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Internet Payment Processing

Last Verified: 2006-07-25

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For online retailers looking to add real-time payment processing to their website, the process can often be confusing and time-consuming. This document will endeavour to answer the most frequently asked questions on this topic.

What is online payment processing?

Online payment processing refers to purchasing goods and services over the Internet, typically using a credit card, with the financial transaction processed electronically in real time. The standard path of implementation involves obtaining an online merchant account for a particular credit card from a bank, selecting a payment gateway that will process the credit card information, and integrating your website with this payment gateway. Throughout this document, the terms payment processor and payment gateway will be used interchangeably, though payment processors often imply a direct relationship with a bank or financial institution.

There are numerous variations on this model, such as a single company providing all financial services. As with other aspects of business, we suggest leveraging your existing relationships first. If you have dealt with a particular bank for years approach them with your online requirements, as they may offer attractive rates or streamline the startup process. Just keep in mind that their way is not the only way, and to investigate alternatives.

How difficult is it to implement online payment processing in my website?

If you have an existing website currently displaying your products, incorporating online processing may not be too difficult or costly. Every online processor has different requirements for their merchants, but in general, you need to add a "buy" button to your product or order page that will direct buyers to the payment processor. This buy button will send information about you as a merchant and particulars of the order to the payment processor.

The actual purchasing process will either occur within the environment of the payment gateway or within your website if your payment gateway just acts as a true virtual Point-Of-Sale device. We highly recommend that first-time merchants use a payment gateway that will handle most or all of the buyer’s purchasing process for you. This way you need not be concerned about providing a secure environment for buyers to transmit and later store their credit card information; and it is much easier to implement rapidly.

What is an online merchant account, and how do I get one?

Online merchant accounts refer to standard merchant credit card accounts with the ability to accept online orders. Banks may refer to these as "Card Not Present" transactions, and may call the merchant account an Internet Merchant Number, Merchant ID, and so on. Due to the perceived risk involved with online purchasing, banks require that merchants use only accounts that are approved for online processing. Even if you have an existing merchant account for your "physical" store, banks will usually require you get a separate online merchant account. Other than being marked internally at the bank as an online merchant account, they are essentially the same as standard credit card merchant accounts.

Obtaining an online merchant account is where many new businesses encounter the greatest challenge in providing online payment processing. Banks will request your company’s financial records for several previous years, and still require you to post a bond as a guarantee against loss from fraud and nonpayment. New businesses obviously do not have a financial history, so banks will demand a thorough business plan with financial forecasts and assess your personal credit worthiness. If you are thinking that it is going to be near impossible for you to ever get a merchant account, keep reading as we will be exploring alternatives to this model.

Can I offer methods of payment other than credit cards?

In Canada, most people are familiar with using debit cards through the Interac network to make purchases against their personal bank accounts, and expect to be able to do this online. Some payment processors allow people to provide bank accounts for use with online purchases, but this is still not the same as using a debit card in the real world. While credit and debit cards physically look the same, there are major differences between them that have made the banks slow to offer online debit purchases (specifically, the way your PIN encrypts the information stored on your card, and how data must be transmitted over the network). Until the logistics involved are worked out, don’t expect debit cards to be offered as an online method of payment anytime soon.

Should I get an American merchant account for U.S. customers?

Cards issued by the company with which you have a merchant account are valid from anywhere, so a merchant account from a Canadian bank in Canadian funds will suffice for accepting foreign orders. With foreign purchases, the buyer incurs the cost of any exchange rates, as the transaction will settle in Canadian dollars.

Many Canadian banks offer U.S. Dollar merchant accounts. The benefit to having a U.S. Dollar merchant account is that you can provide your American customers with the ability to purchase without worrying about exchange rates. While there is a definite marketing advantage to this, you should carefully weigh the benefits against additional bank charges before applying for a U.S. Dollar merchant account.

I can’t get an online merchant account. What now?

