Practical Ecommerce

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.

Practical Ecommerce

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  1. Legacy User January 17, 2007 Reply

    I wish I had this article last September when I needed a gateway for my own cart. After reading closer, I noticed monthly minimums, annual fees and surprise charges every month. It was a tough lesson for a small business to learn. Keep up the good work.


    — *Ray Walker*

  2. Legacy User January 18, 2007 Reply

    I've found hidden, or even outrageous rates with some merchant gateways before I started my store online, Down Home Living Products & Gifts. I went with a sure-fire bet, PayPal. I've used it before to make purchases and felt completely comfortable using it for my own business. Besides, their fees are very reasonable. I requested information from one time when I was in the market, and after deciding I wasn't going to use them, I've been sent several offers (short of hounding me to death) to choose them. I still haven't. I think this article is great for beginners. I will definitely pass the word, of this informative article, to those thinking of starting an Internet store and in need of a payment gateway!


    — *Kevin*

  3. Legacy User January 18, 2007 Reply

    I've been using on my online store. I am very happy with them. They were clear on their rates and fees from the very beginning, and their customer service is great. Thanks for posting this informative article; it should help out people who are new to online selling.


    — *Mike*

  4. Legacy User January 19, 2007 Reply

    I was pleased to see that the article indicated how a payment gateway and merchant account can come from different providers. After two years we had the bank where we do all our business, prepare a bid to become the merchant account provider. As a result we have lowered what we pay in fees and have faster deposits of funds to our account.


    — *Chris*

  5. Legacy User January 21, 2007 Reply

    Disclaimer – I work for a leading online payment provider by the name of ClickandBuy LLC

    This communication piece is meant to be an insider's look at online payment processing to help others make an informed decision. Part of my/our philosophy is to be a valued resource and thought partner to those with questions:
    jamynigri [@]

    1) can the solution facilitate global expansion seamlessly with foreign currencies (offer geo gating of offers to protect content owners etc)
    2) in foreign countries, is there localized customer support (call center with multiple languages that an online user can call at any time to ensure the highest levels of customer support and user confidence) – example: user in France can call a live support option, and speak to a native French speaker to resolve their concern
    3) will the solution calculate and invoice VAT for both the Merchant and end user by country and product type…while providing an online service tool for both mercchant and end user to access in real time
    4) is the solution built on a flexible, ASP platform…thus eliminating hardware/software maintenance and upgrades and hidden maintenance fees
    5) does the solution offer customization of your data a) on demand b) real time c) batch processing d) as events occur
    6) does the solution currently support global brands with stringent secuity and is fully PCI compliant
    7) does the fraud server adjust by purchase history, product type, country of origin, risk of the market segment and by time of day
    8) does the system protect their user base from a fraudulent attempt against any merchant in their system? example: if a fraudulent transaction is attempted, does the system have the ability to prevent the fraudster from attempting a fraudulent action across the merchant network?
    9) does the solution offer unique payment types due to the sophistication of their fraud server, that other solutions do not
    10) does the solution collect on bad debt on your behalf, completely eliminating the merchants overhead and back office cost to chase bad debt
    11) does the solution, via alternative payment methods…allow for incremental, non cannibalized revenue growth
    12) can the system be integrated in as little as 6 hours with dedicated resources
    13) has the company had any recent newsworthy events you should be aware of (either investment by institutional investors or conversely negative press)
    14) is the business model completely transparent without hidden fees, maintenance costs, costs to operate by country…or is the solution a transparent all-in-one-offer
    15) does the solution have flexible Offer Management a) subscription b) PPV c) Pay Per Use d) Pay Per Download e) abilty to up/downgrade services by the user f) donor management g) affiliate programs h) master accounts that can attach as many urls as you choose for aggregated pricing/cost advantages
    16) does the company understand online conversion, and what obstacles traditionally impact (+/-) online conversion?

    Please consider these items as you explore what you hope to accomplish in your ecommerce initiatives.

    — *Jamy Nigri*

  6. Legacy User January 25, 2007 Reply

    I'd like to point folks to USA ePay ( Just based on our experience, I highly recommend them. They have tons of useful features and various ways to interact with their processing. We initially used them as an API to process cards and when we moved to become PCI-compliant (which they are), they have Payment forms so we can outsource the sensitive information handling. They also have a SOAP interface for the ubergeeks, too. They handle recurring billing and multiple users and revenue sources, which make it easier to delegate tasks and pull together useful reports.

    — *Jason Purdy*

  7. Legacy User February 2, 2007 Reply

    Great article and information, Super. However you forgot about alternatives to credit cards such as digital gold currency. A payment solution such as e-gold can be added to credit card processing and capture that those shoppers who do not have credit cards or are not in PayPal countries.

    Mark Herpel

    — *Mark Herpel*

  8. Legacy User March 13, 2007 Reply

    We are a small ski resort with an online store. Initially used a Yahoo!-based gateway tied into a merchant account other than the merchant account we use for our day-to-day operations. The sales volume was low and the maintainance fees were very high.

    Then we decided to switch to PayPal and are quite happy with their pricing structure which compliments our sesonal sales fluctuations. There are no ongoing fees, just per transaction costs.

