Choosing your Payment Service Provider

Making payments using a debit or credit card is something that we all take for granted. These days, most high street stores allow you to pay by card as well as cash or cheque and the transaction completes in seconds. The same is true online, where electronic payment using a card is pretty much the only option.

Given the obvious benefits that electronic payments offer to banks, merchants and consumers, you might expect it to be easy to acquire the ability to receive payments in this way. However, you would be wrong. In fact, the banks are actually quite fussy about who they provide these services to and at times appear to do their best to turn people away.

They have good reason to be cautious. Every year, hundreds of millions of pounds are lost due to credit and debit card fraud. By giving us mere mortals the ability to transact payments electronically on behalf of our customers, banks put themselves at risk from all kinds of scammers and money launderers.

For that reason, the first thing to understand when deciding how you are going to take payments online is this: that the service you use, how much you pay and the time it takes to set it up will all depend on the age of your company and its track record. In a nutshell, the better established and more profitable your business, the quicker and cheaper it’s going to be.

 

Transactional basics

Before looking in detail at various online payment services, let’s first get to grips with some transaction basics. In the UK, debit and credit card transactions are facilitated by “acquiring banks”, which are responsible for moving money between the accounts of those involved in any credit and debit card transaction.

As you would expect, all of the high street banks – Barclays, Lloyds TSB, HSBC and The Royal Bank of Scotland – are “acquirers”. In order to receive credit and debit card payments directly, you need to have a “merchant account” with one of these acquirers. And if you want to take orders on the Internet then you need to make sure the acquirer is aware of this and that the contract they ask you to sign permits it.

If you already have a merchant account that you use for non-Internet business, don’t assume that you can use it to process Internet transactions. Some contracts specifically prohibit the processing of online transactions, so check the small print first. In the past it has been known for acquirers to insist you use different merchant accounts for online and offline payments.

If your bank refuses to grant you “merchant status”, don’t get too downhearted – it’s not the end of the road. One online alternative is to use a “bureau service” from a payment service provider (PSP). Such bureau services enable you to trade using the PSP’s merchant account.

Because PSPs charge a higher rate than the banks and hold on to the cash for anything between 2 and 6 weeks, their risk is lower than the banks’ and this means they can be less fussy about who they allow to transact payments. Consequently, they are more often used by Internet start-ups. However don’t assume that lower risk translates to lower cost, in fact you can expect transaction charges to be higher.

If using a bureau doesn’t appeal then the final option is the PayPal system. Paypal is best known for its email payment system used on eBay, but now enables merchants to accept credit and debit card payments as well. PayPal is actually the World’s third largest transaction company (only behind VISA and MasterCard), so they are a pretty good option. In fact, there is research that suggests that having PayPal as a second payment option can increase your sales.

 

Enabling online payments

If you are fortunate enough to have or be given a merchant account, then you do have some choices about how you go about processing transactions. Some merchant accounts permit the processing of web store payments offline, using the kind of machine you typically find in a retail store (often referred to as a “PDQ” machine).

The banks generally discourage offline processing, because of the increased risk of fraud. To process transactions offline you need to capture and store the cardholder’s name, card number, expiry date and security code (the number printed on the signature strip). Although it’s hard for criminals to intercept these in transmission from Web site to office (as they are encrypted) it is often easy for employees to get hold of them. Card conditions state that the security code must not be stored on a computer.

According to one of my own customers, Mike Hughes of www.firsttackle.co.uk, the benefits of processing transactions online make it a no-brainer. “You get instant checking of customer details including address, postcode, and security code. Also, you need to take fewer security precautions for card details. This avoids cost and complexity and external auditing of security measures taken.” Hughes says. “Furthermore, you get fewer errors from typos, i.e. reading or entering card details incorrectly.”

 

Selecting a PSP

If you are persuaded by Mike Hughes’ arguments and choose to process payments online, then you will need to choose a PSP to work with. The only alternative is to write your own interface into your bank’s systems which is prohibitive for everyone but the largest companies. If you’re anything like me then the price might be the deciding factor. Unfortunately though, it’s a bit more complicated than that.

Currently, there is no single standard that defines how PSPs link their transaction processing services to ecommerce software packages. This means that your choice of ecommerce will almost certainly have some influence on the your choice of PSP. To give you an idea of the scale of the problem, Actinic v8 (my company’s latest offering) supports 16 payment service providers and there are more under development. Typically, buying an off-the-shelf ecommerce solution will give you the most choice, but you still need to check which PSPs are supported. Not all solutions are well appointed in this area and you may be asked to pay development costs if your PSP of choice is not currently integrated.

When looking for a PSP, the first step for many is to talk to their acquiring bank. Ironically, this is not always straightforward. Despite being around for more than 10 years, ecommerce and online payment systems are still specialised services, and so it’s hard to find people with a good understanding of the technology at a local level. The best solution is usually to contact the banck using their own online service. The people who support these services are usually better able to handle ecommerce queries.

Once you are armed with a list of PSPs whose services are compatible with your current, or intended, ecommerce software solution, you can start to look at prices. Like all smart service companies, PSPs do their best to make like-for-like price comparisons quite difficult.

If you have your own merchant account, then the costs will fall into two categories. There will be the acquirers transaction charge, which could be anything from 1.5% to 3.5% (and sometimes higher) of the transaction value and the charge levied by the PSP for enabling the payment. Unless you have a fairly significant business, there is probably not much you can do to reduce the bank’s fee (although it is worth a try from time to time). However, you may find the PSP more negotiable, as it is a fairly competitive industry.

PSP fees are typically levied in one of two ways. You either pay a percentage of each transaction, sometimes accompanied by a small annual or monthly standing charge, or you pay a larger annual or monthly standing charge and a low fixed cost per transaction. In the latter case, you may also be asked to buy a number of transactions up front.

My understanding is that people with lower transaction volumes find it more cost effective to pay a percentage per transaction and businesses with higher numbers of transactions or higher ticket values prefer to pay the higher monthly fee and fixed cost per transaction. However, there is a health warning. It is almost impossible to generalise about this. You need to do the maths yourself based on your own expectations of transaction volume and margins. Better still use an online service such as http://www.electronic-payments.co.uk that will do the comparison for you.

If you are using a bureau service or PayPal then you will have to use the payment service and there is only one charge to worry about. Bureau fees can be as high as 10% because they take on the acquirer’s risk and they can also hang onto your cash for several weeks (remember to factor this into your cash flow calculations). PayPal charge at rates that start at around 5% per transaction.

 

Fraud control and other benefits

Finally, another method PSPs use to differentiate themselves is to offer added-value services alongside their transactional facilities. These might include some kind of fraud risk assessment (based on some heuristic algorithm) or even fraud insurance.

Fraud is a big issue for merchants, because ultimately it’s merchants who pay the price. In the offline world the advent of Chip and PIN has reportedly already reduced fraud significantly. The banks are hoping that the online equivalent, sometimes referred to as “3D Secure” or “Verified by VISA”, will do the same.

Like Chip and Pin, 3D Secure adds another level of authentication to the transaction process, but demanding the entry of a password rather than a PIN. The benefit of this is that if merchants can convince their customers to register and use 3D Secure, then the acquiring bank will indemnify them against fraud.

It is possible to write a book about payment services and I am sure someone is doing it right now. Hopefully, this short article will help to get you going. I only have room for two more pieces of advice. The first is don’t let all the talk about security and fraud put you off, there are plenty of honest customers out there to do business with. Secondly, don’t be intimidated by the technology, if you have the smarts to build even a modest business, you are more than capable of selecting a PSP.

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