower fees than you would if you processed all your sales as MOTO type transactions (where the card is not present and fees are higher). Note also that many POS Software products support the addition of a card reader so that you can enjoy lower Card Present transaction fees.

If you decide to use POS software to process your Internet orders, be sure to use the Electronic Commerce Indicators (within the POS software) to identify those orders that originated on the Internet. Visa and MasterCard now require that all orders accepted via the Internet must be "flagged" as such, and if you fail to indicate them appropriately, you can expect to pay a hefty fine. So be sure to read the software instruction manual on how to use Electronic Commerce Indicators, or contact the company you bought the solution from for directions.

Also, make sure you use the Address Verification type Authorization Requests for your online sales, otherwise Visa will charge you an extra .17% to 1.25% on those transactions.

Next week [9] we look at the fee structures for transaction processing solutions, and more! See you then.

[1] http://www.yahoo.com/Business_and_Economy/Companies/Corporate_Services/Incorporation_Services
[2] http://www.planetpayment.com
[3] http://www.merchantservice.com
[4] http://www.itransact.com
[5] http://www.authorizenet.com
[6] http://www.cybercash.com
[7] http://www.verisign.com
[8] http://www.merchantseek.com/software.htm
[9] http://ecommercebase.com/article/495