Payment Gateways, Merchant Processors, and Bank Accounts
An often overlooked and under analyzed segment of building your eCommerce business is the backend processing of your orders. Entrepreneurs invest lots of money and time into making sure their site design is just right, but often gloss right over their order processing systems. Invest a fractional of your time spent in making design tweaks into choosing the right payment gateway, merchant processor, and bank account, and you will save yourself a lot of money!
Quite simply, a payment gateway is the system used to transmit your customer’s payment information from your secure website to your secure merchant processor. Think of it as the terminal that collects, encrypts, and securely transmits the data to your merchant account. There are many different services to choose from when picking your payment gateway, although, it is important to know that the payment gateway you choose must be compatible with your eCommerce solution. PLEASE be sure to get a list of the different payment gateways your eCommerce solution accepts, and contact each one to learn of their rates and service offerings.
According to a 2009 Internet Retailer report, the 3 most commonly used payment gateway providers by the top 500 eCommerce websites are:
- Chase Paymentech Solutions LLC. (113 of the Top 500)
- PayPal Inc. (75 of the Top 500)
- Cybersource Corp. (45 of the Top 500)
All-In-One (Payment Gateway and Merchant Processor)
PayPal (and other bundled payment gateways/merchant processors) offer an all-in-one service where you get the payment gateway and the merchant processor together. The advantage here is that you do not have to manage two separate accounts, and can sometimes get better rate’s (depending upon what type of credit card you customer uses).
For example, one of PayPal’s services boasts a flat rate (for national sales) based upon your sales volume. The more you sell, the less they charge you to process the transaction. The benefit here is that regardless of which credit card is used (MasterCard, Visa, Discover, or the dreaded American Express), or whether the card is qualified, you get charged the same flat rate. This is unique to PayPal and other all-in-on services.
The payment gateway transmits the encrypted billing data to your merchant processor who is then responsible for routing this data to the credit card network. The credit card network verifies that your customer’s credit card is valid/has enough funds to cover the transaction, then notifies the payment gateway, which then communicates with your eCommerce solution. If the transaction is approved, then the merchant processor will transmit your settled orders to your bank account (sometimes this requires a manual process).
The merchant processor is the behind the scenes system that communicates with the payment gateway, your customers credit card network, and your bank account. It’s important to know whether your payment gateway, merchant processor, bank account, and eCommerce solution all work together. Please make sure your merchant processor interfaces with your payment gateway and your bank account!
What to Know
Payment Gateway’s - when choosing a payment gateway verify and review the following:
- Gateway Setup Fee – many payment gateways will require an initial payment to configure your gateway.
- Monthly Gateway Fee – this is an ongoing fee for the privilege of using the payment gateway
- Per Transaction Fee – every transaction made gets charged a fee. This also includes; refunds, voids, and declines.
- Batch Fee – if you choose to settle up your transactions each day, then you will be charged this fee on a daily basis. This could really add up over time!
- Contract – some payment gateways might try to lock you into a 1-2 year contract. I wouldn’t accept this unless you are getting some great rates!
When reviewing this data make sure that you understand all the fee’s and requirements. Also remember that you can negotiate pretty much all these items (if you are processing a lot of orders). It’s definitely worth a shot to call and try to get the best rate you can! For example, Authorize.net had a package for high volume sites where they charged $50 a month, but provided 2,000 free transactions plus .07 per transaction thereafter. Added up over time, you can save thousands of dollars per year!
Merchant Processors - when choosing a merchant processor verify and review the following:
- Setup Fee – same as above
- Monthly Fee – same as above
- Per Transaction Fee – same as above
- Contract - same as above
- Qualified Discount Rate – this is a very tricky fee to track. The Qualified rate is for specific credit cards, and credit card types.
- Non-Qualified Rate – understand which credit cards do not qualify as the discount rate so you can crunch the numbers. This fee can be as much as double your discount rate.
- Minimum Processing Fee – some merchant accounts will require a minimum monthly transaction threshold. If you don’t meet this threshold, you are charged another fee.
- Order Refund/Chargeback Fee – when orders need to be refunded, or are charged backed, you are usually going to be charged another fee for this.
- International Fee– check the rates for customer orders outside of the United States to see if you are charged extra.
Services like PayPal charge a flat percentage of the transaction (1.9% - 2.9% depending on volume), plus the per transaction fee. Most merchant processors charge in the range of 2.2% - 2.65% PLUS 1%-1.5% for non-qualified cards. Non-qualified card rates apply to corporate, international, and rewards cards, along with cards that don't have full AVS info.
Now, if a good percentage of your orders come from customers that use non-qualified cards PayPal might turn out to be cheaper than a typical merchant processor account.
Please also be sure to check the rates for international orders. This could amount to a large percentage of the sale!
For payment gateways, I would highly recommend Authorize.net (I have been using them for over 10 years). Their platform is rather robust, easy to use, and stable. In the 10 years I have been using them, there was only 1 outage when their data center caught fire.
What do you recommend when it comes to payment gateways and merchant accounts?
I noticed that you perhaps forgot to mention the major bug bear of all fee's that too many business's are unaware of - interchange fees. Strictly speaking interchange fee's are charged bank to bank to facilitate paying the banks for doing the transactions themselves. The card issuers, most likely Visa and Mastercard, change these rates twice every year to reflect "current market conditions".
What most folks do NOT realise is that common processors, and I include the three major players you have named above, do NOT necessarily change their own CHARGED interchange rates to reflect those charged to them by Visa and Mastercard. That in itself is a boon for the service providers as thats funds they do not have to forward payment of - in other words, the processing companies know exactly what the rates should be, and remove excess funds that they have charged their clients so that those monies do not find their way to Visa and Mastercard. Pure profit that you, as a retailer - or construction company - or ebook vendor - or frankly anyone that takes payment by credit card usually doesn't realise is being gotten from them by processing companies.
To put this in perspective, $37 BILLION dollars was paid by companies in unfair interchange fees in 2010. Thats a lot of money needlessly given. If every retailer simply had their fees audited for them, on a monthly basis, to recover those hidden fees, would that improve their profit margin? Of course it would!! Then back into the economy etc etc.. Now (shameless plug time!) we can do this for you without your having to bother with the paperwork, monthly calls etc - find out more on to-find-a.com my site - the services is 100% contingent based. If we cant save you over $1500 per year, then your with an active processing company with your best interests at heart. That's happened 2 times, I believe~~~
Also, an additional factor businesses may be unaware of : if you already have a good rate structure set up, you MUST batch process every-single-night, or those late batches will fall back to the standard fee ratio.
Hope this helps!
Louis Camassa says:
Hi blake - thanks for the feedback. Isn't the interchange fee rolled into the rate fee?