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Accepting Credit-Cart Payments on Your Site When I first conceived of this article in early 2005, I intended to write at length about how to open a merchant account to accept credit-card payments on your site. However, PayPal's Payments Standard service is all any small merchant really needs to accept payments on the internet. PayPal also has a merchant-account-like service called Payments Pro; it looks more professional to the customer, but that is the only real advantage. Nonetheless, let me discuss merchant accounts for a bit. At the bottom of the article you'll see a discussion of PayPal's services. What is a merchant account? A merchant account allows a merchant to accept credit-card payments, either in the real world (with a card-swiper) or on the internet. There are quite a few companies that process credit-card payments. For purposes of this article, I will call these companies "payment networks" or simply "networks". Two widely known networks are Authorize.net and Verisign. A merchant who wants to accept credit-card payments doesn't open an account with one of the payment networks directly. Rather, there are hundreds of smaller companies that act as resellers of the networks' services – I will call these the "resellers". Resellers give merchants a "gateway" to the network of their choice ("gateway" is the term used in the industry for getting access to the payment network.) The cost of your merchant account depends mostly on the reseller that you sign up with, although the network determines many of the fees. In other words, the networks have their basic fees; the resellers make their profit from how much more they can get you to pay on top of the networks' fees. Internet merchants can expect to lose anywhere from 4.5% to 10% or more of their credit-card sales to the reseller. Here are some of the fees you can expect to be charged as part of your merchant account:: - Discount fee (the percentage they take out of each payment – 2.2% to 3%) (you will have to agree to a variable discount fee, meaning that they can raise it on you at any time) - Monthly minimum for discount fee (if your monthly discount fees total less than this, you have to pay a minimum – $20 to $25) (an occasional reseller does not require a monthly minimum, but may charge you more in other areas) - Per-transaction fee charged by the reseller (usually 30¢) - Per-transaction fee charged by the network (10¢ or 15¢) - Monthly gateway fee (the fee you pay to access the network – $10 to $20) - Monthly statement fee (the fee you pay to get a monthly statement – $5 to $15) - Batch deposit fee (the fee you pay to have the money transferred to your checking account – 25¢-30¢ per deposit) (you will not have any control over how often they make batch deposits; they may make more than one batch deposit a day if you have a lot of sales, and the fees can add up) It is not generally possible to get a merchant account without paying all of the above fees, but you should not have to pay any of the fees below if you shop wisely: - Application fee - Setup fee - Annual fee - Other fees: license fee, gateway setup fee, risk-assessment fee, address verification fee, programming fee, real-time fee - Termination fee if you cancel the service Generally, you will have to sign an agreement with a term of several years, but you should insist on having the right to terminate the contract early, and you should not agree to pay a termination fee if you do. Be cautious The reseller business is cut-throat, and you can expect to be lied to by many of the salesmen you talk to. When I had a merchant account, here are the things that happened to me: - I was not told about the network per-transaction fees. - I was not told about the batch-deposit fees. - The salesman agreed to waive the termination fee, and then sent me a copy of the contract with that clause reinstated (!). Although I got the credit-card services I needed for about 16 months, I ended up losing more than 5% of my sales to the reseller instead of the 3.5% I expected to lose. Not only did the reseller not tell me about all the fees, but they raised my discount rate from the 2.29% that we agreed to, to 2.44% by the time I cancelled – I found that particularly outrageous. PayPal's solution: Payments Standard and Payments Pro PayPal offers several services to merchants which allows them to accept payments on their site (including credit-card payments). In order to use either service, you need to (1) use their shopping cart service, or (2) use a compatible shopping cart service, or know how to do some elemental website programming. I use a shopping cart service called Mals-eCommerce, which is free if you use it with PayPal Payments Standard, or $8 a month if you use it with PayPal Payments Pro. To the best of my knowledge, it is the cheapest shopping-cart service on the internet, excepting PayPal's own shopping cart service, which is free. However, as of this date (September, 2007), I'm not sure if PayPal's shopping cart allows you to accept money orders as a form of payment. Payments Standard Both of PayPal's services which I am discussing here, Payments Standard and Payments Pro, allow you to accept payments on the internet via PayPal or credit card. The Payments Standard services shows your customers a screen in which the customer is encouraged to open a PayPal account, but it still gives them the option of paying with a credit card if they prefer. It doesn't look that professional, but hey, you aren't Tiffany & Co., are you? I use Payments Standard because it is cheap. Here are the fees for Payment Standard: - 2.9% discount rate (2.5% if your monthly volume is over $3,000) - 30¢ fee per transaction "Discount rate" is a term lifted from the merchant-account business. That means that PayPal skims 2.9% off of all your sales, plus the 30¢ fee per payment. However, the Payments Standard feature has no other fees, so this is actually cheap compared to merchant accounts (which charge you monthly fees). Also, if you spend the money you make with PayPal's debit card, you can get 1% of that money back. However, to get cash back on your PayPal debit