NFIB

Three Options for Online Payment Systems
08/ 26/ 2003

by Kelle Campbell

One of the toughest decisions when launching an e-commerce site is which payment options to use. Here are three options for providing secure electronic payment systems for your customers.

1. Credit Card and Debit Card Purchases

Allowing customers to use credit or debit cards on your Web site makes sales easy and convenient. The processes for both types of cards are similar, except that credit card purchases are added to the buyer's credit card account, while debit cards deduct the purchase amount from a checking account.

The most traditional method for accepting online transactions is setting up a merchant account designed for Internet sales with a bank or other financial institution. Be aware that merchant accounts are costly, charging you a percentage of each transaction as well as a monthly fee. Some also charge an application fee.

Next, you'll need a secure payment gateway to automatically and securely connect your Web site with your merchant account. This service allows your customers to know immediately if they have entered incorrect data. If someone calls in an order, you can type the information into the service's virtual terminal yourself.

If you opt for this service, be prepared for more fees because like merchant accounts, payment gateway services tend to bill you monthly and take a percentage of your sales. To reduce costs, you can try looking for institutions that provide both an account and gateway for a lower package fee.

Instead of using a credit card processing company, you could opt for point-of-sale (POS) hardware (the type of swipe terminal that you see in stores) or software. Both will transmit the credit card data to your merchant account, but you'll have to manually download the data from your server. However, POS is also good for telephone, mail or face-to-face orders, and banks charge a lower percentage fee for these "offline" transactions because of the reduced potential for fraud.

Another credit card option is to use third party processors who will handle the entire credit card transaction. This eliminates the need for a merchant account or any processing options. All you need to do is place a link on your Web site. Fees vary for these services, so shop around.

2. Electronic Check Purchases

Some buyers may not want to give credit card data online but will submit their bank information for e-checks. There are two ways of processing e-checks: using virtual check software to print and deposit online checks like regular checks, or using an online system that will debit the buyer's checking account via the Automated Clearing House (ACH), then transfer the funds to your bank account.

While some e-check software may be able to verify bank account numbers and bank routing numbers, you will still have to wait for the check to clear after the deposit. Some online services will guarantee checks for an extra price, and many also offer online check verification. In addition, some services generate receipts and email a copy to the check writer. And if the account is incorrect or has insufficient funds, the system will notify you and collect any NSF items without accruing fees.

3. PayPal Purchases

Although there are several peer-to-peer (P2P) payment systems available, e-commerce pundits tout PayPal as the only system "mature" enough for merchant transactions. Essentially, the system allows people to email money back and forth between PayPal accounts. Both parties must have PayPal accounts, but these are free to both businesses and consumers. PayPal has also created free integrated shopping carts and a "single item" Web Accept button for credit card transactions.

In order to do business using PayPal, you need to sign up for a business or premier account. You don't pay monthly fees or setup charges, and PayPal provides a secure server for you. In fact, the only time U.S. businesses pay a fee is when they receive funds. Then you pay a transaction fee consisting of a percentage of the funds received plus 30 cents or a maximum fee of five dollars for e-checks.

Are there disadvantages to using PayPal? Well, the service allows for international payments, but many foreign businesses may find it hard to transfer money into their local bank accounts and some have to pay fees for the withdrawal process. Plus, according to eMarketer and the Gartner Research Firm, 80 percent of US consumers are aware of P2P e-payment services, but only 27 percent use PayPal.

The most important thing to do with each of these options is to shop around and ask questions: Is it compatible with my Web host or existing software? How do all the charges add up? Is security software incorporated or do I need a secure server?

There are a few scams out there, so you must investigate thoroughly. Try out demos, speak to references and take every precaution you can to ensure the option you choose will work for you.

Small Business Sound Off
Does this story hit home?  Share your story with us