3RD PARTY PAYMENT PROCESSORS

Why would you choose to use a 3rd party payment processor rather than a merchant account? Well, there are two fundamental reasons: lack of availability and economic viability. In addition 3^rd party providers also offer a number of features not provided in a standard merchant account.

Merchant Account Availability & Economically Viability

Although establishing a merchant account is much easier nowadays, there will still be situations where a merchant account either cannot be obtained or where it costs too much to setup and operate.

Often, circumstances will dictate that a merchant account cannot be obtained, in which case the only option is to use a 3rd party provider.

Common reasons for the lack of availability of a merchant account facility include:

Not being a registered business

Generally, individuals are not permitted to process credit cards-- including using a merchant account-- for personal use. All of the major credit card providers require merchant account applicants to be registered businesses.

Personal credit liability

Personal credit can become a key issue, particularly for new companies, because the banks will factor in the ability of the business’s principals and fund providers to support the company. If you have a poor credit rating or are financially stretched, the bank may see this as a risk and either decline your merchant account application or, alternatively, apply higher than usual charges to offset the risk.

High risk products and environment

Because fraud is a greater problem with online payments, it is generally more difficult for an organization to obtain a merchant account to deal with its online payments. Also certain products will be seen as more risky than others, particularly higher priced items.

Black listing

The credit card industry uses a list, known as the “Match File” or “Terminated Merchant File”, to effectively banish organizations that have somehow fallen foul of the system. This is commonly known as getting “black listed”. It’s important to do everything you can to keep your name off this list, and if you somehow do end up on the list, to try and rectify the cause of the issue and get off it as quickly as possible.

Technical complexity

Not all companies that wish to accept payment over the Internet will necessarily have the know-how or desire to implement a merchant account facility.

Additional Features of 3rd Party Providers

Apart from the cost elements of a merchant account, it may be advantageous to opt for a 3rd party provider because it supports specific aspects of your business. You may find processes that will help to generate business and increase your profits. These include:

• Product specialization
• Distribution support
• International support
• Affiliate opportunities
• Reselling opportunities
• Acceptance of high risk content
• Additional product marketing (Directory Marketing)

When considering using a 3rd party provider be aware of the following:

• High risk businesses are considered
• No credit checking is performed
• Rates are fixed and cannot be negotiated
• Customer statements will show the 3rd party provider’s details and not the merchant. This is a common cause of chargebacks by customers not recognizing what a payment was for.
• Separate payment gateways cannot be used
• There are no cancellation penalties should you decide to leave the provider
• Funds will generally take longer to arrive

Justifying Setup of a Merchant Account

One of the first questions you should ask is “Is there sufficient business to warrant the establishment of a dedicated merchant account OR should I use a third party payment processor?"

A third party payment processor has its own merchant account and payment gateway that other individuals and companies are allowed to use. Bear in mind that if you opt for a third party payment processor, there will always be the option of progressing to a merchant account as your business grows. As a rule of thumb therefore, if you are just starting out, it is advisable to stay with a 3rd party payment processor until your sales reach about $1000 per month consistently. Then you can safely switch to a merchant account. The downside is that you will need to make alterations to your website and will incur a certain amount of down time while the change is being implemented.

If you are simply looking to incorporate a 3rd party payment facility, compare the following costs, one provider against another.

Discount Rate

Also known as the “swiped rate”, the discount rate is a fixed percentage of the sale price. Whereas, for merchant accounts, the range of discount rates is small (typically between 2% and 4%), those applying to the 3rd party providers can vary enormously, anywhere from 2.9% (Paypal) all the way up to 32% (BTClickandBuy).

Tiers

Several third party processors have complex multi-tier pricing structures. PayPal, for example, has 4 payment options tiers. This means that if you want to know what rates you will pay, you must estimate your monthly sales volume and average product price and then determine which tier you fit within. From there, the monthly costs can be calculated accordingly.

Rate Floor

The rate floor is the lowest possible revised percentage of the sale price a provider will offer. It is effectively a special discount offered for high volumes of sales. Many 3rd party providers, particularly those with high discount rates, use these incentives to attract business.

Item Minimum Discount

The minimum charge that can apply per transaction. This is only used by a handful of the 3rd party providers.

Transaction Fee

A fixed amount charged per transaction. For merchant accounts, rates usually fall between $0.20 and $0.40, with providers sometimes bundling the fee with the discount rate. For 3rd party providers, rates start at around $0.20 and can climb as high as $5.00!, again, with some providers bundling the fee with the discount rate.

