At its most basic level, commerce involves exchanging money for goods or services. Prior to the advent of payment methods like checks, debit cards, and credit cards, this transaction exclusively involved exchanging currency for goods and services. As the commerce process has evolved, there are now a number of ways in which we can pay for things.
This process continues to evolve and become more sophisticated. Ten years ago, most people paid their bills by mailing a balance statement containing account information along with a check. Now, many people pay their bills electronically on the internet – no stamps, checks or paper. People spend billions of dollars purchasing goods and services online, which has necessitated the creation of online payment processing vehicles. This post will help you understand e-commerce payment processing.
In order for an e-commerce site to process payments, you have to start by having a merchant account. This allows your company to accept credit card, debit card and other forms of electronic payment. And, with a merchant account, these funds can be deposited into an account where you can access the money.
These accounts are usually set up through a Merchant Service Provider (MSP), but can be set up through a bank. Setting up through a bank typically costs more and offers less support.
MSPs are authorized by companies, such as Visa or Mastercard, to sell merchant accounts which allow you to process electronic payment transactions.
Merchant accounts are not free. There are a variety of fees charged whenever a payment is processed. These fees vary, but they are all based on Interchange – the base rates (dictated by Visa and MasterCard) from which MSPs markup their rates. Here are some of the fees you can expect with a merchant account:
There are fees associated with opening a merchant account. Be cautious of providers that charge exorbitant fees to process your account application or for account statements.
In order to set up your merchant account, you will have to sign a contract with a provider. If you terminate this contract prior to the indicated term, you may have to pay a fee, which can range from a hundred dollars to several hundred dollars. Just be aware of the fee up front – if this fee seems high, you may want to keep looking around.
Per Transaction Fees
Every time you process a credit card transaction, there will be fees associate with the transaction. This fee will involve a percentage of the transaction and a flat per transaction fee. For example, you may pay 2% plus 25¢ per transaction. If your customer spends $10.00, it will cost you 45¢ to process this transaction. These fees typically vary based on the transaction. Make sure you understand the qualified rate, mid-qualified rate and non-qualified rate.
- Qualified Rate: The qualified rate is what most providers will tell you upfront. This is the base rate you will charge for a credit card transaction. It may look low, but not all of your customers will pay with credit cards that meet the qualified rate.
- Mid-qualified Rate: If a card doesn’t meet the qualified rate for the transaction, you are charged at a midqualified rate, which is higher than qualified rate. If your customer pays with a rewards credit card, for example, you may be charged at the mid-qualified rate.
- Non-qualified Rate: You are charged at this rate when your customer’s card doesn’t meet the qualified or mid-qualified rate. Again, this rate is higher than the previous two. More often than not, customers paying with business or corporate credit cards will fall under the non-qualified rate.
Make sure you understand all the rates that may apply in certain processing situations and that your provider spells all this out for you.
An important thing to note is that all this applies only to MasterCard and Visa. American Express and Discover have their own set of fees, and if you choose to accept these cards, you will have to open merchant accounts with these card providers in order to process transactions. To learn more visit American Express (http://www.americanexpress.com) or Discover (http://www.discovercard.com) online.
The end result of an e-commerce transaction is that your merchant account provider deposits the funds paid for your goods and services into your business checking or savings account.
A few MSPs include:
- Wells Fargo – https://www.wellsfargo.com/biz/merchant/
- PayPal – http://www.paypal.com
- 121MerchantAccount.com (Aliant Financial) –http://www.121merchantaccount.com
- Merchant Service Center – http://www.merchantservicecenter.com
Payment gateways, such as VeriSign (http://www.verisign.com), Authorize.Net (http://www.authorize.net), and LinkPoint (http://www.linkpoint.com), offer services that authorize payments for e-commerce retailers. This is like the checkout at your local retail stores (also called a Point of Sale or POS terminal). There are fees associated with payment gateways and they vary among providers. Typically these fees include a monthly fee and a per transaction fee. For example, you may pay $19.95 per month plus 10¢ per transcation.
Keep this in mind: Some providers offer both merchant account and payment gateway solutions. This is convenient, but it’s not always the most cost effective choice. Shop around, and you may find that it’s cheaper to go with two separate providers.
