Payment Systems

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PAYMENT SYSTEMS

One of the most important things to consider when setting up an online business is how customers are going to pay for their purchases. According to Netpreneur writer Melissa Campanelli, "Payment processing systems lie at the heart of all e-commerce operations. Your site won't survive unless customers can pay for their items with minimal disruptions and maximal convenience." Online shoppers pay for their purchases most frequently with a credit card. To accept credit card numbers as payment, you must use online credit card processing technology that processes payments via platforms like the Web. In an effort to protect personal information like credit card numbers, most payment processing systems include secure electronic transaction specifications, address verification programs, and other fraud screening technology.

Accepting credit card payments via the Internet is quite similar to accepting credit card payments in a more traditional retail setting. Online merchants must work in conjunction with an acquiring, or merchant, bank to process and complete transactions. For example, after a consumer at a book e-tailer like Amazon.com completes a purchase order, Amazon uses real-time online processing software to transmit the customer's credit card information to its merchant bank. Once the merchant bank receives the request, it seeks credit card authorization from an acquiring processor, which handles credit card processing, billing, reporting, and settlement services. The acquiring processor transmits the request to the card-issuing bank—the bank that issued the credit card to the consumer—which responds with either an approval or denial code that is forwarded to the merchant. Typically, despite its complexity, this entire process is completed in less than 15 seconds.

If you would like to accept online credit card payments, you will need to establish a merchant account and purchase an online credit card processing system to facilitate the process. To obtain a merchant account for your online business, you can apply for one at a bank of your choice. Most merchant banks will ask for specific information about how you conduct business and will work with you to determine which transaction processing model to use. The fees charged and services offered by merchant account providers vary widely. Many providers charge one-time application fees. Nearly all providers charge a small fee per transaction as well as a merchant discount fee, which is a percentage of sales that typically ranges from 1 to 4 percent. To familiarize yourself with the options available, you might consider using a site like MerchantSeek.com, which provides a current listing of the lowest-priced merchant account providers as well as information about what types of services each provider offers. If you have already established a merchant account for traditional credit card transactions, you will still need to obtain a separate identification number, known as a terminal ID, for Internet transactions.

Many banks also offer online credit card processing solutions, which handle payment processing for you and even include additional features like online shopping cart technology. By opting to purchase such a service, you can dramatically reduce the amount of work involved in setting up a payment processing system for your business. Companies like Verisign, Authorize.Net, and PayPal also offer comprehensive payment processing solutions specifically designed for small businesses. While most require that you have a merchant account, PayPal and a few other online payment processing firms allow you to bypass the time and cost involved in securing such an account. In some cases, payment processors might offer free trial periods for their payment processing services. For example, as of May 2002, Verisign offered a free 30-day trial of its Payflow Pro service to online business owners looking for a payment processing solution. Ratings and reviews of various payment processors are available from MerchantSelection.com.

Credit cards are not the only online payment option businesses can offer customers. Check cards, typically issued by large credit card companies, pull money directly from a customer's checking account, allowing customers to pay for purchases without the expenses associated with a credit card. Customers using check cards on the Internet simply enter their check card number as they would a credit card number. Accepting check cards is very similar to accepting credit cards; in fact, the transaction processing methods for both are nearly identical. If you are able to process online credit card payments, you should be able to process online check card payments as well at no additional cost. Another option, Internet checks, makes use of the automated clearing house (ACH) network. While they are similar to check cards in that funds are pulled directly from a consumer's checking account, the gateway used to settle Internet check transactions is very different. As a result, check card funds are usually deposited into a merchant's account in two or three days, while Internet check funds take 10 to 14 days to close.

Many payment processing solution providers offer various payment processing capabilities that allow you to accept credit cards, check cards, and Internet checks. Additional services include the ability to accept international payments and protection against credit card chargebacks, which happen when a consumer disputes a credit card transaction. When deciding which payment processing services you will offer your customers, a February 2002 issue of Entrepreneur.com recommends that you "keep in mind that today's service-conscious consumers expect convenience, and the more payment options you offer them, the more likely you are to win their business."