Fraud Prevention

What You Didn’t Know About Payment Systems

What you don’t know can truly hurt your online business. This has never been more true than when you set out to choose an Internet payment systems. It’s not so much that making a wrong decision can harm your business irreparably (although, it can); it’s that there is so much information to process before you commit to a payment gateway and merchant account provider.

A Quick Review of the Basics

Payment systems — if we may simplify a bit — are the combination of a payment gateway and a merchant account that allow customers to buy goods and services online, and that allow an ecommerce business to process transactions and collect money. If your accounting model is such that your online business must be integrated with an existing enterprise billing system, then payment systems can reflect that need as well. For our purposes, though, we’ll refer to payment gateways and merchant accounts.

According to, a payment gateway is the “service that automates the payment transaction between the shopper and merchant. It is usually a third-party service that is actually a system of computer processes that process, verify, and accept or decline credit card transactions on behalf of the merchant through secure Internet connections. The payment gateway is the infrastructure that allows a merchant to accept credit card and other forms of electronic payment.”

Those payment gateways deliver information to merchant accounts, which in turn provide the structure for your business to receive funds. According to, a merchant account represents “an industry term for a business banking relationship whereby you and a bank have arranged to accept credit card payments (usually, a local bank can suffice for this kind of relationship). Setting up a merchant account usually involves the bank understanding your business and working with a third-party processor to arrange a mechanism for accepting payments.”

Many vendors offer a solution that ties a payment gateway into a merchant account — an all-in-one offering. However, merchants can select payment gateway solutions and merchant account providers separately.

As a general rule, payment gateways aren’t an absolute requirement to do ecommerce on the web. You could theoretically take orders from a website and process them manually; entering credit card information into the PoS system you have at your brick-and-mortar store, finalizing the sale and distributing the goods yourself. However, most businesses don’t have the time for that type of effort and, therefore, need both a payment gateway and a merchant account provider.

The question is: How in the world does one go about picking a provider for each?

How to Choose Your Payment Gateway/Merchant Account Provider

John Bodine, the vice president of sales and marketing for Authorize.Net, says business owners should choose a provider in much the same way they would any other vendor.

“Get an understanding of who you’re dealing with,” he said.

Bodine noted that the company’s longevity and history should be weighed with as much importance as many other factors. He noted his company has 158,000 merchants that use the Authorize.Net payment systems platform, and has been in business for 10 years — rendering it practically ancient in web years.

However, Bodine also recognizes there is just a ton of information available on the web for businesses to use in the decision-making process. You might start with a basic Google search and then work your way into discussion forums and message boards, looking for recommendations from fellow ecommerce entrepreneurs who have already “been there, done that.”

We did just that and came up with a list of common criteria businesses use to make payment gateway/merchant account decisions:

  • Does the payment system require a conventional merchant account? Many new businesses without an established credit history might find it difficult to obtain a merchant account quickly.
  • What type of fraud protection does the vendor offer? Businesses want to protect themselves from charge-backs, the result of a thief using a stolen credit card to make fraudulent purchases.
  • Does the vendor make it easy for your business to brand the payment system interface to look like it fits on your website, with your logo, with your colors and design?
  • Is it possible to integrate the payment system into an existing billing mechanism?
  • Beyond a basic 128-bit digital certificate used for security, does your payment systems provider offer a solution that is PCI-compliant?
  • What is the time period between the finalization of a sale and the transfer of funds into your bank account?
  • Can your payment systems provider handle global currency?
  • Does your payment gateway vendor offer a solution that integrates seamlessly with your existing shopping cart and/or storefront software?
  • How much does the solution cost, and how clear is the vendor about the fee structure?
  • How easy is it to switch from the vendor’s solution to another, should you become unsatisfied with the first offering?

Deciphering Rate Structures

Bodine told of customers who came to Authorize.Net citing dissatisfaction with other vendors’ rate structures. Many business owners don’t take a close enough look at the specifics of rate agreements when deciding on payment gateway and merchant account providers.

According to an article on, there are three basic components of payment gateway fees:

  • One-time fees
  • Recurring monthly fees
  • Transaction fees

The same article cites three components of merchant account fees:

  • One-time fees
  • Recurring monthly fees
  • Transaction-related fees, accrued either per transaction or per an order total

Fee variance is significant, depending on the vendor you choose. For example, customers who select the Authorize.Net platform can obtain quotes from a number of resellers whose rates vary widely. A savvy shopper can find resellers offering rates significantly below a standard market rate. Other vendors, such as PayPal and Cybersource are pretty consistent in terms of fee structure.

An Alternative Payment Solutions Perspective

While Bodine cited Authorize.Net, Cybersource and VeriSign as the big three in the payment-systems marketplace, vendors such as PayPal and Google have made significant headway into what experts call the alternative payment-solution marketplace. In fact, Google has decided not to charge processing fees through the end of 2007 in order to help its Checkout product reach critical mass.

Google’s Checkout system allows consumers to enter billing information one time in order to make online purchases a one-click process on ecommerce sites that have made themselves Checkout-capable. While Google has seemingly eliminated the need for a merchant account with its solution, Bodine cautions that it’s not the same as an all-in-one payment gateway/merchant account solution.

“We see it as a can’t-have-one-without-the-other solution,” he said. “They go hand in hand.”

What If I Decide To Switch Vendors?

Switching from one payment gateway or merchant account provider to another doesn’t have to be difficult. They key is in the provider’s customer service capabilities combined with the product’s ability to integrate with your existing ecommerce website.

“What is the integration change that will need to occur? That is the key question,” Bodine said. He noted that Authorize.Net has thousands of integration partners and has converted thousands of customers over the years in as little as a couple of days. Bodine said that business owners can gauge how tough it would be to make a change by examining the complexity of the existing ecommerce website: Is there a lot of custom scripting/coding done in your e-store? What sort of conversion tools might a new vendor have to enable an easy switch?

One note, though. Bodine cautions merchants considering a vendor change to remember that moving from one payment gateway provider to another can result in significant information loss. Once the switch is made, valuable sales information history can be lost forever.

To counter information loss, Bodine recommends that merchants “download as many of the reports and details‚” of their transactions with the previous provider as possible before finalizing a changeover.

How to Protect Yourself from a Bad Deal

In addition to plenty of research about services and features from various payment gateway and merchant account vendors, business owners should scour the web for complaints about them. You can be sure that if somebody has had an issue with a payment gateway or merchant account provider, his or her frustration has likely spilled over onto the web in the form of a message-board complaint.

Bodine says most merchant frustration stems from not understanding the fees charged by a provider. As for other payment-systems horror stories, he cautions against believing everything you might find on the web. “How many of them are true?” Bodine asked.

However, if the business owner understands the fee structure, how the system integrates into the website and is comfortable with the provider’s business history, customer support capabilities, fraud protection and payment timeliness, it’s likely that he or she will have made a wise payment gateway or merchant account provider decision.

PEC Staff
PEC Staff
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