Online Payments and Merchant Account Providers

The process of setting up online payment may appear confusing at first, but the hard work is choosing the right service provider.  In my search I spoke to everyone from sales agents to bank representatives and I now have a collection of contracts with very tiny print.  I put together a summary of the process, things to watch out for, and a comparison of rates. I hope this helps.

 How it works: Credit Card Payment Flow

 Customer enters payment information into our secure site (aka Shopping Cart/Checkout).

1. The payment details are sent to the Payment Gateway for approval.
2. Gateway forwards the transaction to our Merchant Bank.
3. Our Merchant Bank forwards the transaction to the Credit Card Issuing Bank for verification.
4. Credit card bank verifies transaction and sends response code (Approve, Deny) back to our Merchant Bank.
5. Our Merchant Bank forwards the response to the payment gateway.
6. Payment gateway stores the results and response back to our online store. Payment information is displayed to the customer; i.e. “credit card was charged”, “credit card was denied”, etc.

 This process happens in a matter of seconds.

 Where Do We Get a Merchant Account?

Banks. Most banks use First Data Corporation network for their credit card payment process. FDC network clears about 80% of all credit card transaction. Here's a list of banks that are FDC Alliance Partners.

Merchant Service Providers (MSPs). I refer to them as Vendors in this article. Advantages of MSP over Banks:

• MSP have many bank affiliates and third-party account database, which mean higher approval rates (especially if your business is considered high risk).
• MSP will make recommendation on the best suited solutions or packages. Banks are limited on options.
• Better chances of negotiating lowers rates and contract terms with vendors than at a bank. 

What are the requirements?
Requirements vary depending on the provider and the amount of risk they are willing take. Three vendors told me they only needed a Tax ID or SS#, business checking account, and an address (which is not completely accurate). I later found out that the vendor submits our application to the underwriter and the underwriter will request additional information for approval. Most underwriters will ask for both application and website information as follow:

The Applicant & Business Info:

• Applicant must be a principal owner of the business
• Business License (Tax ID) or DBA (SS#)
• Checking Account
• Address
• Driver’s License and Contact Info of Principal
• Credit check - for new business, the personal credit history is a influential element

On the Website:

• Must be a live site
• Company name or DBA name on the site
• Shows Product and Price
• Terms of Service
• Return/Refund Policy
• Shipping Methods
• Privacy Policy
• Contact info for support (email, form, etc.)
• Working Shopping Cart/Check out page
• Secure

Alternatives Service Providers
Alternative payment service such as PayPal, Google Checkout and Amazon FPS are becoming more and more popular with new small businesses. These companies provide packages that fit most business model, they are simple to implement, low cost, and you can get started almost immediately.

RATING AND RATES 

Read the Tiny Print
Vendors use the same pool of financial institutions and gateways. It is a very competitive and lucrative market. They make money from markups to the fees, and additional service charges. In my talks with vendors, only if asked, did a few of the reps disclose the additional costs. One rep told me to read the contract carefully, but he can't give me the contract or discuss rates until he has my application.

Varying fees and rates can be applied to specific card type (MC, Visa, AMEX, Discover, personal, business, and rewards card). The industry term for this is Qualified vs. Unqualified cards (unqualified having the higher unadvertised rates of course). Read your contracts carefully, especially the footnotes.

What’s important?
Keep in mind rates are not fixed, most companies can change the rate with 30 days notice. Finding a service provider with a solid reputation, flexible policy, provides good customer service, and 24/7 technical support is more important than the fees. An indicator of a good vendor is transparency into their company and if they ask in-depth questions about your business.

New Business Recommendation
For new a business with unknown sales volume, the per transaction rates may not make a difference early on. I might go with PayPal or Google Checkout for a few months just to collect some information around sales. Because there is no start-up cost, no monthly fees, an immediate sign up and use process, and low development time, there is very little risk and out-of-pocket cost. The only disadvantages are that customers will be redirected from your site during the transaction and the possible perception of not being as 'professional'. That said, until you understand your volume, the flexibility and ease are the way to go.