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Online Payment Basics
When did payments via the Internet first begin?
The Internet has been used as a vehicle for the payment of goods and services online since the mid 1980s, but only really took off in the 1990s when more online commercial applications and services began showing up.
Who used these services and what were the key components?
To begin with, paying online over the Internet was available only to businesses that had a specialized Merchant Account. This was designed principally to accept credit cards but would also normally allow the processing of other card types such as debit and gift cards.
To allow an online payment to take place a Payment Gateway was used. This hooks into both the customer’s account (credit, debit, etc.) and the merchant’s account. It verifies information, transfers requests and authorizes payments in real time. The Payment Gateway is equivalent to the physical POS (point of sale) terminals that you see at checkouts in retail stores.
Merchant Accounts and Payment Gateways remain at the heart of all online payments that are made, even today. Whether you are using some kind of 3rd party provider such as PayPal or have set up your own merchant facilities, and whether you are physically aware of them or not, to accept payments online over the Internet these components are always there, one way or another.
Some of the better known Payment Gateway providers include:
· Plug ‘n Pay
I understand that credit card payments are not the only type of payments processed online these days. What other payment types are accepted?
In the beginning, only credit cards were accepted for online payments. Now, the following (and more) are accepted:
· Credit Cards
· Debit Cards
It’s important to note that, in this context, PayPal is a special type of account from which money can be taken to pay for goods and services. The owner of the PayPal account deposits funds into the account and is then able to pay for goods and services using that account assuming of course that the seller accepts PayPal payments. PayPal began as a payment medium through which purchasers on eBay, who did not have credit cards, could deposit and then spend funds. Students unable to obtain a credit card are a good example. It is a measure of the success of PayPal that it is now considered a payment method in its own right and is so widely supported.
Bear in mind that the use of online payment facilities does not preclude other more traditional forms of payment such as paper checks and postal orders. Many older people continue to function solely in an offline world and there are also countries, Nigeria for example, where credit card fraud is a growing problem, from which it would be unwise to accept an online payment. Payment via the more traditional means should therefore continue to be made available.
How does a Payment Gateway ensure the security of information used in the payment process?
To process payment transactions securely, we have to transmit the information involved, both between the customer and your website and between your website and the customer and merchant accounts, in a manner that makes the data difficult for hackers to intercept and read.
SSL (Secure Socket Layer) Certificates take care of this. Certificates work through a combination of programs and encryption/decryption routines that exist on the web hosting computer and in browser programs like Internet Explorer and Netscape.
Some of the better known SSL Certificate providers include:
How are small businesses and individuals who don’t have a merchant account able to accept online payments?
Although establishing a merchant account is easier nowadays, there are situations where a merchant account either cannot be obtained or where it costs too much to setup and operate. An alternative is to use a 3rd party payment processor such as PayPal.
A third party payment processor has its own merchant account and payment gateway that it allows other individuals and companies to use. Virtually anyone can sign up and use these facilities. The third party processor makes its money by taking a slice of each transaction that’s processed. As your sales increase, a merchant account will generally become the more cost effective solution, so it is quite common for a business to start off using a 3rd party processor and then move to a merchant account and gateway when sale volumes increase. The merchant also has greater protection and control when he operates his own merchant account, whereas the 3rd party payment processors largely operate as a law unto themselves.
The best known 3rd party payment processor is, of course, PayPal. Don’t be confused about 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.
There are many other 3rd party payments processors including 2CheckOut and Google Checkout. Google Checkout has made quite a splash since its introduction in June 2006. Google also offers a payment guarantee and claim that merchants can boost their business using Checkout, because they are more likely to be included in Google AdWords.
What came after these basics? Presumably just using a Payment Gateway and SSL Certificates meant that there was a lot of work still to do to accept online orders?
In the beginning, companies looking to cater for online shopping and payments developed their own order entry facilities and programmed their own integration into the Payment Gateway. As the requirement for mainstream businesses to accept payments online increased, however, there grew a need to provide more sophisticated online order entry facilities with standardized access to Payment Gateways.
Enter the Shopping Cart. For smaller merchants, especially those selling just one or two products, using PayPal or perhaps selling through the likes of ClickBank (see below), where the checkout facility is built in, is the best strategy.
If you’re a merchant who sells a wide variety of products however, your choice of shopping cart is a serious decision that can impact the profitability of your business. For serious online marketers, asking the right questions and being fully informed about software and services is crucial to making the right choice. Think carefully about what functions you require your Shopping Cart to perform, then find out which Shopping Cart best performs those functions and ensures that your customers have the services and features they most need.
Are there any other aspects on Online Payments that can affect product sales?
There are a number of other topics relating to Online Payments that affect a business’s profitability. Security measures included with the payment process, and how well these are conveyed to your customers, can have an effect on whether or not a person decides to buy from you. Many people are suspicious of the Internet and credit cards and need a helping hand to get them over the sales line.
Other customers will be concerned about passing across personal details, that they might be used unscrupulously. Privacy Seals are an ideal method for allaying these fears and winning the buyer over.
What about Chargebacks? Where do they come into this?
Returns and Chargebacks have a direct impact on your business’s profitability. The majority of chargebacks can be eliminated by improvements to your payment process. Payer Authentication, for example, will automatically reduce fraud-related chargebacks by 60% to 70%.
What about affiliates and services such as ClickBank, 2Checkout and PayDotCom?
Another fundamental question that every business needs to ask is whether or not they wish to partner with affiliates to help increase their sales. If you are interested in partnering with affiliates, how do you intend to attract and engage with them?
For individuals and small businesses that have only one or a few digital products to sell, organizations such as ClickBank offer a meeting place for merchants and affiliates to find one another. For a small fee, a merchant is able to list his product(s), indicate a rate of affiliate commission and attract potential affiliates to his website. When an affiliate chooses to help sell your product, a special link is provided to be placed on the affiliate's website, articles and emails, that in turn direct traffic to the merchant’s website. When a sale takes place, the source of the sale is tracked back to the affiliate using identification data in the link. The affiliate then receives his commission.
Unfortunately there are a few nasty traps awaiting the newbie affiliate. It is a sad fact that about a quarter of all affiliate commissions are lost as a result of affiliate link hijacking and bypassing.