Taking Online Payments - A Guide

Setting up an e-commerce website is not too difficult, the choice of software or developer is vast but making the decision about which route to take is fairly simple once you've compared the most likely options.

But building the website, or even marketing it, is only part of the story; you still need to be able to process payments from credit and debit cards. This causes more confusion and misunderstanding than almost any other part of setting up an online shop so we've written this page as a simple guide to what the options are.

Process

Its well worth looking at the online payments process to gain an understanding of whats happening when a customer purchases something from an online store. Lets assume that the customer has been through the cart and checkout process and entered their contact and delivery details etc.

The website encrypts the transaction information and sends it securely to the payment gateway.
The payment gateway receives the transaction information from the website, encrypts it, and submits an authorisation to the card issuing bank.
The card issuing bank receives the authorisation request, and replies to the payment gateway with an approved, declined, or error response.
The payment gateway receives the response then sends a reply back to the website, based on the response. The website updates to show the customer that their purchase was approved, declined or had an error.
At the end of the business day the payment gateway sends a settlement request to the business' merchant account provider (bank). The bank then issues separate requests to the card issuing banks and deposits the funds into the businesses bank account when they become available for transfer.

What this process shows is that selling online requires three things to be set up; firstly, a website with a shopping cart, second, a payment gateway and third, a merchant account. The latter will require an internet merchant ID with one of the options to be described later.

Options

There is no one best online payments solution, each are different and will be suited to different types and stages of business, its up to you to compare the offers of the various companies and, in some cases, well worth attempting to negotiate to get the best deal you can.

There are three main ways of taking payments online, two are 'real time' live transactions and one is where card details are collected for processing later offline.

All in one (bureau) payment service provider

This kind of online payment processor provides the payment gateway internet merchant ID and merchant account in one. In essence, you share the internet merchant ID and merchant account with the provider and all their customers - in other words they take the money into their account and then pass it to you (or you request 'drawdown') later.

Examples of these are PayPal, Nochex and WorldPay World Direct plus a (growing) number of others. The advantage of this kind of online payment service provider is that you don't need to have a long trading history to open an account, the first two are very low cost to set up; free sign up plus two tiny transactions to verify your credit or debit card authenticity. Worldpay was the first provider of this type of service and it enabled thousands of startup internet traders to get up and running in the early days of e-commerce because it overcame the difficulty, for many startups, in opening a merchant account.

PayPal and Nochex have both evolved from providing person to person payment services for making and receiving auction payments. When they first started providing payment services for online shops they were seen as being a second class payment option when compared to 'proper' payment gateways however, both have changed the way the they operate and now provide a perfectly good system. In particular, Nochex now provides an excellent payment page that is designed to work well with webshops rather than the previous 'log in or signup to pay' arrangement.

Worldpay's World Direct account, also aimed at the small business, is a more traditional online merchant service - its sign up and running costs reflect this.

Transaction rates charged vary, Nochex starts at 2.9% plus 20p whereas PayPal's basic rate is 3.4% plus 20p. Worldpay charge 4.5% per transaction with a £30 per month fixed fee.

Due to the fact that no trading history is required and only basic checks for authenticity are carried out there are greater restrictions or terms imposed on these type of services. They vary from provider to provider but range from a four week settlement time with Worldpay to maximum spend limits on indivdual cards for a set period with Nochex. Why impose these you may wonder? Its all about managing risk and online payment services are just as averse to losing money as any other financial institution, particularly with card fraud and the incidence of chargebacks being higher in the online environment than elsewhere.

In summary, all in one, bureau payment service providers give a simple to operate and reasonably priced entry to taking online payments, many have upgrade paths that provide lower rates and more flexibility as the account becomes more active making them ideal for startup and small internet businesses.

Dedicated Payment Gateway

These work hand in hand with your own standard merchant account so that all the money from your online orders is deposited in your own account, usually within three days. To use a payment gateway you also need an Internet Merchant ID, note that this is in addition to your standard merchant account, these are supplied by your merchant account provider (bank) or often by the payment gateway business - unfortunately, there is a charge for these, usually around £75 or more in the UK.

The benefit of using a payment gateway is that they handle the online transaction (as described above) and the money is transferred into your own account, unlike the all in one service where its held in the bureau's account until you either request a transfer or reach the end of the settlement period. Its far more efficient than a manual transaction plus authenticity checks are carried out on the card before the transaction goes through providing you with warnings of any inconsistency with registered addresses thus minimising the risk of fulfilling a fraudulent order or incurring a chargeback.

There are lots of payment gateways, and once again, they charge based on differing criteria; some, such as Bucks.net, are based on a percentage only, others like Protx charge a monthly fee and no percentage. Most payment gateways provide their services for a combination of the two - and require a sign up fee to get started.

To summarise, the payment gateway route can have quite high set up costs but in the longer run will be more cost effective than basic bureau services. These are probably better for established merchants with a 'real world' sales outlet and an existing merchant account or well funded e-commerce startups who can afford a high value marketing campaign.

Encrypt card details and debit later

Many of the DIY webshop software system providers, including Shopfitter and Actinic, provide a secure environment where customer card details are stored in an encrypted format enabling the online store owner to collect the information. The data is accessed by logging in to a secure site and using their decryption key to decode the card details, the order can then be processed as a cardholder not present (CNP) transaction.

Although this kind of system is secure, certainly more so than telephone orders, it is not popular with the merchant account providing banks, many of whom may consider use of this as being in breach of their terms of service. It is lower cost than using other forms of online payment because transaction charges are only applied by your merchant account provider, however, there may be an annual fee for use of the secure server. This depends on the shopping cart service you use, Actinic currently charges £100 per year, ekmpowershop charges £19.99 per month plus a £49.95 set up fee, Shopfitter provides this service free (i.e. within the £1 per order charging framework).