Jun 19, 2012

The money is in the details

So you have a top-notch idea for E-commerce. You even have a well-considered business plan. Here’s a technical question for you: How are your customers going to pay you?

It sounds like a silly ‘small picture’ question, I know. But it’s really one of the most important and most problematic details your brand-new E-commerce project may encounter.

If you’ve got a good idea for an E-commerce web site, chances are you’ve used somebody else’s E-commerce site at some point in the past. If you paid by credit card, you’re familiar with the online payment process from the user’s side of things. But building that functionality into your own web site requires a bit of planning and some critical decision-making well in advance of your ‘go live’ date.

How transactions work

Online credit card transactions are a two-step process. First, a gateway service processes your customer’s credit card information, authorizes the charge for their purchase and captures the funds from your customer’s account. After that, the gateway service then sends those fund to your merchant banking account for deposit.

It’s really not that difficult a process to set up, provided you’ve done all of your paperwork and have your accounts established before your site is ready to go. Bricks-and-mortar merchants have a bit of advantage here, because chances are they already have a merchant account in place. If you don’t have a merchant account in place, you’ll need to allow for at least a couple of weeks to get one set up.

Gateways hold the key

Gateway accounts are the important piece of the puzzle. Some banks have their own gateway service and require you to use it. Others are more flexible and allow you to use any payment gateway you like. Either way, you’ll need your merchant banking account established before the gateway can be set up.

Of course, none of the services are free. Which means you need to budget for the additional cost of doing business. Merchant banking accounts make money off the percentage-based fee they charge for each credit card transaction. Fees vary by bank, and you’ll typically get lower rates when you sell at higher dollar volumes. Gateway services also have costs associated with them, usually including one-time setup fees as well as monthly and transaction-based fees.

Other payment options

Payment options other than credit cards are available. If you expect that your site will generate fairly moderate monthly sales (say, less than $3,000), a payment service like Paypal or Google Checkout make sense. You can accept both credit card and Paypal account payments through Paypal’s Web Payments Pro interface, for example, and the payments can be deposited into your business’ Paypal account – which means you don’t need a merchant banking account. The services still charge monthly and transaction-based fees, however. They are good options for smaller volume E-commerce, but if your site’s monthly transaction volume reaches the neighborhood of $5,000, ‘straight’ credit card payments generally become more cost-efficient.

The moral of the story is this: Few elements of any E-commerce operation are more important than how customers make their payments. Weigh your options carefully, because the decisions you make about your site’s payment process can have a big impact on your business’ bottom line.

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