Here’s how a payment gateway works:
- Your customer hits “submit” to initiate payment for the items in the shopping cart.
- The payment gateway receives this encrypted information from your site and submits an authorization to the card-issuing bank.
- Once this request is received, the payment gateway receives a response code from the card issuer indicating approved, declined, or error.
- The payment gateway then sends a reply back to your site, which then lets your customer know the status of the order.
- Last, money from your customer’s card-issuing bank is received by your merchant account, which is then deposited into your business checking or savings account.
Secure Sockets Layer
Secure Sockets Layer (SSL) Protocal provides secure data transfers over the internet by encrypting the information that is exchanged between you and your customer. Encryption is the process of obscuring information to make it unreadable. This prevents the interception of your customer’s data. Think of this like when intelligence agencies communicate using codes. These agencies communicate in this way, so that if enemies intercept the information, they can’t understand the communication. In the case of SSL, however, no human can break this code, even if they do manage to intercept it – it’s far too complicated.
Everything involved in your e-commerce transaction is encrypted. The encryption process starts when information is transferred from your shopping cart software to the payment gateway and ends when money is deposited into your merchant account.
You must have SSL on your online payment pages, so you have the ability to handle encrypted transactions. In order to have SSL, you have to purchase an SSL certificate from companies such as VeriSign (http://www.verisign.com), thawte.com (http://www.thawte.com) or GeoTrust (http://www.geotrust.com). Once you buy this license, it is installed on your web server. Then transactions between your web server and your user’s browser are secure.
It is imperative that your site is secure. If customers have the slightest inkling that your site isn’t secure, they will go elsewhere. The one thing that inhibits people from shopping online is the fear of having their information intercepted by someone with bad intentions. How can your users tell? When they begin the checkout process, the URL will change from “http://” to “https://”. Also, a picture of a lock will come up on the bottom of your customers’ screens when they are on a secure portion of a website.
Credit card fraud happens when you are fooled into releasing products or services, believing that a credit card account will provide payment, only to find out later that fees will not be paid. For example, one person steals a credit card from another and then makes purchases from your online store. Once the victim realizes his card has been stolen, he contacts the card provider to let it know that the card was stolen and that charges made after a given date are fraudulent. The card provider then takes the money back from you.
You can implement a few additional measures during checkout to help prevent fraud. Integrating address verification system (AVS) and card verification number (CVN) checks on your site can help your cause. An AVS check involves your asking the customer to verify the billing address for the card. A CVN check involves the customer inputting a code from the back of the card, which allows you to verify that it’s actually in their possession. Keep in mind that AVS isn’t a perfect way to prevent fraud. If you set up rules too stringently in your shopping cart software, you may lose out on viable sales. Here’s why: If the card provider doesn’t support billing verification as a part of payment authorization, it will send back a “declined” message for this reason alone.
You can also take advantage of card association verification systems like Verified by Visa (https://usa.visa.com/personal/security/vbv/? ep=v_sym_verified) and MasterCard SecureCode (http://www.mastercardsecurecode.com). Utilizing these systems allows you to shift liability back to the card company since they will assume the loss caused by anyone circumventing their own security systems.
You can also verify with merchant services that the phone number of record is the same as the one given at the time of purchase. If your gut tells you something is not right, you can even call the number to see if it is “good.” Cell numbers can be problematic and should cause you some suspicion, although more and more people are choosing cells over land lines. You can find out if a number is a cell number by going to www.fonefinder.net. More tips are included in IMPress’ eBook Customer Service 101 in the section entitled, “Watch for Fraudsters.”
In order for people to purchase goods or services from you, you have to be able to process payment transactions just like any brick-and-mortar operation. In the e-commerce world, your company has to have a merchant account to receive payments and a payment gateway, so payment information from your customer can be processed. There are a number of companies out there who offer services to facilitate these processes.
IMPress Action Checklist
Below is a list of the steps that will help you as you approach payment processing on your e-commerce site. Check off each step as you complete it to keep track of your progress.
- Evaluate merchant account providers, paying special attention to all fees
- Open your merchant account so you can receive payments
- Research payment gateway providers and pick one
- Be sure you understand all fees involved in payment processing
- Purchase an SSL license to ensure site security
- Evaluate fraud protection measures