Online Payments

During the initial stages of setting up your online store, one of the first things you will need to do after deciding on your products or services, is to determine the payment methods which you will accept on your website. Needless to say, your choice of payment method must be able to support credit card transactions, since this is how 9 out of 10 sales on the Internet are paid for. The two ways you can do this, is by either setting up a merchant account, or by engaging the services of a third party payment processor.

Essentially, a merchant account is a bank account which is special account used to hold payments received from credit card transactions before being transferred to your company bank account. Having a merchant account alone is not enough, as you will also need to have a payment gateway before you can start processing transactions from credit cards on the Internet. When deciding on a payment gateway, it is important to ensure it will be compatible with the shopping cart module on your online store. Some of the more popular payment gateway providers include USAePay, Verisign and AuthorizeNet. Many banks partner with these payment gateway providers to offer you a one-stop package, also known as a Merchant Solution.

If your online business is generating several thousand a month in sales, it makes better business sense to setup a merchant account. However, most people starting an online business might find the cost associated with setting up a merchant account to be prohibitive. A good alternative for them is to use a third party payment processor. In the following section, we take a look at the various third party payment processors available today and their relative advantages and disadvantages.

PayPal

PayPal is perhaps the most popular an widely known third party payment processor on the Internet with over 72 million accounts worldwide, with growth rate of over 40 percent a year. The reason for this is that PayPal provides a simple and economically viable alternative for merchants who want to receive payments via credit cards on their online stores but do not want or are not prepared to setup a merchant account.

Presently, PayPal offers four different package for merchants, namely PayPal Website Payments Standard, PayPal Website Payments Pro, PayPal Email Payments and PayPal as an Additional Payment Option. Each one of these have their own merits and unique selling points, and the costs associated with three of the packages is summarized in the following table:

While both PayPal Website Payments Standard and PayPal Website Payments Pro allow merchants to accept payments via credit card, the main difference is that with Payments Standard, the payment is processed on PayPal’s servers, which means your customer is redirected to PayPal’s website.

PayPal Website Payments Pro on the other hand works in the same way as though you had your own merchant account. This means that PayPal becomes the payment gateway behind the scenes when a customer pays for your product via credit card, and will never have to leave your website as is the case with Website Payments Standard.

The third option available to online merchants is the PayPal Email Payments, which, incidentally is what PayPal started with. This involves you invoicing your customers via email and receiving the payment via PayPal. The fourth and final option is PayPal as an Additional Payment Option, and is designed for merchants who already have a merchant account and would like to offer PayPal as an alternative way for customers to pay for your products.

Due to its high level of integration with eBay, PayPal should be your first choice of receiving payments if you intend on selling your products through eBay. Another reason for this is that PayPal is used by 75% of the customers on eBay, and it would make good business sense to accept the payment method preferred by the majority of customers on eBay.

Some people who have had bad experiences with PayPal freezing their accounts may not want to pay you via PayPal. For this reason, it is a good idea to provide an alternative payment processing method on your website to cater to such customers. However, PayPal’s strict policies have paid off in the long run as they have a much lower rate of merchant losses compared to merchant accounts. This is a good reason for online merchants to use PayPal as their primary payment processor.

WorldPay

If you are not located in the United States, you may face difficulties in setting up a merchant account which is compatible with some of the shopping cart solutions in the market. In this case, WorldPay may be the answer to your problems, since they provide a total package which includes a merchant account, payment gateway and store front or shopping cart.

Additionally, fraud protection and risk management features are also thrown in to truly make it a one stop solution for your online payment processing needs. Being a division of the Royal Bank of Scotland, WorldPay is definitely a reliable and reputable payment processor you might want to seriously consider for your online store. However, if you compare their fees with PayPal, you will notice that they charge a $400 one time setup fee, a $50 monthly fee, and a higher transaction fee, in the range of 3.25% + $0.40 per transaction, or 5.25% per transaction if you need to be able to process multiple currencies.

2Checkout

2Checkout works differently from PayPal or WorldPay, in the sense that its business model is that of an online distribution center. When your customer purchases a product from your website, 2checkout purchases the product from you and immediately resells it to your customer. Therefore, your customers will receive a bill from 2checkout and not your website. A strong point of 2Checkout is that it accepts merchants from anywhere in the world, and supports recurring billing. It costs $49 to setup an account, and 2Checkout charges 5.5% + $0.30 per transaction.

ClickBank

Clickbank,is the platform of choice for people who sell digital or virtual products, such as ebooks and online video courses. When you list your products on ClickBank, you instantly have over a hundred thousand affiliates marketing your products. This gives your products instant exposure and allows you to take advantage of a huge market potential. Clickbank,  allows customers to pay via PayPal or credit card. Its costs $50 to setup an account with ClickBank, and the transaction fee can vary depending on the commission that goes to the affiliate which marketed your product. Additionally, ClickBank charges a transactional fee of between 2.5% + $0.33 to 7.5% + $1.

The payment processors we have looked at above are among the more popular ones on the Internet. There are, however, many other reliable payment processors on the Internet, and two which are worth mentioning here are MoneyBookers (http://www.moneybookers.com) and Ikobo (http://www.ikobo.com). Ultimately, you will need to do a thorough research and comparison of the various payment processing alternatives available to you, and select the one which is most suitable to your needs and market.