Forms of Online Payment
While everyone is aware that there are online payment options other than credit cards, not everyone is aware of the range of other payment vehicles that are available and what effect they can have on the profitability of your business. Put simply, the more payment options you offer your customers, the more likely they will “all” be to buy from you.
The timing of payments can also have an effect. Whether the transaction takes place in real time, is processed overnight (in batch mode), or even at some agreed-upon point in the future, such as when a milestone has been achieved by a service provider, the availability of these payment alternatives can influence the decision to buy.
Many people prefer anonymity when making an online purchase. Although PayPal grew largely out of a need to allow online purchases between one-off merchants and buyers, it also carries with it anonymity, which many buyers view as a personal security device. PayPal is also used by a significant number of people (students for example) who don’t have a credit card with which to make purchases online. So, in most situations, you will also need to allow for the PayPal form of payment.
Not everyone who shops online wants to pay online. Seniors often fit into this boat. Used to paper checks and postal orders, you should make every attempt to accommodate these buyers who have none of the more modern means to pay for your product or service.
The aim of this article is NOT principally to explain all of the ins and outs of the various payment vehicles that are available. The specific details of each payment vehicle and processes involved can be obtained readily from their providers. The intention instead is to make you aware of the selection of payment possibilities and to highlight areas that you should address when using them. This, in turn, will help to increase sales AND, on occasion, will reduce the incidence of chargebacks.
The availability of non real-time payment alternatives can influence the decision to buy and the cost of running your business. If your business doesn’t have a large number of payment transactions, then it may be more cost effective to use online capture of credit cards details (and other payment types) followed by overnight batch updating.
What is meant by "Non-Real-Time” Processing? This occurs when the encrypted credit or check information that goes from the customer to the web site's server, does not make the trip to the Merchant Processor as well. Instead, the customer's information is collected, then held in storage, and later the merchant uses a point of sale terminal or PC to submit the transactions for authorization and capture. It’s then the merchant's responsibility to let the customer know by email, phone or other method that their transaction has been accepted or declined. Following this system means the merchant is essentially acting as his or her own secure payment gateway, because the merchant acts as the link between the Internet transaction and the processing company.
Payment Card Networks, also known simply as Credit Card Networks, are used in the execution of both Credit and Debit Card payments and, until fairly recently, were used almost exclusively for credit cards payments.
There are two types of networks – proprietary and open networks. American Express, China UnionPay, Diners Club, Discover and JCB are all proprietary payment card networks. These companies act as issuer, acquirer and also the network operator. MasterCard and VISA are both open networks. They consist of member banks that in turn are the issuers and acquirers.
The reason for mentioning Payment Card Networks here is to ensure that you are aware of the two lesser known networks – China UnionPay and JCB, whose geographical memberships may or may not be relevant to your business and level of sales. We’ll discuss shortly.
You can expect a difference in approach to chargebacks between the proprietary and open payment networks. The proprietary networks are less inclined to agree to the necessity of giving money back to the customer on application for a chargeback and are more apt to agree with the merchant if he provides a response that makes good rebuttal points to the customer’s complaint.
Finally VISA, MasterCard and JCB all offer their own forms of Payer Authentication that can dramatically reduce the incidence of fraud-related chargebacks.
JCB (Japan Credit Bureau)
Dominant in the Japanese market and now accepted by over 11 million merchants worldwide, JCB agreed to an alliance with Discover in August 2006 that is expected to lead to the acceptance of JCB cards on the Discover network and visa versa.
Also note that JCB has released a programme called J/Secure that uses the same standards as the Visa and MasterCard programs for Payer Authentication. Signing up to J/Secure will virtually eliminate any fraud-based chargebacks for JCB payments.
If you intend selling in Japan then not allowing for JCB (Japan Credit Bureau) payments may have a detrimental effect on sales.
Founded in 2002, China UnionPay is an association for the Chinese banking card industry and is the only interbank network and credit card organization in the People’s Republic of China.
China UnionPay credit cards can be used in over twenty countries outside China but are not as widely accepted as the other major providers. The Beijing Olympics were a major test of the effectiveness of China UnionPay as a unified national payment card network.
The Chinese have only recently begun to warm to the idea of credit cards, even though they rank second only to the U.S. in card issuance. 827 million cards had been issued to China's 1.3 billion population as of March 2005, with 10 million of those being credit cards and the rest debit cards which remained unused.
The Chinese have a culture of saving, so the low incidence of credit card usage is understandable. However, the Beijing Olympics certainly had an effect and it can expected that at least debit card payments made through China UnionPay will become much more common in the future.
