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"Top
Tem Reasons Why Online Businesses Fail"
Funded
in part through a Cooperative Agreement with the
U.S. Small Business Administration.
Tony
Stevenson of ZDNet Australia wrote an interesting
article on the topic of Online Businesses. Click
here for the summary and a link to the article.
Introduction
to E-Commerce
One
of the most important decisions that an e-commerce
business makes is the choice of how the business
will become capable of accepting online credit
card payments. This paper includes:
· Introduction
to E-Commerce Payment Gateways
· Steps
in Shopping for an E-Commerce Payment Gateway
· Comparison
of Payment Gateway Options
· Conclusion
Introduction
to E-Commerce Payment Gateways »
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A merchant account is
a bank account that allows you to accept credit
card payments. Most online payment service providers
require a valid merchant account. For instructions
on setting up an Internet merchant account, enter
into Google, "How do you set up a merchant
account".
A payment gateway is the connection between your
e-commerce website and your bank’s credit
card processor. The gateway connects the merchant’s
order form to the customer’s credit card
processor or bank so that the transaction can
be automatically authorized in real-time in just
a few seconds.
Different gateways can vary in how they operate
but most follow these common steps:
- Customer “submits” credit card
information on the website.
- Sales and credit card information are transferred
to the payment gateway from the merchant by
way of protected Internet connection.
- (Optional) This information goes through a
fraud detection system and a positive or negative
response is sent to the payment gateway provider.
- Credit card and sales info are transmitted
from the payment gateway provider to the bank’s
processor.
- The processor verifies that the credit card
account is not over-drafted or reported stolen,
and that the numbers in the address and ZIP
code match the billing address on the customer’s
credit card. The sales amount is deducted from
the balance in the customer’s account.
- A transaction authorization number (or negative
reply, if it doesn’t pass) is transmitted
from the bank’s processor to the payment
gateway provider, and then from the payment
gateway provider to the merchant’s website
ordering system.
- The merchant’s website ordering system
reports either the success or failure of the
order to the customer via the website browser.
- The merchant informs the payment gateway provider
when the ordered item is shipped and the payment
gateway provider “settles” the transaction
with the bank’s processor.
- The bank’s processor transfers the money
from the customer’s credit card account
into the merchant credit card account, and the
money is now available to the merchant.
There
are four types of payment gateway systems that
should be examined before a decision is made.
The first two are not technically payment gateways,
but since they serve the same basic purpose, they
will be addressed.
1) PayPal
PayPal offers an on-line credit card processing
service designed for on-line merchants who do
not have a merchant services account. Approval
time for merchants is one or two weeks and the
fees are 2.9% plus a 30 cent transaction charge.
Advantages of PayPal include:
- The customer can easily make online purchases
- PayPal offers other free services such as
free money transfer. The recipient must also
have an account.
- The merchant and customer’s checking
account and credit card are verified by PayPal
in order to minimize fraud.
- The merchant instantly receives the online
payment into his PayPal account.
Disadvantages of PayPal include:
- If the merchant does not have a merchant services
account, the only way to accept payment is through
PayPal. Therefore, the customer must have a
PayPal account or be willing to sign up for
one, in order to make an on-line purchase with
the merchant. The purchases will be delayed
until the customers are approved by PayPal.
This could result in a loss of sales from customers
that must go through the extra step of signing
up for a PayPal account.
- The customer has a limited number of payment
options: Withdrawal money from customer’s
PayPal account, or charge VISA or MASTERCARD
credit card. PayPal does not accept Discover
or American Express credit cards.
2)
Service Bureaus
Service Bureaus, such as CCNow, take care of the
entire credit card transaction for the merchant,
who then only needs to deliver the product. In
this way, the service bureaus acts as the legal
retail seller, with the merchant as their legal
fulfillment agent. CCNow does not charge set-up
or monthly fees, but 8% to 9% for handling the
transaction for the merchant. They delay payment
of funds for several weeks to protect themselves
from chargebacks. If the business does not have
a merchant account but still uses service bureaus,
they will be charged a higher rate.
3) Form Hosted on the Gateway’s site
This is a secure order form which is hosted on
the payment gateway provider’s site. It passes
the purchaser’s credit card info and purchase
price onto the processor, and is often less expensive
than having the order form hosted on the merchant’s
website. The disadvantage to this method is that
because the credit card and address data is entered
on the payment gateway provider’s site instead
of the merchant’s site, it is more difficult to
for the merchant to get that information, which
will make it more difficult to track chargebacks
that often come with only a credit card account
number to identify the purchaser.
