Whether you're Selling-A Hundred or Selling-A Million, if you're serious about selling
on the Web you need to be able to accept payments from your customers. While
there are many different payment methods, the most popular include accepting credit
cards and in order to do so you'll need to set up a merchant account.
Setting Up An Account
Merchant accounts are accounts that accept and hold credit card transaction monies.
These accounts can be established through merchant service providers (MSPs) such
as banks or via independent service organizations (ISOs). Banks are generally
viewed as secure and reliable, but are generally more selective when deciding for
whom they will open a merchant account. ISOs tend to be more flexible but
are willing to accept more risk, since they are neither monitored nor regulated.
However, they charge a premium for accepting the risk associated with your business,
so be prepared to pay more.
A merchant account for online business is similar to a merchant account for mail
order business; the risk is associated with the fact that you don't have the physical
credit card to scan. It used to be that banks were reluctant to open merchant
accounts with businesses that hadn't been in operation for at least two years with
all sorts of other stipulations, but today, most banks will open merchant accounts
even for new businesses, if they have a history with you. If you haven't been
in business for two years, talk to your personal banker -- where you have your own
checking and savings or mortgage accounts -- to see if they can give you a merchant
account. If you've been in business for two years, go directly to your business
banker and apply with him. Don't contact ISOs until you've been turned down
by your bank, because the fees are higher in the beginning, and for the life of
the account.
When you apply for a merchant account, you'll need to supply the bank with the average
order size and the average monthly amount that you expect to be running through
the account. Estimate conservatively. You may be asked to keep a percentage
(or even a full month's estimated order total) in an account to cover fraud. If
you round-up to impress the banker, you're going to end up paying more in tied-up
capital. Tell him what you expect to be processing the first or second month.
If by the sixth month you've far exceeded that amount, he'll find you to discuss
increasing your reserve, but you've got your account, and you've got a thriving
business.
What You Need
In addition to procuring a merchant account for credit-card acceptances, e-tailers
also need an order form on their sites. The form can be built using HTML,
and can be set to use a CGI script (written in a language like ASP, ColdFusion,
PERL, server-side Java, etc.). Preferably the form should be encrypted using
SSL (Secure Sockets Layer). Your ISP, hosting company, or WPP can set you
up with SSL for a small fee. You also need a certificate from an organization
like VeriSign. Prices vary depending on the service, so check Verisign's site
to find the right certificate for you. The ordering page is then placed on
a secure server. You will also need payment-processing software to handle
transactions between you and your bank. The software is more of a service
than a product and information sits on that company's server rather than yours.
Options include buying or leasing software on a monthly basis. There are many
companies to choose from.
How It Works
Once a relationship with a merchant account provider or acquiring financial institution
is set up, the institution then deposits daily credit card sales into the merchant's
account after deducting certain fees. Some financial institutions also conduct
merchant services, either in-house or out-sourced to third parties. Such services
include customer service, billing, authorization, reporting and settlement services.
Third-party companies offering these merchants services include First Data Corp.
and MerchantConnect, from Nova Information Systems.
What Kind of Authorization Process Do You Need?
E-tailers need to anticipate how many transactions will occur on their site.
There are two types of authorization processing: batching and real-time. Batching,
used frequently by smaller merchants, is done by hand offline. Once orders
are sent by customers, through phone calls, faxes, or online forms, they are processed
manually. This can be accomplished through several methods such as swiping
through a terminal or using PC-based authorization and settlement software.
Since fraud is such a problem online, and because small merchants are least able
to bear the cost of fraud, small merchants should consider batching payments, taking
steps to guard against fraud, before assuming they need real-time processing.
By contrast, real-time authorization provides credit card purchases to be approved
or declined immediately. Some e-tail sites use this method to try to save
time and money through automating the process, but many sites, especially smaller
ones, don't need real-time authorization and its added expense. Wait until
you see large volumes of inventory or products ordered electronically (such as content
or software downloads), before investing in this solution. It sounds like
less trouble, but it requires constant monitoring because any downtime in the payment
processing is time during which you can't accept orders! You must determine
your needs along with your customers. If done properly, a customer won't even
know whether their payment is being processed in realtime. As long as you
give your customer an order number on the thank you page, they will think their
order has been processed. You have every right to *begin* the fraud/credit
limit check at that point. Customers aren't entitled to your products until
they've proven they can pay for them.
Merchant Account Costs
E-tailers also need to determine which merchant account provider fees will work
for their businesses and which could kill them. There are various fees that
merchant account providers charge e-tailers, and many vary significantly.
Merchants should figure out if the fees charged will outweigh potential profits.
Common fees include:
* Discount rates: the percentage of bank card sale amounts that the acquiring financial
institution charges merchants for transaction settlements. This depends on
the average order size that you quote the bank. A larger order size will usually
result in a smaller discount rate. Generally about 2-3 percent.
* Intercharge fee: amount that merchant's acquiring financial institution pays consumer's
issuing financial intuition for every credit card transaction settled. Transaction
fees can vary from a low of 25 cents to a high of 70 cents per charge. Discounters
selling lots of low-cost products could get killed in transaction fees.
* Equipment and Installation: these costs include hardware/software, set-up and
programming. If you're purchasing an e-commerce solution from your Web hosting
company, you may be able to avoid these costs altogether, or they may be bundled
into your hosting fees.
* Monthly Fees: also includes minimum fees, may cover total charges, statements,
and excess usage.
* Reserve Costs: some banks hold back a percentage of merchant transactions to cover
contested charges. Chargeback fees can also be charged when disputes are settled
in favor of credit card holder. Fraud often takes the form of disputed charges,
which, in the U.S., are almost universally settled in favor of the card holder.
This means that in addition to losing the amount of the sale -- after the product
has been shipped -- the merchant loses the $20-50 that the bank charges in chargeback
fees. Also, if the merchant has too many chargebacks, he's at risk of losing
his merchant account. Merchants who think they're going to set up shop without
a customer service phone number will likely lose more than the cost savings of no
800# in chargebacks. High chargebacks also result in an increased reserve
requirement. Begging your banker to let you keep your merchant account is
much worse than begging to get him to give you one.
The good news is that depending on your provider, these fees can greatly differ,
and most can be negotiated. E-tailers need to do research compare rates and
services, apply these to their specific costs, and then make an informed decisions.
Many merchant account providers offer cost information on their sites. Provided
you do your homework and shop around, you should be able to offer your customers
the ease of credit card payments without adversely impacting your business.