Web and Ecommerce 7.10. Ecommerce: Payment Gateways and Merchant Accounts

Ecommerce: Payment Gateways and Merchant Accounts

Unless you’re willing to have customers send you checks through the mail (perish the thought!), your Web site needs to process credit card transactions if you want to sell people anything. Taking credit card payments is a complicated affair. Credit cards need to be authenticated, the payment needs to be authorized, and a bank or other financial institution has to handle reconcilement with the card issuer. Processing a card through the Web requires additional tasks.

Payment gateways are the services that authenticate a card and send the transaction information for authorization. Whenever you go to Starbucks or any other store and the cashier swipes your card, the information is being sent to a payment gateway for authentication and authorization. Some payment gateways are designed for cashier stations, some are designed for mail order and phone centers (called “MOTO” payment gateway services), some are designed for mobile phone e-commerce, and some are designed for the Web.

Once a credit card transaction has been authorized, the payment gateway sends the transaction information to a financial institution administering a merchant account in your company’s name. Web-based transactions are a special breed, so your company needs a merchant account specifically set up to handle Web-based transactions and their attendant risk. Outside of the nature of the transaction, a merchant account differs from a personal account by including reconciliation services, the process of moving money from the card issuer into the account.

There are more than a few payment gateways to choose from―the most common are Authorize.net and PayPal, the latter who just purchased their payment gateway services recently from Verisign. Most payment gateway services are actually sold by resellers―for instance, you can only use Authorize.net by purchasing the service from resellers, who typically bundle merchant accounts with the payment gateway service.

Payment gateways typically charge a set-up fee, a monthly fee, and a fee for each transaction.

Merchant accounts typically come with set-up fees, monthly fees, and sometimes transaction fees. Some merchant accounts can tie directly into other merchant accounts or your personal account―when money flows into the account, it instantly flows out to your personal account (don’t tell your bank, though―your personal account is not underwritten for the risk attendant on credit card transactions!)

Once you decide on a payment gateway and merchant account, special coding has to be inserted into your checkout pages. For this reason, you should have both your payment gateway and merchant account solidly in place before any coding starts on your Web site. Your Web developer contacts the payment gateway for all the relevant coding information and integrates that special coding into your purchase pages.

7.10.1. Authorize.net


Authorize.net is the most common payment gateway used by small- to medium-sized Web businesses. It is universally praised for its cost-effectiveness, reliability, and consumer brand awareness. You do not, however, contract directly with Authorize.net to use their payment gateway services, but instead contract with one of dozens of resellers. The Authorize.net Web site provides a partial list of resellers.

Resellers offer a range of services and fee structures. Many resellers offer merchant accounts in addition to Authorize.net payment gateway services. You, of course, have to balance the whole weight of fees―sign-up fees, monthly fees, and per-transaction fees―to determine the total value of the package offered by a reseller. Because the fees vary from reseller to reseller, we cannot reliably price out Authorize.net services. Expect to pay anywhere from $100 to $200 in set-up fees, $10 to $50 in monthly fees, and per transaction fees over a certain monthly limit.

As part of their standard Web payment gateway services, Authorize.net also offers

  • Recurring billing
  • Electronic check processing
  • Fraud detection services that allow you to customize fraud detection filters
  • A merchant toolbox including accounting and productivity online software

Authorize.net also offers separate, integrated payment gateway services for bricks-and-mortar retail stores, mail order/telephone order, and mobile phone e-commerce.

7.10.2. PayPal


PayPal, a wholly-owned subsidiary of eBay, is best known for its innovative account transfer service which more than any other technology has enabled the explosion of Internet auction services. The company very recently purchased its payment gateway division from Verisign and, by doing so, immediately became the second-largest payment gateway service used by small- and medium-sized businesses.

Unlike Authorize.net, you do not contract with a reseller, but set up services directly with PayPal. Since PayPal’s fundamental business is offering personal and merchant accounts, you can also purchase a merchant account through them.

PayPal Payflow Payment Gateway comes in two forms: Payflow Link and Payflow Pro. Payflow Link functions like any other payment gateway. Through special coding on your site, credit card information is forwarded to the PayPal payment gateway which then authenticates the card and receives authorization for the credit card transaction. Payflow Pro offers additional services including fraud detection, a virtual terminal, and a PayPal Manager dashboard.

Like all other payment gateways, Payflow allows you to connect the gateway to any merchant account.

Payflow Link costs $179 to set up and carries a $20 monthly fee for up to 500 transactions per month. Any transactions over the 500 limit will cost $0.10 each.

Payflow Pro has a set-up fee of $249 as well as a monthly fee of $60 for up to 1,000 transactions. Additional transactions cost $0.10 each.

PayPal also offers lower-level payment gateway services closely aligned with their signature account services. The standard service directs users from your site to a PayPal credit card information page which sends the credit card and billing information to PayPal’s payment gateway. PayPal Pro operates more like a standard Web payment gateway. Customers put in their credit card and billing information on your shopping cart (no need to detour to a PayPal page) and special coding written into your shopping cart page sends the information to the PayPal payment gateway for authentication and authorization.

Both PayPal Standard and PayPal Pro require that you also have a PayPal Business Account―you cannot use a separate merchant account for customer credit card payments. PayPal Accounts are actually pretty pricey―they charge a 4.9% transaction fee on all deposits into the account. Ouch.

PayPal Standard comes with no set-up or monthly fees, but does include per-transaction fees of 1.9% to 2.9% of the transaction total plus an additional $0.30 on each transaction.

PayPal Pro has no set-up fees. The monthly charge is $20 and each transaction bears a fee between 2.2% and 2.9% of the transaction total (including taxes and shipping charges) plus an additional $0.30 for each transaction.

7.10.3. iTransact


iTransact offers low-cost payment gateway services including single and recurring credit card payments, electronic check payments, shopping cart, and an auction pay system if you are doing business on eBay or other online auction sites. The gateway was designed mainly for entrepreneurial, small businesses.

They have customized their services for startups and home-based entrepreneurs by offering a leasing as well as a purchase option. To purchase iTransact gateway services, you pay a setup fee ($249) and a monthly charge ($25) for up to 500 transactions. Each transaction over 500 involves an additional $0.14 charge. If you choose to lease, there is no setup fee. Instead, the monthly fee runs $45 per month for up to 500 transactions with an additional $0.14 fee for any transactions exceeding the 500 per month maximum. The lease term is twenty-four months.

If you do the math, the leasing option costs $200 more over the twenty-four month term―you only want to choose the leasing option if you cannot afford the $249 up front.

7.10.4. Shift4


Shift4 offers a payment gateway, “$$$ On The Net,” for both “card present” and “card not present” transactions. It is an integrated product that is meant to manage bricks-and-mortar, Web e-commerce, and MOTO transactions in a single package. The service also includes debit card transactions, electronic checks, signature verification, and can take any credit card and connect to any merchant account. The product also includes fraud control and a separate gift card program (so you can issue your own gift cards).

You purchase $$$ On The Net from Shift4 directly. Pricing is customized to your business and is available only by calling their sales representatives. Because the system is based on an innovation―fully auditing credit card transactions before sending them to the merchant bank — $$$ On The Net saves high-volume businesses tons of money, even though the setup and monthly fees are high. If your site is processing oodles of credit card transactions, you’ll make money through Shift4. If not, you are better off going with another payment gateway.

(As a side note, if you’re a bit flummoxed by the company’s bizarre name, fire up your word processor, hold down the shift key, and hit the 4 key. What do you see? Here’s what I see: some people are too clever by half.)

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