Batch Fee

A fee charged to close out all of the transactions for a day. This applies where the mode of payment is not immediate but instead stored to transact overnight. Batch fees are not normally used by the 3rd party providers, who deal instead with real-time transactions.

Monthly Minimum

The monthly minimum is the lowest amount the supplier will charge for their services each month. Where the normal discount rate and transaction fees do not reach the monthly minimum, the client makes up the difference. Most 3rd party providers do not enforce a monthly minimum charge. For merchant accounts, the monthly minimum is sometimes waived, but will normally be $25 or less.

Gateway Access Fee

Monthly charge paid to the secure payment gateway provider such as VeriSign or Authorize.net. For merchant accounts, the cost is between $0 and $25. For 3rd party processors, it is usually included as a free service.

Statement Fee

This fee represents the cost of each monthly transaction statement sent out. For merchant accounts, the fee typically ranges from $0 to $15. For 3rd party processors, it ranges from $0 to $49 (InstaBill) with some providers offering it as a free service.

Annual Fee

An additional annual fee of between $20 and $350 charged by a handful of the 3rd party providers.

Setup Fee

Sometimes there will be no setup fee as is the case with PayPal. However, it is common to charge a set up fee with many providers charging between $30 and $750, depending upon the client’s requirements.

Most merchant accounts include some kind of one-time application or setup fee ranging from $0 to $100.

Payment Cycle

All providers pay out at least once per month with many paying bi-monthly and some even paying weekly.

Language

All providers are able to transact business using English, but there are also a number that will accommodate other languages. For example, MultiCards supports Italian, Spanish, Dutch, French, German, Russian and English.

Other Considerations When Looking for a Payment Processor

It is recommended that you also consider the following before proceeding with a particular 3rd party provider:

Restricted products

Does your product or service stand at odds with the 3rd party provider’s restricted product list? If it does, then consider using another provider – or risk having your account frozen/closed.

Currencies

What currencies are your customers most likely to use? If the majority of your customers do not buy in US Dollars, consider a provider that allows for your customers’ native currencies in order to minimize the impact of exchange rates and associated costs.

Note that this also has a beneficial effect on sales, as some customers may be put off by being forced to spend in a “foreign” currency.

Payment Types

What forms of payment are accepted and how well do they fit with your customer base? If you’re expected, for example, to receive e-checks in addition to credit card payments, then ensure that your provider includes that facility.

Also, if you are expecting many customers with a preference for paying with less common credit cards such as JCB, then choose a provider that supports that credit card. Again, being able to easily accommodate your customers will have a beneficial affect on sales.

Aspects of 3rd party providers that can help generate business

Apart from the cost elements of a merchant account, it may be advantageous to opt for a 3rd party provider because it supports aspects of your business and its processes that will help to generate business and increase profits. Your choice may depend on one or a number of the following:

Product Specialization

3rd party providers are sometimes very particular about the products they allow and restrict. You can usually find a list of which products 3rd parties have restricted. When setting up an account with one of these providers, you must take these restricted products into consideration. Failing to pay attention to such details could result in a freeze on your account.

These 3rd parties also list products which are illegal, such as pornographic, gambling, and pharmaceutical products. Higher risk products like these cost more money for credit cards to insure and will cost too much for many parties to allow.

You may wish to work with a processor that is focused on what you are selling. If you sell soft goods for example, you’ll probably want to use a processors that emphasizes digital goods. Depending on the nature of your product, you may even need to invest in a high-risk content specialist.

Digital specialists are divided into three sub-categories:

1. Software specialists
2. Other media and information content that is not high risk
3. High risk content including membership services

Software specialists include DigitalCandle, Reg.net, RegNow, RegSoft, Share*It, SWREG and V-Share. Their emphasis is on registration and maintenance of software. They will provide you with directories that organize your products according to their content, and make them available for browsing and purchase online. Additionally, these specialists can offer support for affiliates who sell your products.

Some non-software digital specialists who will not accept content deemed to be high-risk are BTClick&Buy, ClickBank, DigiBuy, Kagi and Pay-Line. These companies supply your business with download services, marketing support, informational content, membership services, directory listings, shareware registration services, and services that provide membership access to your site. While some of these will also deal with high-risk content it’s an exception rather than the rule.

High-risk specialists include iBill, InstaBill, Jettis, Moneybookers, Process54, Verotel, and VolPay. Due to the fact that their supported products are software-based, the classification of these specialists is not always clear. What is common is that they all handle content that is deemed to be high-risk. Some companies, such as Moneybookers, offer a variety of lower-risk products as well.