card, you also have to place an item up for auction on eBay at least once every three weeks (a pretty stupid requirement, I think). Payments Standard has a couple other shortcomings: If your customer has a PayPal account but wants to pay with a credit card, and if her credit card is associated with her PayPal account, PayPal may require her to use her PayPal account. I say "may" because PayPal told me this was the case; but when I tested it out on the internet, I found that it wasn't true. Also, your customers who have PayPal debit cards cannot use them on your site; they must use their PayPal accounts. Payments Standard doesn't come with a free Virtual Terminal. The Virtual Terminal allows you to go onto PayPal's web site, enter the credit-card information of a customer, and get paid. This means that ALL your payments from customers must be via your web site; you can't accept payments by mail or phone. Actually, you can use PayPal's Virtual Terminal, but PayPal charges you a $20 monthly fee for the service. Depending on what kind of cart you are using, you can email a special link to the customer which will allow her to pay whatever amount you designate via your shopping cart. The Mals-eCommerce shopping cart, which I use, allows me to do that. Payments Pro Payments Pro is a more professional implementation of the Standard service. Customers fill out their credit card information on your web site (or on the web site of your shopping cart service), and the whole process looks the same as if you had a merchant account. Your customers are not, for example, encouraged to open a PayPal account. Also, the use of the Virtual Terminal is included, so you can accept payments over the phone, via Fax, or in person. However, Payments Pro has an added $30 monthly fee. The fee used to be $20, but was recently raised. When the fee was $20, I felt that Payments Pro was an economical alternative to a merchant account; but at $30, Payments Pro now costs about the same as a merchant account. However, you can still get cash back on your PayPal debit card, and that will defray some of the cost. PayPal's reputation Because of some of their aggressive practices, PayPal doesn't have the best reputation among merchants. If PayPal believes that your account is being used for fraudulent activity, they may limit your access for up to six months, and that includes freezing your funds. In fact, a lawsuit was brought against PayPal because of this practice, and, I believe, PayPal modified their behavior as a result (though I don't actually know the outcome of the lawsuit). PayPal assured me on the phone that there was nothing that a customer could do to cause an account to be frozen, but that apparently isn't true. If you ordinarily receive $2,000 in payments per month and someone sends you $10,000, that could – judging from what I have read – trigger PayPal to freeze your account. In other words, any activity in your account involving sums that are out of the ordinary could supposedly trigger a freeze. One story circulating the internet now is about someone who set up a PayPal account to receive donations to aid the victims of Katrina. $27,000 came into the account in less than a day, and PayPal froze it. However, the person collecting the money was apparently not associated with any relief organization, so PayPal – in my view – had reason to be suspicious. One of the things that infuriates people about PayPal is their apparent arrogance. In the past they have locked up the money of customers for long periods of time, something which no bank could do. As long as you are the proven account-holder, you should have access to your funds – after all, the money in your account does not belong to PayPal. If PayPal is worried about fraudulent activity, contacting the authorities would seem to be the proper course of action. For the most part, banks are supposed to be neutral organizations that provide a service, but PayPal doesn't take a neutral stance. If you are concerned about protecting your money from PayPal, set up a special checking account to receive funds from your PayPal account. Transfer funds out of your PayPal account at frequent intervals, and then transfer the funds out of your special checking account into another account at your bank. PayPal won't be able to access the funds after that; and if your account is frozen, only a minimal amount of money will be lost. However, in my experience, I have not had any problems with PayPal. They can be annoying to deal with at times; but if you are not involved in fraudulent activity, you shouldn't have a problem. Among customers, PayPal also doesn't have the best reputation, primarily because of PayPal's annoying requirements for setting up an account. However, your customers will not know that PayPal is processing their payments until they get their credit-card statement, at which point PayPal's name is given as the credit-card processor. So far, I have not had any complaints. What about ProPay? ProPay (www.propay.com) is another way to accept credit-card payments from your customers. It is more economical than PayPal for monthly sales volumes up to about $2,500, but the savings are not huge and are not, in my opinion, worth the increased inconvenience. Here are some of the disadvantages of using ProPay versus Payments Pro: - ProPay will not accept payments for you on your web site. Rather, you must manually enter charges on ProPay's web site or over the phone. - ProPay has four service levels. With their Basic service, you cannot accept more than $1000 in monthly sales, and no transaction can be larger than $250 (although I have heard that ProPay may permit exceptions). Their Premium service limits you to $3000 per month in sales, and $500 per transaction. PayPal's services do not have service levels or limitations. - With ProPay's Basic service, you cannot accept American Express or Discover Card payments. - ProPay charges more "incidental fees" than PayPal does, and some of them are quite high. There are pretty much no instances when I feel that ProPay is better than PayPal (unless you prefer, for some reason, to enter payments manually), so I obviously don't recommend it. |