Receiving Payments in your Online Store
Why Use a Payment Service Provider?
Make it easy for your customers to pay in your online store. Payment, including the ease and security of payment, is always one of the decisive issues for customers.
Moreover, when you don’t arrange your payments well, processing payments will cost you a lot of time. So also make it easy for yourself to receive money!
Processing the payments yourself
You could in theory process the payments yourself. Open a bank account and set up a merchant account so you can start receiving payments. This will still leave you with the question how to process the payments. You could develop this yourself, but you’d need quite some technical knowledge to do the job. Assuring security and up-time may become issues as well…
Using a payment service provider
I strongly advise you to use a payment service provider – it will save you time and money. You need to integrate it with a plug-in to your online store. For some e-commerce software there are already built-in links. Others even have their own payment service provider (PSP). A PSP receives all payments to your online store on your behalf.
Three advantages of payment service providers
Payment Service Providers offer you three distinct advantages.
First, they will offer your customer a number of payment methods, while you just get the money transferred to your bank account without having to collect from each of the payment method provider individually. Offering multiple payment methods (best is to offer at least all popular ones in your market) is really good for conversion. Customers like to pay the way they are used to and trust.
Second, the PSP will make sure the connection and the customer’s data and payment are secure. You don’t have to worry about a secure connection during check-out because the PSP will take their responsibility for the security aspect.
Third, with an integration with your E-commerce Software the PSP will automatically indicate whether a payment has been successfully completed, whether it is still pending or whether it (temporarily or permanently) failed to come through. You don’t have to check your bank account every half an hour to see if there are new payments and thus orders that need to be made ready to be shipped.
For a successful online store it is inevitable to let a payment provider process the payments, whether you arrange it now or later. The speed and the time you save is worth a lot!
Differences between North America and Europe
In North America and some European countries, such as France and the UK, the bulk of online payments are made with credit card. In other European countries, such as Germany and the Netherlands, the majority of online payments are processed differently, for example by online banking. Some merchant services also require you to have your business registered in a certain region or country. In short, there is not one solution that will suit everyone’s needs.
In the remainder of this page I will explain which elements compose a typical payment service provider fee (and therefore the various steps involved in a typical transaction). In other pages I review a number of payment service providers that you could use.
On Merchant accounts and payment gateways
You need to open a merchant account to be able to receive money. A merchant account is a business account with a bank. The merchant service provider (MSP) is responsible for maintaining your account within national and state regulaions, depositing funds into your checking account, and helping to protect you against fraud.
To be able to receive money, apart from the merchant account you also need a credit card (and/or debit card) terminal for offline payments or a payment gateway for online payments. Some payment service providers don’t make the effort explaining about the different parts that make up a transaction and which parties are involved in it. This often also leads to an unclear pricing system.
Some payment service providers offer an all-in-one solution, while others are just a merchant service that teams up with a payment gateway, or the other way around.
Credit Card Fees, Multi-tiered pricing, and interchange plus pricing
One example of interchange plus pricing: Dharma
|Card Type||Interchange||Card Brand Fees||Merchant Fees in the case of interchange plus pricing||Final Rate in case of working with Dharma||Total Fees|
|Paid to whom:||Paid to your
|Paid to Merchant service provider (in this example: Dharma)||Total rate you pay||For $100
|Visa Reg. Debit||0.05% + $0.22||0.11% + $0.02||0.35% + $0.15||0.51% + $0.39||$0.90|
|Visa CPS Retail||1.51% + $0.10||0.11% + $0.02||0.35% + $0.15||1.97% + $0.27||$2.24|
|Visa Rewards||1.61% + $0.10||0.11% + $0.02||0.35% + $0.15||2.07% + $0.27||$2.34|
|MasterCard World||2.05% + $0.10||0.12% + $0.02||0.35% + $0.15||2.52% + $0.27||$2.79|
|American Express||3.50% + $0.15||n/a||$0.15||3.50% + $0.30||$3.95|
In the above table you find the credit card fees in the second and third column. Whether your payment provider has multi-tiered pricing or interchange plus pricing, this always stays the same. There are hundreds of different interchange fees – see for example only a part of the interchange fees for visa cards in the US here.
Merchant Service Providers mostly use the tiered pricing model.
In the fourth (merchant fees) and fifth (final rate) columns you see what amount is paid to the merchant and in total respectively, in the case of using this interchange plus-priced merchant service provider.
Multi-tiered pricing is based not on the principle of charging the credit card fees + a set extra merchant service provider fee, but on tiers. Mostly MSP’s use three tiers, and when they use more tiers the principle is still the same.
In the three-tier pricing model, the first tier is the qualified rate, the second the mid-qualified rate and the third tier the non-qualified rate. When is a rate qualified, or first tier? When a regular consumer credit card is used and proccessed in a manner defined as standard by the merchant service provider, the internet merchant will pay the lowest rate, or the qualified rate (first tier).
But if the payment is made by a card or in a way that is not defined as standard (for example business or rewards cards instead of regular consumer cards; for example a credit card is keyed in in a credit card terminal instead of swiped), it will be either defined as second or third tier. The mid-qualified and non-qualified rates are typically higher.
Take into account that the Merchant service providers choose which tier they will assign dozens of categories (card types and processing methods) to. Every Merchant Service Provider arranges these tiers differently and quotes you the price of the qualified rates only. Chances are that you don’t even find out about the higher rates of the other tiers – untill they are invoiced to you (but it may still be hard to find out as they are not shown transparentally).
Concluding, the multi-tiered pricing model is a lot easier to understand, as your invoice doesn’t show dozens of categories, but just three (or some more) tiers. However, because it is not a transparent categorizing method indicating how exactly your payments are going to fit in the tiers, it is a safer bet to choose for interchange plus pricing. You will always need to pay the interchange fees, and will never pay more than a set merchant service provider fee.
Of course your choice of payment service provider depends to a large extent on the region you are operating in. Your customers want to pay in the way they are used to, and you should offer them those payment methods to achieve a higher conversion rate. Never force your customers to pay with a certain payment method or you will lose clients.
As already indicated above, there are differences between Europe and the US, and within Europe as well as to customer payment preferences and payment methods available.
In the following pages we will discuss a number of payment service providers, most of them catering to a certain market. Find out what payment service provider is the best for your online business!