"Top Tem Reasons Why Online Businesses Fail"

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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 » top

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:

1. Customer “submits” credit card information on the website.


2. Sales and credit card information are transferred to the payment gateway from the merchant by way of protected Internet connection.


3. (Optional) This information goes through a fraud detection system and a positive or negative response is sent to the payment gateway provider.


4. Credit card and sales info are transmitted from the payment gateway provider to the bank’s processor.


5. 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.


6. 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.


7. The merchant’s website ordering system reports either the success or failure of the order to the customer via the website browser.


8. 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.


9. 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 » top

1. Find the store-building or shopping cart program that meets your company’s needs.


2. Determine which payment gateway systems are supported by your shopping cart and fit your budget.


3. Find a web hosting service that supports both your shopping cart and payment gateway.


4. 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.


5. Buy what you can afford. Unless you have a substantial marketing budget that will bring significant traffic and sales immediately, don’t overbuild.


6. 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.

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 » top

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 » top

• 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