If you intend selling online to the Chinese, you should seriously consider incorporating China UnionPay as one of your payment facilities.
Credit cards are far and away the most commonly used form of Internet payment. For most online businesses, unless there is something very unusual about your product or service (such as a high ticket price), then you simply must allow for this form of payment.
Credit cards are a form of unsecured credit. Although the concept of credit cards began in the 1920’s, the first general purpose credit card was introduced by Diners Club in 1950. The next major card was American Express in 1958. Then came the banking system credit cards starting with Visa (originally known as BankAmericard) and Mastercard (formerly Master Charge). Discover Card, introduced by Sears in 1985, is another very popular US based card with over 50 million cardholders.
The list of providers doesn’t stop with these, of course. For MasterCard and VISA there is an extraordinary amount of competition between the banks, each with their own particular MasterCard and Visa card offerings.
What are the advantages of accepting credit cards online?
Perhaps this is stating the obvious, but apart from the convenience that applies to virtually all forms of online payments, a key advantage of credit card acceptance is that they allow merchants to sell to consumers based on credit or “future income”. This is an advantage over and above debit cards and checks, where funds must already be available in the consumer’s bank account before the transaction will be accepted.
Allowing for the receipt of credit card payments will help to create an air of respectability about you and your business. Put differently, if you don’t accept credit cards, a negative impression or “small” and “unprofessional” image might be conveyed.
What are the disadvantages of accepting credit cards online and what can you do about them?
Chargebacks are the scourge of the credit card payment world. As a business, you believe you’ve made a sale only to find that the payment is going to be reversed through a chargeback, sometimes months after the initial transaction occurred.
Apart from the added charges imposed by the credit card provider, which can cost you anywhere from $10 to $50 or more per chargeback, chargebacks cost valuable time. For every chargeback, there’s a significant amount of processing involved. Whether you win or lose the dispute, you face lost time and a considerable amount of hassle. Chargebacks are to be avoided!
Note that the incidence of fraud-related chargebacks can be greatly reduced through payer authentication.
Buyer Suspicion and security concerns
Many users, particularly those who are older or new to the Internet, will think twice before passing over their personal details including their email address and especially credit cards. They are wary of fraud and read stories about how others have had their Credit card details copied and used without authorization. These are reasons for them NOT to buy.
You can help to overcome this by providing assurance of the security of the transaction through advisory text on your website
Obtaining certification for your website and displaying both a security seal and privacy seal prominently on the website will also inspire confidence.
Credit cards cost more to accept than other forms of online payment. Typically, they cost about twice as much as checks and as much as 5 times more than debit cards. If you’re using your own merchant account, it will usually be possible to negotiate for a reduction of fees such as the discount rate.
Debit cards, also known as check cards, are becoming an increasingly popular method of payment for buyers over the Internet. Buyers save money by making payments from their bank account rather than using credit.
Some of the better known Debit cards include:
Owned by MasterCard, Maestro has re-branded a number of formerly well known brands including Switch and Laser. There has been a major advertising campaign touting Maestro as “The New Cash.”
A sister brand to Maestro targeted at the under 18s and owned by MasterCard
Formerly known as Delta and the direct competitor to MasterCard’s Maestro
A sister brand to Visa Debit and targeted at the under 18s. The direct competitor to MasterCard’s Solo.
In some countries where the criteria for obtaining credit cards is more stringent, Solo and Visa Electron are becoming popular due to more relaxed entry requirements and reduced costs.
What are the advantages of accepting debit cards online?
There is a flat fee for each debit card transaction unlike credit cards where there is typically a 'per transaction' fee plus a percentage of the sale value. Also, you won’t ever be charged any of the additional fees that sometimes apply to credit cards for higher risk transactions.
Providing customers with this additional payment mode can sometimes make the difference between making and losing a sale. If you’re competing aggressively, then you’ll want to provide at least what your competitors do, otherwise some of your business is likely to go across to them.
Providing the debit card payment option can be especially relevant in places where using credit is not considered socially acceptable. This is the case in China, where of the approximately 1,000 million payments cards issued to date, the majority are debit cards. Less than 20 million are credit cards.
What are the disadvantages of accepting debit cards online and what can you do about them?
Because of the increased risks with debit cards, issuers place daily limits on the amount that can be spent using the debit card from its associated account. The daily limit can sometimes be as low as a few hundred dollars. This clearly limits what a customer is able to purchase online at any one time. It’s also possible that, having already made some payments using the card, its ability to be used for further payments, including products from your website will have been extinguished later in the day.
