ePayments are an important part of doing business electronically - the 'consideration' for the goods and services supplied.
Receiving epayments incurs extra costs with the retailer paying a commission to the financial institution processing the card details. Additionally there will be operating costs for the payment system used to process the cards.
ePayments systems are often costly to develop, challenging to carry out and sometimes technically difficult to understand. The hurdles represent a ‘barrier to entry’ which, if overcome, can give your organisation an effective competitive and collaborative edge.
There are several approaches to taking epayments. Some of them can co-exist with others and some are mutually exclusive.
Data encryption and PCI DSS
Credit cards are the most popular means of making epayments, especially over the Internet. Since it is now estimated that Identity theft now costs the UK economy around £1 billion per year, encrypt transaction data in any payment solution.
You also need to find out about PCI DSS - the Payment Card Industry Data Security Standard which serves some way to combat this increasing threat to online security, trust and confidence. Our article What is PCI compliance? deals with PCI DSS.
1. Traditional card payments
Traditional card (credit, debit or pay-as-you-go cards) payments take place offline and need you to have a Merchant Service and PDQ machine from your acquiring bank.
Merchant service: this is the generic term for the service provided by banks that allow you to ‘swipe’ credit and debit cards at your place of business. PDQ (process data quickly) machine: this generic term for the machine used to ‘swipe’ a credit or debit card. Once you have ‘swiped’ the card, the customer’s details are passed to an acquiring bank for processing. The acquiring bank checks the details of the card and authorizes the transaction. The acquiring bank is the bank that provides your merchant service
10 Basic Set-up Steps for card payment
- Apply to a bank for a merchant service
- Negotiate the costs
- On acceptance, pay the set-up costs
- Receive and install a PDQ machine
- ‘Swipe’ the customer’s card to collect their credit or debit card details
- Wait while the card details are passed to the acquiring bank for approval
- Ask the customer to sign the sales voucher
- Verify the signature and process the payment
- A transaction charge is automatically paid to the bank
- The customer leaves with the goods or service
2. Mail order
Mail order payments by phone, post or fax are more at risk of fraud. Acquiring banks ask for more commission to carry out these customer not present transactions.
Mail order payments involve more risks for banks and financial institutions than transactions where the customer is present at the point of sale.
Consequently, acquiring banks usually ask for more commission per transaction (perhaps 3.1% instead of 2.79%) and a more detailed agreement on the fraud checks you use. With proper planning, your mail order operation should be able to get a customer not present merchant service from your bank without difficulty. If you already have an offline service negotiate with your bank to avoid paying another set up charge.
3. Online payments
Internet Merchant Services and PSPs
When taking online Payments you need an Internet Merchant Service and a Payment Service Provider (PSP) to collect card details over the Internet. A Payment Service Provider acts like a virtual PDQ machine. Your bank will carry out thorough credit checks and will charge you for this service. The more transactions you make, the less it will cost you.
An acquiring bank is a high street bank that offers credit and debit card processing services. They acquire the money from the customer, process the transaction and credit your account. You need to apply for a merchant service if you want a bank to handle your Electronic payments.
Merchant Services fall into three categories:
- Standard Merchant Service for use in shops when the customer is present;
- Mail-order Merchant Service for customer not present transactions when the customer orders remotely by phone or post / fax;
- Internet Merchant Service for transactions generated over the World Wide Web.
Obtaining an Internet Merchant Service from an Acquiring Bank is quicker and easier if you already have “offline” card processing facilities set up with the bank. In this case, just ask your bank for an extra Internet Merchant Service ID for use exclusively with Internet transactions. This process is normally quick, especially if the risk to your business does not change. If you have no prior card processing the bank will carry out a thorough credit check (lasting anything up to 8 weeks).
The delay can make it worthwhile using a payment bureau that can be upgraded when the Acquiring Bank application is ready –or when you feel your Internet turnover justifies the slightly higher fixed costs of an Acquiring Bank. Alternatively you could look at Post Paid Account services, some of which remove the need for an Internet Merchant Service ID.
When you get multiple merchant numbers for both online and offline, you may need to pay separate set up fees and rent a PDQ swipe machine for customer present transactions. The acquiring bank could charge around £25 per month for this rental. If you are getting a combination of these services negotiate the costs with your provider as they may only charge one set-up fee.
Your choice of PSP will depend on its cost and compatibility with your chosen e-commerce software solution. A fixed monthly fee starts around £10, but there are some cheaper option available starting as low as £0.05 per transaction. Usually, the higher your transaction volume the cheaper the rate you will be charged.
4. Acquiring banks
Acquiring banks form an part of taking Electronic payments. The Acquiring bank provides that merchant service that allows you to take card payments via the web or traditional PDQ machine. Acquiring services tend to be offered by the UK banks as an extra service that runs along a suite of other services offered by the bank concerned. The banks look on the merchant acquiring service that they sell as one revenue stream of many.
