For many smaller organizations looking to start accepting credit cards online, the question quickly arises as to which provider to use to accept those payments. And actually, what type of provider is the question really being asked first. Depending on your company’s situation, factors such as cost, security, usability, trust, and more come into play quickly. Nearly all online payment solutions can fall into one of two categories.
Merchant Account with Online Payment Gateway
If your organization is already accepting credit cards offline, then they most likely already have a Merchant Account set up, probably with their bank. This is the “traditional” way to accept credit card payments, and to extend this to the online world, you need to integrate that with an Online Payment Gateway, such as Authorize.net. You pass your customer’s payment information to your Merchant Account via the Online Payment Gateway. If the card is approved, the money is deposited into your bank account, typically at the end of the day.
Advantages of Merchant Accounts
There are several benefits to using a Merchant Account for your online payment processing. The biggest is that your customers stay on your site for their entire checkout process, and you have complete control in designing how that experience will look and feel for them. In nearly all Merchant Account situations, you are using an established, FDIC-insured process for transferring funds. You also have total control of the refund process, rather than leaving that up to the discretion of a third party.
For smaller companies, without a lot of transactions per month, the biggest disadvantage of Merchant Accounts and Online Payment Gateways is typically the cost. Both components will bring their own monthly charge, along with a fee per transaction. Also, you will need to purchase an SSL Digital Certificate for your site in order to receive & transmit your customers’ credit card information securely. The certificate must be renewed each year and can cost anywhere from $100 to $500 per year. There are typically more development costs to implement this method of accepting payments to your web site as well. Also, if time is an issue and you have not Merchant Account already set up, it can take several days or even weeks to get it approved and initiated.
Private Payment Systems
Private Payment Systems (PPS) such as PayPal, Amazon Payments, and Google Checkout are third-party systems that handle the payment facilitation for you. In this scenario, when your customer is ready to pay, they are taken from your site to the PPS site where they can complete the transaction. If the payment is accepted, it is held by the PPS for a period of time (generally a few days) before it is deposited into your account.
Advantages of a Private Payment System
The two biggest advantages of most Private Payment Systems are ease of implementation and lower costs. Their costs per transaction are actually typically higher than the transaction costs associated with a Merchant Account, but there are rarely any monthly fees except for plans with additional features. Most PPS solutions have simple widgets available to generate a snippet of code to easily add to your web site. Adding a “Pay Now” button with PayPal, Google Checkout, or Amazon Payments can truly be done in a few minutes. Finally, PayPal does have some nice other tools such as a shopping cart and a one-click shipping platform that can be integrated into your site. However, these do eliminate the “set up in a few minutes” advantage as well as requiring more development costs.
The biggest disadvantages with a PPS implementation are usability and lack of control. In most cases with a PPS, your customer must leave your site in order to pay. This can be confusing to them, and at the very least, takes them to a new look & feel that is different from what they’ve been experiencing on your site. In most cases, they are shown a login box. Now days the login is typically not required, but that’s not always clear to the customer, causing more confusion—just what you don’t want in the critical last piece of the checkout process.
You also lose control. You lose control of this step of the payment process. You rely on the screens and code of your PPS. Your branding control is limited. Once the customer completes the payment, it is sometimes difficult to control how to get them back to where you want them on your site. You also typically have limited statistics available to you. For example, you cannot get information from PayPal regarding how many times your customers visit the payment page. That is, you cannot tell what percentage of people try to pay, but end up not for some reason.
You also lose control of your money. It is up to the PPS to determine when you will receive it, or even if you will receive it. There are many stories of merchants having their money held for weeks by a PPS because they had questions about the transactions. Refunds are determined by the PPS. If a customer wants a refund, the PPS decides if it is a valid request and if so, gives them your money without your approval. They are not regulated by the FDIC or any other banking authority.
Recently, a kind of hybrid of these two models has surfaced. The most prominent so far is a venture called Stripe.com is making inroads into both of these areas. We will have a review of Stripe in a future blog post.
That of course depends on your situation. In the end, it typically boils down to costs. If you are an organization with a small number of online transactions, such as a trade group with an annual event you wish to take online registrations for, or you have an e-book that you sell just a few times per month, then the sales revenue will probably not support the monthly costs associated with a Merchant Account. If you’ve been using a PPS for a while and you’ve grown to where your revenues would support the slightly higher monthly plus transaction costs of a Merchant Account, you might not yet be able to afford the development costs of changing your site to process via the Online Gateway.
However, in most cases, if you can afford the Merchant Account, that will definitely be the better way to go. The usability improvements alone can often pay for the added cost. This is far too critical a step in the checkout process not to be able to design exactly how the page should look, keep it consistent with the prior steps, or control what messages the user might see. Also, many people still subconsciously associate being taken to a PayPal screen with “startup”, and might wonder if there is a store that is more established than yours.