Affero, another processor, specializes in accepting donations for non-profit organizations and other causes. In addition, there are generic processors (discussed below) which can also be set up to accept donations.

Non-Specialized Content Processors

The following third party processors do not specialize in any specific product genre. They include, but are not limited to: 2CheckOut, CCAvenue, CCNow, FastPay, iKobo, ImagineNation, Kagi, Moneybookers, MultiCards, MyPaySystems, NoChex, PayMate, PayPal, ProPay, StormPay and Yahoo! PayDirect.

Even though I classify these processors as non-specialized, they can still be identified uniquely from the different product they choose to restrict, the amount and degree of processing costs, how much support they have in the international community, which country they are based out of, how much support they have when marketing products, and opportunities provided for affiliates.

Companies can update or make modifications to these types of lists at any time. As these lists are mere categories for the type of product that is restricted, they usually provide links to more in depth descriptions of what is and is not acceptable business practice. Different processors generate different lists, so it’s suggested you spend considerable time ensuring that your products are not prohibited.

In the worst-case scenario, if your product cannot be sold legally by any of these third parties, you’ll have to invest in a content specialist. Of course, if you’re selling illegal goods, it’s highly unlikely any processor will accept your products.

International Trade

There are many third party processors that are based outside of the United States. Some of these are BTClick&Buy (UK), CCAvenue (India), FastPay (UK), Moneybookers (UK), NoChex (UK), PayMate (Australia) and VolPay (UK). Some of these only operate locally, while many (such as PayMate) will conduct international business.

Within the United States, several processors exist that will conduct trade internationally. These include 2CheckOut, DigitalCandle, iBill, iKobo, InstaBill, Kagi, MultiCards, PartyKey, Pay-Line, PayPal, Share*It, SWREG, V-Share, Verotel and VolPay.

If your company is conducting business internationally, it is extremely important that your processor supports trade in multiple currencies. Though it seems illogical, some processors do conduct trade in countries where they do not accept the national currency. You should also look into support for multiple languages as necessary. Your customers must be able to understand what they’re buying and how to navigate checkout! Make sure your processor supports international trade, as well as all relevant currencies and languages.

Affiliate Opportunities

You can raise additional revenue for your business by taking advantage of affiliate opportunities. About half of 3rd party processors offer an affiliate program. It’s up to you to decide if it’s right for your business to invest in one.

Although organizations such as ClickBank call themselves “Online Retailers”, they are not true shopping malls and are unlikely to attract very many ordinary “paying” customers. Although products can be purchased there, these aren’t really places where a business would expect to sell large volumes of their products.

Organisations like ClickBank make their money by including a 3rd party payment processor as part of the deal. The “carrot” is their convenience, in that merchants and affiliates are able to find one another more easily. However, whenever a sale is made, be it directly via the merchant or as directed by an affiliate, the payment will attract a transaction fee. For ClickBank that fee is $1.00 + 7.5% of the sale price of the goods involved.

These “Online Retailers” are clearly not cheap and are a whole lot more expensive than pure-play 3rd party payment processors such as PayPal. If you’re just looking for a payment processor, these so called “Online Retailers” are an expensive choice!

Other 3rd party payment providers that offer good affiliate marketing opportunities include:

iKobo

iKobo has a 10-tier affiliate program in which you receive 5% of fees paid by your clients when utilizing an iKobo account with their own business. You will also collect payments from these clients for as long as they continue to sell merchandise using this account.

StormPay

StormPay is another multi-tiered affiliate program. As a 7-tier structure, this program earns 2.5% of the fees paid for every down line level. Like iKobo, you receive residual payments for as long as the customer uses this account. The fact that StormPay underwrites higher chargeback ratios than its competitors is an added benefit.

Shopping Malls

An online shopping mall is a step up from the Online Retailers or, to be more precise, is a layer that sits on top of one or more Online Retailers. Remembering that an online retailer like ClickBank is really just a merchant/affiliate meeting place combined with a third party payment processor, an Online Shopping Mall provides search facilities and an otherwise palatable shopping experience for customers shopping for products sold through an online retailer.

CBMall (short for ClickBank Mall) is a good example. With CBMall, anyone with a website can place a choice of ClickBank product search dialogs on their site and generate affiliate commissions from ClickBank product purchases that are initiated from these searches.

In a similar vein, affiliates who are in search of products to sell are advised to take a look at services such as CB Engine. This is the premier search engine for comparing products and their affiliate earnings and potential from the ClickBank directory.

