Guide to Online Payment Acceptance
By Matt Mickiewicz and Jim Conley
There’s a myriad of different ways to go about processing online payment, and it’s very easy to get confused. This guide considers the following payment acceptance solutions in detail:
- Credit Cards
- Online Checks & Debit Cards
- Digital Cash & Micropayments
- Escrow Services
The guide was put together to help you understand in detail how online payments work, so that when you decide to purchase a solution for your site, you know what to look out for, and what questions to ask.
Commonly Used Words
Throughout this guide you’ll see some words and phrases that might confuse you. For the sake of clarity, we’ve defined some of those commonly used words here.
Merchant Account Provider: This is the company that helps set you up with the proper merchant account, and provides the software and equipment you’ll need in order to perform credit card transactions. They may also be able to provide other payment acceptance services, such as debit card processing and online checks. Merchant Account Providers are also known as Independent Service Organizations (ISO) or Agents.
Secure Gateway Provider: Ensures that the connection between the Merchant Website and the Merchant Processor are secure.
Merchant Processor: Actually process the credit card or check transaction.
Virtual Terminal: This is the “online terminal” that allows you to manually type in credit card orders via your Web browser. It usually comes with a Real-Time processing solution.
Credit cards are almost universal. Whether you’ sell memberships over your Website, widgets over the counter, or office supplies through a catalog, you should accept credit cards.
Accepting credit cards can enlarge your user base in two ways. Firstly, it lends credibility to your business, which is of the utmost importance if you want to close the sale. That credibility stems from the fact that people believe that you have to be a ‘real’ or reputable company in order to accept credit cards. And secondly, shoppers feel safer buying this way, as credit card companies only hold consumers liable for the first $50 if fraud occurs.
However, because of the nature of Internet transactions, there is no physical credit card present for you to swipe, nor is there a customer to sign for the purchase. This means that ecommerce purchases fall into a higher risk category known as Mail Order/Telephone Order (MOTO) transactions, or “Card Not Present” transactions. Due to the higher risk of these transactions compared to their in-store counterparts, fees are higher than purchase situations in which a card is present.
The Merchant Account
A Merchant Account is an account at a financial institution that allows you to accept credit cards. You may find that you can acquire a Merchant Account directly from your local bank, or you may decide to use one of a number of Merchant Account Providers that can be found through your favorite search engine. Not all Merchant Accounts can connect to the Internet, and those that can may be limited to a particular Secure Payment Gateway, so be sure to determine how this account will connect to your site if you’re a Web Merchant.
A Merchant Account Provider will open an account for you at a financial institution (a bank with whom they’re partnered) that can handle Internet transactions, and approves your credit history. Be aware that there are a lot of Merchant Account Providers out there who aren’t reputable, so make sure you check them out before you commit to one. Avoid all the hype and terminology, and don’t pay more than a $100 processing fee to get the account. Most merchant Account Providers will offer you equipment and software with which you can process credit card transactions, but remember: you don’t have to buy from them if their prices aren’t within your budget.
All Merchant Accounts will have some kind of set up or application fee, which is usually at least $99. Where there is not an initial fee, you can be sure that the Provider will try to make up the difference on a software or equipment sale, or by otherwise marking up the transaction and service charges.
International Merchant Accounts
If you live outside the US, you may encounter quite a few problems obtaining a US Merchant Account, not least of which will be the cost of the account itself. Essentially, you have three options:
- Go with a 3rd party processing company (more on this a little later),
- establish a US presence or
- use a company that specifically deals with foreign firms.
To establish a US presence, you’ll need to incorporate your company in one of the 50 states. Nevada and Delaware are both popular choices, with over 50% of the Fortune 500 companies being incorporated in one or the other due to their low fees and business-friendly regulations. The best way to go about incorporation in the US is to seek out a firm that will set up a mailing address with mail forwarding, and telephone number for you, and who will fill out all the incorporation papers on your behalf, which might cost up to $1000.