Payments Part III: The Final Frontier

September 17th, 2008 Chris Posted in Payments | No Comments »

Sorry I’m late with this post … I have to admit that I’ve been a bit distracted with a bad couple of days in the financial markets. Merrill – gone. Lehman – gone. AIG – terminal. All because of the credit crunch.

So let’s get back to how we can use credit to put more borrowed money into the hands of the banks. What could go wrong?

In this final installment, we’ll look at the back end credit card processing. We’ve already covered how we collect orders from customers via the store front and shopping cart.

Payment Gateway

As I mentioned previously, think about the Payment Gateway as the virtual equivalent of the Point of Sale device at your local retail store. It gets the order information from your shopping cart and confirms the good standing of the credit card. If the Payment Gateway is happy, the order is processed and you’ll get your money. If the order is rejected, then you’ll get a failure notice and the user will be told that their order has been rejected.

Don’t worry – all that user interaction is managed by the shopping cart software behind the scenes. You just need to tell the shopping cart which Payment Gateway you are using along with your Payment Gateway account number.

Gotcha Warning – You need to make sure that the Payment Gateway you use is compatible with the Shopping Cart you want to use. My recommendation here is to pick the Shopping Cart first and then figure out what Payment Gateways it supports.

What are the factors in choosing a Payment Gateway? Here, I believe, size matters. When we chose ours, we picked the most established Payment Gateway supported by the shopping cart because that would mean the least risk that the integration with would ever break. The reality is that whenever you connect two pieces of technology, a change on either end often breaks that integration. By picking the biggest Payment Gateway, the risk that something goes wrong with the connection to the shopping cart is minimized (the prospect of all those angry customers ensures that a lot of diligence is taken in making sure nothing ever breaks).

We picked Authorize.net – one of the biggest in the business. In general, most of the big Payment Gateway companies have similar features – most of which we don’t use. One thing to note that is if you also process telephone orders, you’ll want to make sure your Payment Gateway has a “virtual terminal” which allows you enter order information directly into the Payment Gateway via your computer (instead of having to call it in yourself – a pain).

If you are doing physical orders, you have two choices: use the “virtual terminal” per above or get a Point-of-Sale terminal. For the sake of brevity (err… at least not so much longevity) I’ll ignore the latter.

Gotcha for “foreigners” – something thing to watch for you international operators (ex. Canadians selling in the $US), is that multi-currency operation is a large pain in the neck! Most Payment Gateways (especially not affordable ones) only operate in one currency. Authorize.net, for example, only operates in $US. That means, for us, all our prices are in $US and everyone’s cards are charged in $US.

There are some higher end Payment Gateways that do support multi-currency, but they are much more expensive and don’t have the same shopping cart support. Another option is to set up separate Payment Gateways – one for $US and one for $Cdn (or other foreign currency). This implies that you need to be able to set up your shopping cart to use multiple Payment Gateways, which many can do.

My recommendation: keep life simple. Pick one currency. We do get customers occasionally complaining but we’ve never lost business because of it…

Merchant Account

A Merchant Account is used to pass the actual money between the card holder’s bank and your bank. They also provide the Payment Gateway with information on the status of the credit card which is used to accept or decline transactions.

A single merchant account is used for Visa and MasterCard. In most cases, a merchant account can be applied for and obtained through your Payment Gateway provider which makes it convenient to get. If you want to use AMEX, then you will need a separate merchant account directly from AMEX (you can go to their web site and apply on-line.

Merchant Account allows you then to receive proceeds from the credit card transaction and have them deposited directly to your bank account.

Gotcha for “foreigners” – If you are doing business outside of the $US, you can only accept $US Amex cards if you have a physical presence (i.e. an office) in the $US. If you don’t, perhaps it’s time to call your buddy down South and ask him for a favour (note – to complete the illusion, spell it f-a-v-o-r). But wait – there’s more! You also need a $US bank account physically in the States for AMEX. We got the help of our banker at RBC to help us open one in Florida through their U.S. subsidiary, Centura. Another reason to bank with RBC – they are great for small business…

Gotcha for “foreigners” – What – another one? Yup. To accept $US from Visa and MasterCard, you need to have a $US currency account. The good news is that it can be physically in your country which is easily done at most banks. To support this, you need to work with a Merchant Account provider in your country, Here in Canada, we chose Paymentech.ca - a subsidiary of Chase.

If you don’t get a Merchant Account from your Payment Gateway provider, make sure you understand the Payment Gateway compatibility requirements. To make a long story short, each Payment Gateway provider supports certain processing platforms and you need to make sure that your Merchant Account provider supports them. Did you head explode? Mine did when going through this ourselves. I just copy and pasted the requirements and emailed it to our Merchant Account provider and asked “OK?”.

Once you’ve done all this, you’re good to go! Although you may be left with the distinct impression that it’s just not worth it…

Last Thoughts

While it does seem complicated, much of the complications arise from multi-country operation.

If you’re in one country, I would simply follow the recommended vendor chain: pick a Shopping Cart. Many of them offer payment gateway and merchant accounts solutions that they resell from others. Take advantage of it. If they don’t, ask the top 2 vendors of each type that they recommend.

If you’re operating internationally, the first decision is if you think you need to operate in multiple currencies. If you can live with just one – do it. Also think about if you need AMEX – it does complicate life but depending on your target market, you’ll need to have it.

You’ll note I really haven’t talked much about price. Shopping Cart pricing varies a fair bit, and that needs to be a factor in your evaluation. For merchant account providers, we found that with just a bit of negotiation, they match each others pricing – although your pricing will be dependent on the specific financial situation of your business. Finally, Payment Gateway pricing seemed to be pretty consistent… I’d also apply my “fire your suppliers” strategy to these vendors as well – just make sure to watch for any “setup” and “disconnect” fees which may make it harder to switch.

In the end, setting this up is a pain, but a necessity. Like it or not, credit cards are the life-blood of most micro businesses.

C.