For instance, a low rate for taking card payments may show that your bank is generating revenues from you in other respects – a loan interest would be an example. Rates for card processing are for this reason, highly variable and should be considered along all your other banking charges. Furthermore, because of complex rules governing the way acquiring banks assess risk (of allowing different businesses to take cards) it is difficult for the online payments tool to model or predict exactly what the costs might be.
5. Online payment bureaux
A payment bureau is the easiest way of taking payments online as they do all the work for you. Bureaux accept most type of business and have a simple application process. However, they take 30-60 days to clear merchant’s funds and charge more for their service.
A Payment Bureau like Worldpay or Netbanx is a one-stop solution collecting and processing the card details on behalf of the business without requiring an Internet Merchant Service with an Acquiring Bank or a separate PSP to be set up. Their simple application process makes bureau services a popular choice for online payments and an ideal solution for a SMEs first step into e-commerce.
A bureau collects funds via credit or debit cards using ITS OWN acquiring service. The bureau collects money for multiple retailers to make the trading volumes necessary to make the service profitable. Bureaux in the UK will generally accept most types of business with a business bank account and an address that confirms the identity of the business.
A bureau reduces the risk of accepting almost any type of business through one principal mechanism - the bureau holds the collected funds for 30 -60 days (settlement period) in the initial period of accepting a business. There is a cost to this in terms of cash flow to your business and possibly interest charges.
6. Secure online transactions
Although they cost less, online order forms can be time-consuming and problematic for customers. Ensure that your online order form is secure by using a secure server to email customer information, an offline PDQ machine or shopping cart software. An order form is a simple page on your site that the customer fills in with details of themselves and the goods they want to buy. There is no automation and the fields in the forms are sent to you as an e-mail and do not use a PSP.
As a very basic method of taking orders through your online catalogue this can be very manual and labour intensive. An automatic ‘buy product’ button can take the user to the order form page where product details are already filled in but customers who want to buy separate products need new forms for each one and it soon becomes clear that a simple shopping cart product is more effective.
A simple form is NOT a secure way of collecting card details. To be secure you, the Merchant, must use a secure order form, which uses a secure server to email the customer’s credit card information.
BACS (Bankers Automated Clearing Services) is ideal for making regular automated payments to repeat customers, helping those who are making more than 150 monthly payments to manage cash flow and reducing human error.
This payment method is ideally suited to business-to-business (b2b) transactions with regular or repeat customers. It is already used to pay over 70 per cent of salaries of the UK workforce. BACS payments are usually processed as batches using dedicated software linked in with the banks system. Currently these payments can be facilitated directly through a business bank via a “file” of transactions or via dedicated software that links to the bank account making the payment.
At the enterprise level, BACS can be integrated with an e-commerce b2b purchasing system to allow automated settlement of accounts between organizations.
As the BACS process is electronic, it removes the need to write cheques, which can be a costly process, subject to human error. Payments can be made much later in a business day, up to 9pm and are cleared within two business days to any bank account.
The payment method is suitable for customers who are making more than 150 monthly payments.
8. Alternative payment methods
Other ways of taking payment online include person-to-person, mobile commerce, pre-paid cash card and micro-billing payment solutions.
These payment services can stand alone but mostly exist alongside a mature PSP/Acquiring solution to give customers extra choice, offering substantial benefits to the customer. They may be worth considering if the other bureaux or PSP are not an option.
Consumers set up an account using their bank account details and the person-to-person solution will then allow eligible merchants to debit this account directly. This payment is common on auction sites but can be used as a general entry-level payment solution.
Mobile Commerce allows a sale that has been conducted over the Internet to be confirmed by sending an SMS to the customer's mobile phone. The customer will normally need to set-up an account to do this but once they receive the SMS they can then accept or decline the sale that will (on acceptance) be charged to their bank account or mobile phone bill. There is also a growing market in ‘drop-charges’ to mobile phones where the call cost is charged at a premium to recover transaction costs.
Prepaid cash card
These cards can be ‘charged’ by the consumer using cash, credit / debit cards or direct debit from a bank account and then used at participating websites and high street stores. Commonly used when an e-cash environment is required for children without credit-cards but also useful for small transaction amounts (even down to a few pence) where the minimum credit card transaction charges would disproportionately affect the profit in the sale.
These payment solutions offer a premium telephone number billing service that is essentially pay per view Internet content hosted in a private area of the web. Customers pay for this content via their Internet Service Provider (ISP) or their phone bill. Charges are typically high for this service and it is really only suitable for niche content areas.
Credit cards are the most popular means of payment, especially over the Internet. Make sure in any payment solution that the details are encrypted. It is now estimated that Identity theft now costs the UK economy around £1 billion per year, and to some extent, the banks are to blame for this figure by forcing electronic payment systems onto SMEs.