PayPal

The best known 3rd party payment processor is, of course, PayPal. It is both a method of payment for customers that have a PayPal account AND a 3rd party payment processor that is able to accept payments made using credit cards, debit cards, eChecks and, of course, PayPal customer accounts.

PayPal is free to use, free to join and now services over 40 countries. Its original concept was the ability to pay anyone with an email address. Much maligned by the banking fraternity in its early days, Paypal has earned its position by reacting quickly to a gap in the market and evolving to suit the needs of its customers. For eBay, Paypal solved a huge problem by allowing its customers to accept online payments. Before that, checks and postal orders were the order of the day slowing down business and eating into profits.

Paypal was founded in 1999 as a Dot Com startup, using venture capital to offer a $10 bounty for every new member referred. With this approach, it quickly grew its customer base to over a million people and, after various attempts to develop its own online payment solution, was acquired by eBay in mid 2002 for $1.5 Billion.

Unfortunately, its fast rise to fame came a variety of problems and issues, the end result being that a significant number of people have a distinct dislike and aversion to using PayPal. This is evidenced by a number of web sites that describe various issues and “horror stories” users of PayPal have had. These websites include:

• No Paypal (www.paypalsucks.com)
• Paypal Sucks (www.paypalsucks.org)
• About Paypal (www.aboutpaypal.org)
• Paypal Warning (www.paypalwarning.com)

It’s important to view these sites with the understanding that, in their own way, these are money earning web sites. Yes, there have certainly been issues with Paypal, as indeed there have been with many of the other 3rd party payment providers. But at the same time, they clearly fill a gap in the market and are, by and large, providing a very worthwhile service.

The potential problems that sometimes occur are indeed a good reason for opting for a merchant account as soon as this option becomes economically viable. In a Merchant Account, funds are deposited directly into your personal or business bank account and are protected by government regulations. However, companies such as PayPal are not bound by such regulations. None of these companies are banks and can (and do) freeze their client accounts at their own discretion. Unfortunately, there is little or nothing that can be done by merchants in response. If you’re serious about your business, work towards using a merchant account to accept credit cards, and bypass PayPal and other similar companies.

As a credit card processor, PayPal stands between you and the processing bank, profiting from the discount rate, which is the difference between their charge to you and what they are charged by the bank. PayPal's rates are influenced by chargeback rates. The more chargebacks, the higher rate they pay, resulting in lower profits for PayPal. Processing up to $50 million per day, it's not hard to see how even an increase in chargebacks of 1% could make a huge difference. In fact, it works out to over $18 million per year in losses. That's why PayPal reserves the right not to fight chargebacks, in an effort to maintain a low discount rate. Unfortunately, the seller is the one who loses in the end.

No studies have been completed to verify its significance, but it seems logical that allowing your customers the option to pay via PayPal or another non-PayPal method is a valid approach to safeguarding against account freezing or closure.

Google Checkout

Google Checkout is a credit card information storage facility that allows customers to make payments online without having to re-enter their credit card and other personal details for each purchase. It’s a secure system that takes the leg work out of paying online. Unlike PayPal, it is NOT a full blown money processing service. For example, it does NOT allow the storage of funds, transfer of money and deposit and withdrawal of funds to and from a bank account as is provided by PayPal.

The key and unique advantage of Google Checkout, is its collaboration with Google Adwords. An additional shopping cart graphic is appended to search ads which, in turn, increases click through rates and, over time, results in advertisers paying less to get the same ranking for their ads.

Alternatively, advertisers will get more ads with better placement for the money they are spending. Either way, this seemingly small difference has the potential to make a significant difference to a merchant or affiliate's profit margin.

Google clearly took a long hard look before entering the payments market and has provided a facility that offers the following:

• Shopping via a single sign-on
• Only having to enter credit card information once at setup
• Product showcasing
• Feedback for vendors on the responses of customers to Google Adword campaigns

Although Google has a long way to go to catch up with the likes of PayPal, these features are clear differentiators that will stand them in good stead. It’s also clear from their literature that Google are taking a very proactive stand when it comes to chargebacks and, in so doing, may become even more attractive to merchants, many of whom may have had bad experiences with chargebacks and in their treatment by the other providers.

The Product Showcasing aspect of the venture is certainly one of the more interesting aspects of Google’s offering and is being watched intently.

The early indications are that Google Checkout is already starting to have an impact on the online payments market and is ironically attracting business in a similar way to that used by PayPal when it first grabbed the lion's share of the online payments market several years ago.

When it come to Google and Google Checkout – Keep watching this space!