All is not lost however. If there are insufficient funds, or the limit has already been exceeded, then you can direct the buyer to a different payment form. Alternatively depending on the size of the payment, suggest to the customer to phone his/her provider and request a daily spending limit upgrade. This can apply for a limited time period (that day, for example) or even for a specific transaction and all it will usually take is a simple phone call from your customer. It’s worth mentioning this because it may result in a sale that might otherwise have been lost.
As with Credit cards, Debit cards can attract chargebacks. The same rules apply including the techniques described earlier for Credit card chargebacks.
Most of the real-time payment gateway providers such as VeriSign and Authorize.Net can process electronic checks, commonly known as e-Checks. An e-Check is an electronic version of a paper check normally entered via an online form.
e-Checks are one of the fastest growing forms of online payment.
It’s possible for merchants to pay for Check Verification and Check Guarantee services to speed up and safeguard the receipt of check funds. For cost and details, you will need to contact your provider.
What are the advantages of accepting checks in this way?
The no Credit Card generation
This payment method is becoming a popular alternative for customers who don’t have credit and debit cards and wish to continue using checks.
Checks via Online Form, Phone, Fax and E-mail
This form of payment allows you to accept check payments via an online order form, the phone, fax or email. You gather the details of the paper check from the buyer, enter these into a special check creation program and then re-print the check. Then simply deposit this at your local bank branch as if it were the original check.
The technology for gathering the data and creating checks can be obtained using software such as :
· Checkmatic Software Products
· Checks by Fax
What are the advantages of accepting checks in this way?
The no Credit Card generation
This payment method is about as close as you’re going to come to allowing check payments the traditional way without having to wait for a “check in the post” and will appeal to consumers who are used to paying by check, particularly those who aren’t very computer literate.
What are the disadvantages of accepting checks in this way?
Processing payments in this way is labor intensive and there’s also the act of having to physically deposit the check once it’s been created
Because this is a check, it needs to be cleared in the usual way before receipt of funds can be confirmed. It means that your customer won’t get his product at the time of purchase. For this reason, this form of payment should be considered a supplementary, as opposed to replacement, option.
If you intend selling products via eBay, then you’ll no doubt offer payment by PayPal. PayPal is ideally suited to an auction-based environment but should always be offered as an additional payment method no matter what is being sold. It’s popular (and also unpopular) for a variety of reasons and will allow for purchases by people who don’t have a credit card. PayPal is also an ideal medium through which to receive international payments.
PayPal offers several levels of service to merchants including a shopping cart that allows customers to buy several products with a single payment.
Another payment option worth considering is Google Checkout. It only arrived in July 2006, but Google is making every effort to help it grab hold.
If you’re a service provider, there may be times when you go out on a limb financially by relying on your customer to pay for services within a reasonable time period after accepting and completing a piece of work. Contracts are usually involved with this type of service, but the man with money invariably has the whip hand and there’s never an iron clad guarantee you’ll be paid, even though you’re in the right.
Occasionally the buyer’s situation will change in the midst of a project, or even after project completion, but before payment has been received. Again, you may not get paid even though you’ve fulfilled your part of the bargain and are contractually in the right.
An Escrow service is an ideal way for dealing with these situations. It acts as a middleman, ensuring that the buyer is satisfied with the work that’s been done and the provider gets paid his due. It can also be used for high priced products and in auction type situations.
For larger projects, it’s common to put in place milestones and for payments to be made per milestone.
For further information on how to set up an escrow payment acceptance service, see www.escrow.com
Digital Cash is a form of online currency that replaces traditional money and uses an encrypted serial number to transfer money into your designated account.
The customer is able to spend money with merchants who are tied in with the digital cash provider. A customer can use a credit card or personal or business checking account to add funds to the digital cash account.
People like digital cash because of its security. Customers don’t have to carry cash or even use a credit card or check to purchase goods and services. As you can imagine, for the customer this is an excellent way to avoid fraud. However, digital cash transactions are not without a downside. The first problem is its limited acceptance. Because it is a new form of payment, very few merchants currently accept it. Of course, as this payment method gains popularity, that issue will no doubt resolve itself, as merchants jump at the chance to provide one more secure payment method for Internet-wary customers. The list of digital cash providers includes:
· Cash Cards Intl. - products and services worldwide can be sold without worries about chargebacks. Collect money, deposit money and perform other necessary functions from almost any worldwide ATM .
· eCharge - Offers eCharge Net and eCharge Phone accounts.