    The only thing we found difficult with PayPal is the brand integration. PayPal allows you to change the colors and add an image to your checkout page but it is a far cry from a full seamless integration. You can actually see how it works without completing a transaction at our page at

    — *Beth Clark*

  9. Legacy User April 6, 2007 Reply

    An additional problem with PayPal is your customers need to have a PayPal account, and PayPal–rather than the bank–is actually holding your money. I've found many other businesses blogging that complain about these same probelems. We recently switched from PayPal to PaySimple, which uses the USAepay online gateway, and are extremely happy with the system. Also, getting set up was easy–everyone I spoke with there was very personable and helpful.

    — *Jordan*

  10. Legacy User April 10, 2007 Reply

    A slight correction to Jordan's post. Your customers do not have to have PayPal in order for you to use PayPal as a merchant. PayPal does offer solutions that allow you to process credit cards where the customer. Also PayPal has purchased Verisign's payment services and so now has a wide range of options including a fixed .10 per transaction one (with $20 monthly fee).

    — *chris*

  11. Legacy User April 23, 2007 Reply

    How about passing on the gateway. Take the info yourself and skip the gateway. If you have QuickBooks and want to download or enter the info if you're not a large or heavy use site, you'll save hundreds of dollars a year but using QuickBooks or finding a processing company that won't kill you for the keyed in entry. Scott Neuman –

    — *Scott Neuman*

  12. Legacy User April 25, 2007 Reply

    Yes, the gateway costs extra, but it is completely worth the peace of mind — I don't have to store my customers sensitive information. Our gateway stores the info which leaves me without that liability and also helps me convince customers who are leary of straying from paper checks that electronic payments are actually more secure. I've actually heard that unless you are using encryption to store your customers info in QuickBooks, you may be violating security regulations.

    — *Jordan*

  13. Legacy User July 18, 2007 Reply

    We use Authorize.Net in our retail (swipe) and online stores. We received our Authorize.Net account and merchant account without paying one penny in setup fees from a company named CYBERAUTHORIZE ( Our rates are low and the staff in cyberauthorize is excellent. Daryel – Jacksonville Jr NBA Basketball League (

    — *Daryel – Jacksonville Jr NBA*

  14. Legacy User September 5, 2007 Reply

    The problem I have with PayPal is the numerous spoof emails I have been receiving that look legitimate. I don't want my customers having to deal with them and possibly being taken in the process.

    — *Marion*

  15. Legacy User November 18, 2007 Reply

    Great article! I run a web design company [Puerto Rico en Línea] and my clients have a lot of questions about ecomerce and this is the perfect article to explain to answer all their questions about it… (and some of my own).


    — *Ruth*

  16. Legacy User February 9, 2008 Reply

    Great article,
    Please do your homework, as we lost $12,000.00 from paypal and wont use them . No joke. as they do not realistically fight chargebacks, as over 30 so called customer filed for chargebacks 3 months later and paypal did not protect us and we have lost over $3,700.00, So again please be safe and read rules,(small print). There are allot of companies out there, and just because they are big doesn't necessarily mean they are good or honest, several smaller companies can offer great deals and sometimes have better options and give better customer service than the big guys..


    — *host it planet*

  17. Legacy User May 23, 2008 Reply

    Informative article!
    I am in process to apply for merchant account through Chase Paymentteck in Canada. It allows me to use Paypalflow Pro gateway. I am curious about any person in here has done this before. This article seems a little bit pro Is there any comparation article between pro gateway and Authorize.ent available?
    My site:

    — *Quentin*

  18. Legacy User June 28, 2008 Reply

    This is the informative article which gives more details about the payment of the shoppers.

    Canadian Merchant Accounts

    Canadian Merchant Accounts

    — *stephenmathew*

  19. David Durick October 25, 2008 Reply

    Good article and very good comments. Having been in the software industry in and around payments for over 10 years I thought I’d give a few points of advice. For the person mentioning skipping the gateway and just get the card data from the customer and hand-enter the card information into quickbooks, that’s a HUGE BAD IDEA! He’s right about the fees are no biggie but you do not, under any circumstances want to be holding full credit card numbers. The potential for someone getting that and you being liable is not worth the hassle.

    On the comments about gateways and comparing, well, there’s litterly hundreds and hundreds of them. We built a gateway in our payment application and and the others listed are all good gateways. In many respects, they are all pretty similiar. Ours, in particular, will handle ACH payments which is rare but not all ecommerce sites need that ability. Since we will gateway to any credit card processor, like, I recommend getting your gateway software seperate from your merchant account. That way, if you chose the software that works with your shopping cart or best fit for features, you can then move to another processor if you need to and you don’t have to worry about changing anything technically with your shopping cart or your gateway software.

    Also, be aware of those hidden fees with merchant accounts. We do work with a credit card processor and setup merchants with merchant accounts, but the two big hidden fees are, at least in my opinion, CANCELLATION FEES! and too good to be true rates where your mid-qualified and non-qualified transactions are sky high. Needless to say, our opinion is if you have to charge cancellation fees, high monthly minimums, annual fees, and high hidden discount rate fees, you are just trying to make a fast buck and your aren’t looking to build a good relationship. Unfortunately, the payments industry is full of that!