Ace In the Hole

By SmallBusinessComputing Staff | Posted July 01, 2001
by Tom DiNome

Pattie Sbardella could barely afford to keep her own Web site. She started Pattie's Patch, a fruit, vegetable, and gift shop in Hampton, N.Y., about nine years ago and launched www.pattiespatch.com in 1999. "My Web site was costing me more than $200 a month," she says. "I was ending up more and more in debt."

In addition to paying $80 monthly to a hosting company, Sbardella had a series of fees to pay including those for her Internet merchant account. Even with the discount rate (between 2 and 3 percent) which is a percentage of revenue from online transactions, fees can increase if a merchant draws a higher-than-average percentage of charge-backs (charges disputed by customers). Sbardella's discount rate was nearly 4 percent and her merchant account bank charged monthly fees whether she had orders or not.

Credit cards rank as one of the most popular forms of online payment (according to research firm Cyber Dialogue, nearly 88 percent of consumers pay with plastic). Clearly, a business that doesn't offer this option finds itself at a disadvantage. To accept credit cards, however, business owners typically must apply for a second Internet merchant account, separate from the account they use to accept and process credit card transactions in stores.

In the past few years, a number of online payment services have sprung up that not only handle payment processing, but also give customers a variety of alternative payment methods, including checks or debit cards. These services typically offer lower transaction fees and processing costs, no setup expenses, an easier application process, and fraud protection.

Glance At The Numbers
Just starting up a site can require a large investment. Unless the site's volume is steady, the additional and often substantial fees and costs associated with an online merchant account, can put e-commerce financially out of reach for many small businesses.

Costs vary depending on the bank or organization but account setup costs are generally a few hundred dollars. Per transaction fees, which merchants pay their providers, range between 20 and 40 cents. Then there are fees for address verification, reporting, and any equipment or software involved.

Compared to what online merchant accounts can cost, many of the growing crop of online payment services can provide cheaper options. PayPal, for instance, offers what it terms a "blended" rate of 2.2 percent plus 30 cents per transaction received by businesses, with no set up or application costs. Another service, Verza, rolls most of the fees traditionally associated with online merchant accounts into a 4.9 percent rate plus a $1 transaction fee.

For many businesses, large or small, online merchant accounts still make the most sense, if they have high volume and average transaction amounts. For example, if a merchant sells items for higher amounts, say $50 or more, then turning over 3 percent of that sale to an account provider isn't as much of a bite. But for a smaller business selling items for $10 or $20, the discount rate can seriously eat into profits.

This difference appealed to Sbardella, who has since dropped her merchant account and now uses Verza to handle payments. Visitors to her site click the Verza button when they're ready to pay, and they're taken to a Verza link to complete the transaction, this is the common procedure when using these services.

"I was at the point where I was going to have to give up my Web site," she says. "Verza doesn't charge me anything, unless I have an order. Then they take their part as my merchant account [provider], which any bank is going to do."

Security Blanket
Another reason businesses are turning to alternatives is that many banks, wary of online fraud, aren't jumping at the chance to offer merchant accounts for Internet businesses. "The Canadian Bankers Association's official word on online commerce is that it is no more prone to fraud than any other type of commerce," says James Whittall, president of www.menessentials.com, a men's cosmetic and skin care site based in Aylmer, Quebec.

"Yet we went to these banks, and the first thing they asked us for was a $100,000 bond [$63,000 U.S.] and the vital organ of our choice. The explanation for why it was so outrageously overpriced was because Internet commerce is more prone to fraud. It became apparent very quickly that we were not going to get an Internet merchant account, which of course throws a huge wrench in the works, especially if you want to offer sales 24-hours a day, with real-time credit-card transaction processing."

Whittall turned to InternetSecure for his credit-card processing. For a $500 start-up fee, the company now accepts MasterCard, Visa, American Express, and Discover for $24.95 a month plus a discount rate of 2 to 3 percent, depending on the card. InternetSecure holds 10 percent of Whittall's sales each month in case there are any charge-backs, and that money is placed back into his account at the end of the month.

Unlike brick-and-mortar merchants, who are protected from the brunt of fraud costs because they collect a physical signature on every transaction, online retailers bear the full responsibility for fraudulent charges. Therefore, the safeguards that these online payment services offer are attractive to many. Most online payment services feature some level of fraud-protection, typically in the form of verification of a buyer's address.

Get paid Fast
With online merchant accounts, it can take nearly a week from the time a card is verified until the money is deposited in a merchant's account. With most online payment services, the process is much faster. Bob Coon, who runs Ruth's Place, a gifts and collectibles shop in Alexandria, La., with his wife, got started in e-commerce selling on eBay. Customers would win bids, then mail him cash, checks, or money orders. "I still accept them, but you have an inherent delay, because people have to send me their payments," he says. "With PayPal, I get paid instantly. I have actually completed sales and been paid in less than 30 minutes."

One night, Coon received an e-mail from a woman who wanted to buy a set of cookware. "I quoted her a price and she went to PayPal and paid me," Coon says. "All that happened in less than 15 minutes. In the past, I would have had to wait to get her check or money order or to have the credit card processed. With PayPal, I don't have to. The deed is done."

Credit Comfort
Alternative payment services may be cheaper and offer greater security, but businesses aren't ready to give up their merchant accounts entirely. Bob Butler believes paying for both is worth the additional fees. Owner of Xtreme Sports LLC, an authorized XFL merchandiser, he offers direct credit-card payments through an online merchant account in addition to PayPal.

"Online consumers have become more knowledgeable in matters of security and online fraud, but they still want the convenience they are accustomed to for making purchases as if they were in a regular retail store," Butler says. "We originally only offered the PayPal option, but our customers requested additional payment methods."

"Consumers know that if you accept credit-card payments directly, then you must be recognized by financial institutions, banks, and lenders as an established business," adds Butler. For the time being, there's no one solution to please both businesses and consumers. But, stay tuned, things are always changing.

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