· RocketCash - Another popular digital cash provider
· InternetDollar - Another form of e-currency that allows making online purchases.
· E-Gold - 100% gold-backed E-Money .
· Pocket Pass - Make Internet purchases through selected online merchants and even doubles as a prepaid phone card!
· Micropayments (e-Wallet)
As the world of e-commerce matures, more payment methods will be created to meet growing demand. Consider a scenario where a music provider sells access to music for only pennies. Sound odd? Sure, because even with credit cards, purchasing goods or services for pennies is too much of a hassle. Enter the concept of micropayments.
Micropayments are not new, but have only recently begun to be accepted by merchants. Generally, micropayments are used to process very small transaction amounts ranging from just a few cents up to $10 US.
In terms of the average credit card transaction, a small transaction in this range might cost the merchant more than the cost of the goods or services, so it’s easy to see why the idea hasn’t caught on yet and why most merchants haven’t enabled micropayments on their ecommerce web sites.
Consumers too haven’t yet latched on to the concept of paying just a few pennies for access to music and other content. It may therefore be several years before micropayments are widely accepted, although a quick Internet search does show some ecommerce sites that have added this capability already.
For the progressive merchant, however, processing micropayments is very similar to credit card processing, except the transaction fees are substantially lower. You can expect that charges for micropayments will be added to your ISP (Internet Service Provider) bill.
Even given the newness of micropayments as yet another payment option, it's a viable solution for e-commerce merchants who wish to sell goods and services costing just a few pennies. For example: Music
· Pay-per-play games
· Newspapers, articles, reports, etc
· Small computer programs
· Tickets and postcards
If you're searching for a micropayments provider, try these companies:
· Paystone Micropayment Solutions - Accept micropayments of $0.25 cents or more at an affordable price
. eTelCharge - Adds charges to your phone bill
. eCoin - Token-based micropayments solution
These provide an additional method for obtaining payment where the purchaser is not in a position to buy online but still wishes to make a purchase.
Although the numbers will be relatively small, it all adds up and you might as well have those extra sales. Also, where a potential customer does NOT have the usual online payment facilities (i.e. Credit Card/Debit Card, eCheck or PayPal), he may be more likely to proceed with a purchase, if he can clearly see that the Postal/International Money Order option is available. One approach is to have a button that takes him/her to an “IF YOU PREFER TO PAY USING POSTAL/INTERNATIONAL MONEY ORDER” screen.
In this situation you would not be able to provide the product/service until the paper check had been received and funds cleared and in your account.
Also, paper checks should only be allowed if they are in the correct currency. So in the US you would accept local checks made out in $US. In the UK you would accept local checks made out in £UK etc..
The problem with personal checks is that they sometimes bounce, in which case both the seller and buyer end up paying penalties. And they cost time as well. Therefore, I suggest accepting personal checks for bigger ticket items only, and where you consider the odd hiccup is acceptable. You certainly would not want to do it for low priced items, say for less than $US 100.
Another alternative, where the purchaser can’t pay online and doesn’t have a local check account or the size of the purchase doesn’t justify accepting personal checks, is to allow the customer to pay using one of the following instruments. One way or another, it should be possible to accept payment with a minimum of risk. The only valid reason for not offering these as a potential payment vehicle would be where the purchase size is very low, in which case the cost and inconvenience of the additional payment handling couldn’t be justified or is not cost effective.
Postal Money Order
(Where the seller and purchaser are in the same country)
These are purchased for the amount of money required and are like certified checks except that there’s usually an upper limit that will restrict the size of purchase.
Postal Money orders are a safer option than personal checks, which are drawn from the customer's bank account. However, there has been an increase in the incidence of counterfeit money orders. For this reason, you should cash them with an agent of the issuer e.g. at a post office. In this case, the authenticity of the money order will be determined on the spot and the holder paid and absolved of further responsibility there and then.
International Money Order
(Where the seller and purchaser are in different countries)
This is similar to a Postal Money Order but is used to make payments overseas. They are issued by the buyer’s bank and purchased in the desired required currency. Various forms of identification are usually needed to cash an International Money Order and, for this reason, they are considered to be safer than sending money by post.
(Where the seller and purchaser are in the same country)
A certified check is one for which the bank verifies that sufficient funds exist in the customer’s account and sets aside the specified amount of funds to cover the payment.
(Where the seller and purchaser are in the same country)
Also known as a bank draft, cashier’s check, teller’s check or treasurer’s check. A cashier’s draft is made out to the seller and is issued by the bank in its own name for money paid. It also includes a reference to the purchaser of the check.
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