The Payment Processor

Because most of your e-store orders will take place with a credit card, it may be important for you to understand the nature of an online transaction.  Behind the scenes, credit card transactions are fairly complex.  In every transaction, there are multiple independent groups participating, including the online merchant, the customer, your bank, the bank that issued the credit card and the online processor or clearinghouse that manages the whole process.

As with the merchant account, you may incur a variety of charges through the use of an online processor.  This page tries to highlight some of the charges that may be encountered and gives examples of expected costs for each area.  The examples given are to be used as a guide for you to help find the right package for your company.   It pays to shop around for the best deal for your company, and each online processor will probably offer a completely different package depending on your current needs and their payment structure.

Before your customers' money can make it into your bank account, there are a series of steps a transaction must go through, including:

• Authentication - Verifies that the credit card has valid numbers, has been officially issued, and has not been reported stolen.
• Authorisation - Checks to make sure adequate funds are available to make the purchase.  If they are, the funds are "reserved" or "parked" for you.
• Settlement - Once you have shipped the products or completed the service, you will need to let the banks know so they can release the parked or reserved funds to your bank.

The big issue with credit card sales is that you most likely cannot actually debit a customer's card unless you will be shipping the product or completing the service within 48 hours.  Even though the card may be approved and the funds reserved, you may not be able to "settle" the account until you have completed the fulfilment process.  Your online processor can help you with this, so be sure to ask about batch processing and the releasing of funds.

Having a merchant account is not enough.  All a merchant account does is enable you to accept credit cards.  To process these cards, you will need a payment processor or transaction service.  Also known as "gateways", these organisations make the wheels of e-commerce go "round".

As an Internet business, you have two options with regard to accepting and processing credit cards, Manual or Automatic Processing (Real-Time Credit Card Verification).

Manual Processing

If you anticipate low initial volumes or want complete control over credit card processing, you may want to consider manually processing the credit cards.  In this scenario, you would receive an order via a secure connection (SSL) complete with credit card information.  We will design your site so it notifies you of an order, but does not transmit credit card information by email.  You will need to login to an admin panel to view full order details and collect the information you require to complete the transaction.

If you want to manually process cards, talk to your payment processor about the methods involved.  Most payment processor companies will provide you with the software or web interface you need to process cards manually.  Remember that expensive equipment or swipe machines are not necessary if you will never be face to face with customers.

Automatic Processing With An Internet Merchant Account

Automatic Processing is a great time saver for web merchants who don't want to mess with hand entering credit card information one order at a time.  While manual entry is great for merchants with low volumes, it can get cumbersome if orders start rolling in.  With Automatic Processing, your website works with your payment processor to verify the card and complete the transaction.  You are only notified of successful orders thereby saving valuable time.

When your customer fills out an order form and enters his or her credit card information, the information is then sent via a secure connection (SSL) to your payment processor or transaction service.  Your processor will send a secure message to the bank that issued the card to the consumer to verify that sufficient credit is available to make the purchase.  In addition, the processor will verify that the account is active and that the card is not reported stolen.  Some processors have other fraud-detection safeguards in place, so be sure to ask about available security features.

Once a transaction is authorised, the issuing bank will send your processor an authorisation for the funds and reserve the monies.  Your website will then be notified of the approval so you can accept and process the order.  We will forward your customer to a confirmation page to thank them for their order and acknowledge that it has been received.  If a customer's credit card is not approved, your website will be notified so you can redirect them to an "Order Failed" page.

Whether you use manual or automatic credit card verification, the work done by the payment processor is essentially the same.  The main difference is that you are transmitting the credit card information instead of your website.

It should be noted that there are two broad types of automatic payment processors.  The first type requires you to have an Internet Merchant Account with your bank.  The second type provides an all in one solution i.e. no need for an internet merchant account.

Typical Charges

Minimum Account Billing

This is a reasonable fee that requires you do a minimum amount of business each month.  Many banks require a monthly minimum of at least £20.00 i.e. you sell £20.00 worth of goods.  This means that even if you don't sell anything in a given month, you will still be assessed fees based on at least £20.00 turn over.

Chargeback Fee

If a customer is unsatisfied with his or her purchase and can't get a refund or is just looking for a free ride, you may be faced with a chargeback attempt.  A successful chargeback will result in the bank returning the customer's funds and debiting your account for the full amount, often with a chargeback penalty of £10 to £20.  Be sure to ask about your bank's chargeback policy.  Banks tend to be more loyal to cardholders than merchants so try and protect yourself by eliminating chargeback fees.

Transaction Fee

This is an inevitable merchant account fee that is assessed on every transaction.  Typically this fee is equal to about 2% to 2.5% of the purchase.  If a product costs £100, the bank would receive £2.00 to £2.50 for their service.  While rates are dependent on the nature of your business, anticipated volume, and your credit history, you should never pay more than 3%.  If you are an established business with considerable volume and good credit, then you should never pay more than 2%.  The exception to the rule is the use of American Express or Discover cards where the discount points may be higher.

Set-Up Fee

This is another reasonable fee that covers the administrative work necessary to establish your account.  If you face an Installation or Programming Fee, there really shouldn't be a set-up fee.  There is a considerable amount of work completed to set up your merchant account, so the fee should be expected.  The set-up fee can range anywhere from £35 to £350, but you shouldn't have to pay more than £200.

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