4) Order System and API Hosted on the
Merchant Site
This type of payment gateway, which is the most
able and most expensive, is an order form hosted
on the merchant’s secure website that takes all
the purchaser’s information and then transfers
the information needed by the credit card processor
to the payment gateway provider, which then passes
it on to the processor. The payment gateway provider
provides an API (Application Programming Interface)
to make the merchant’s website capable of transmitting
credit card information securely. Merchant-hosted
APIs are very powerful and allow the merchant
to collect all of his customers’ information into
a database. APIs can be difficult and expensiveto
install because they usually require a programmer’s
help. Verisign offers Pay Flow Link, which uses
a form on the gateway site, and PayFlow Pro, which
offers API on the merchant’s site.
Steps
in Shopping for an E-Commerce Payment Gateway »
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- Find the store-building or shopping cart program
that meets your company’s needs.
- Determine which payment gateway systems are
supported by your shopping cart and fit your
budget.
- Find a web hosting service that supports
both your shopping cart and payment gateway.
- Set up a Merchant Credit Card Account. Most
merchant account ISOs (Independent Sale Organizations)
will try to sell you their package of shopping
cart, payment gateway, and merchant account.
However, few ISOs are qualified to help you
determine what kind of shopping cart, ordering
system, and Gateway you need.
- Buy what you can afford. Unless you have
a substantial marketing budget that will bring
significant traffic and sales immediately, don’t
overbuild.
- If you can’t afford a merchant account, use
PayPal, or CCNow until sales get large enough
to justify the expense of a merchant account.
Type |
Set-up
Fee |
Monthly
Fee |
Percent
Fee |
Transaction
Fee |
Merchant
Acct. |
$200 |
$25
(minimum)
$5
report fee |
2.5% |
25
cents |
Payment
Gateway |
$200
+
$3000
- $9000
Programming
Fee |
$10
to $40
($20
for our comparison) |
None |
10
cents |
PayPal |
None |
None |
2.9% |
30
cents |
CCNow |
None |
None |
9%
(8% in Nov. and Dec.) |
None |
ClickBank |
$49.95 |
None |
7% |
$1 |
DigiBuy |
$29.95 |
None |
13.9% |
None |
This information was put on a spreadsheet and
the operating costs were calculated as a percentage
of revenues for $25, $50, and $100 purchases.
The set-up and programming costs were not accounted
for; the results are only based on operating
costs. CCNow was calculated using 8.5%
because a majority of the sales are made in November
and December for many companies. Here are the
results using $50 purchases:
Comparison of Payment Gateway
Options »
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Several
things are apparent:
- At first glance, PayPal looks very appealing.
The merchant account/gateway route is only cheaper
when monthly sales start to approach $50,000.
- If you anticipate gross revenues of less
than $650, do not set up a merchant account/gateway.
This option starts to become cost effective
compared to the alternatives beyond $650.
- The monthly difference between a merchant
account/gateway and PayPal is fairly flat beyond
$1,500 and by the time you reach $4,000 in revenue
the difference in cost is almost nothing.
- CCNow, ClickBank and DigiBuy are appropriate
only for products that can assimilate the substantial
purchase costs of 8% to 14%, such as products
with a gross margin of around 50%.
Keep
in mind that this analysis only applies to direct
costs. The hidden costs are in time and ease-of-use.
Note that:
- Many service bureaus don’t send receipts until
several weeks after the sale.
- Neither PayPal nor the service bureaus give
the merchant access to the customer’s credit
card number.
- DigiBuy provides a practical digital download
and registration system, but takes about 14%
of the total sales price.
- ClickBank has no shopping cart.
A merchant account/gateway (the merchant-hosted
API variety, not necessarily the gateway-hosted
order form) allows you to integrate credit card
purchases into custom applications that:
- Provide an easy-to-use, easy-to-understand
interface for your customers.
- Allow you to adapt the selling approach and
ordering process for maximum sales.
- Simplify calculation of shipping costs and
taxes.
- Enable you to put all customer data into a
single database for superior customer service.
- Exhibit the customer’s credit card number
for easier tracing of chargebacks and returns.
- Permit you to automate your online business.
Conclusion »
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- A merchant account/gateway allows the versatility
needed to make it easier for both the customer
and merchant. For the customer, ease-of-use
means more sales. For the storeowner, this versatility
means time (and therefore money) saved.
- If you are just starting out and can’t afford
a merchant account/gateway method, use PayPal,
CCNow, or ClickBank, depending on what you are
selling and how much profit margin you can afford
to spend on operating costs.
- Consider moving to a merchant account/gateway
when sales reach between $650 and $1500 per
month. When sales reach $4000 a month move to
a merchant account/merchant-hosted API payment
gateway system in order to save purchasing costs
and reduce processing time and costs.
- Don’t lease e-commerce services. If you can’t
afford to pay the set-up fees up front, don’t
order. Online businesses are too risky in the
early stages to sign restrictive lease agreements.
Updated March 2003
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