There are numerous benefits to having your own merchant account, but often the banks make it extremely difficult for you to get one. Fortunately, there are other ways of engaging in online payment processing. A common solution is to employ the services of a payment gateway that provides a "master" merchant account for many companies to use. Master merchant accounts will handle all of the credit card transactions for all clients of the payment gateway, as the payment gateway has put up a substantial bond to the credit card processor to guarantee the sales through the processor. The upfront cost in time and money is much less than when you obtain your own merchant account, but expect to pay higher fees per transaction than you normally would. Another important downside is that all buyers will see the name of the master merchant as the seller on their credit card statements, which could lead to confusion.

A nice middle ground between using your own online merchant account or a master merchant account is being offered by some companies such as PSiGate (www.psigate.com) and InternetSecure (www.internetsecure.com). In this model, the payment gateway will obtain a merchant account on your behalf from the bank they do business with; thus, you will have an account in your name. The restriction is usually that this merchant account, while in your business’ name, cannot be transferred to another service, forcing you to use only them as your payment processor.

What is PayPal?

Arising from the popularity of eBay online auctions, PayPal (www.paypal.com) is quickly becoming the dominant force in online transaction processing. PayPal originally started as a peer-to-peer money transfer system for eBay auctions, but has now expanded for use as a payment processor for any website. Features that have made PayPal attractive to millions of users include: acting as a master merchant for credit card processing; no cost to establishing "seller" accounts; relatively easy to integrate into a website; and has very competitive transaction rates.

This low cost of entry into e-commerce has made PayPal a very popular and well-known solution for payment processing. Leveraging the PayPal name on your e-commerce website can lend credibility to your online activities, which is critical when attracting customers that may be hesitant to purchase online. Recently, PayPal lifted its requirement for buyers to have a PayPal account, thus removing another barrier to new customers that may not have understood or desired to open a PayPal account just to make a purchase.

To get started with PayPal, all that is required is a bank account for them to deposit funds received from customers. You do not require any online merchant account to receive payment via credit card, and PayPal also allows buyers to use bank accounts for payments besides the major credit cards. Furthermore, PayPal provides limited fraud protection for both buyers and sellers, pending certain criteria are met. With all of these features, it should be clear why PayPal is becoming the choice for businesses looking to test the e-commerce waters.

What are chargebacks, and how can I prevent fraud in general?

Chargebacks are debits by your bank against your merchant credit card account due to errors in the transaction, or more often, due to a buyer contesting the charges on their credit card. Chargebacks occur in real-world transactions, but the anonymity of the Internet and lack of the cardholder being present with a required signature makes online retailers more susceptible to having the bank issue a chargeback against them. The process for disputing chargebacks is specific to each bank, but in general, you will be required to prove every step of the sales process in a timely manner.

Suggestions on how to avoid chargebacks are also valid for reducing online fraud in general. Understand what existing technical measures are already in place to reduce fraud by your payment gateway. Retain and require documentation for every stage of the sale. Respond to your customers in a timely fashion. Require human intervention for suspicious orders, such as to foreign countries, PO boxes, and orders over a certain amount of money. Consider using a shipper that can provide you with a signature for proof of delivery. Finally, find out if your payment processor provides some sort of seller fraud protection, and follow their guidelines.

Recently, Visa and MasterCard have each launched initiatives that aim to improve consumer confidence in online retailing. "Verified By Visa" and "MasterCard SecureCode" are programs that require cardholders to enter a PIN that confirms that you are the cardholder. This PIN is meant to simulate having the cardholder sign the transaction, thus reducing your exposure to potential disputes. Check with your payment gateway to see if they support either of these services.

Summary

Online payment processing, while having been around for over a decade now, can still be a daunting task for businesses to implement into their online activities. The major Canadian banks are often slow to embrace new technologies, so we must look to third parties to lead the way. Placing your trust in these third-party gateways can be difficult, and few standards have emerged making the requirements for online processing different from gateway to gateway. The successful payment gateways recognize the difficulties for new online retailers and try to remove any barriers for you. The rise of PayPal and others as a low-risk, low-cost solution means that you can now investigate this aspect of e-business with a minimal initial expenditure. We hope that we have given you a basic understanding of online payment processing so that you can make more informed decisions on this important aspect of your online venture.

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DISCLAIMER
Information contained in this document is of a general nature only and is not intended to constitute advice for any specific fact situation. Users concerned about the reliability of the information should consult directly with the source, or seek legal counsel.

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Last Modified: 2007-01-23

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