The factors that help shape choice in the online payment world

There are now many payments types or channels available to both merchants and customers (cash, cheque, credit card, debit card, pre-paid card, direct debit, Internet direct bank transfer, e-wallet transfer etc). However, they all present different advantages and disadvantages, and these may be quite different for a consumer versus a merchant. However, by drawing together a range of international literature about payment systems and how they are used by people and organizations of all kinds, six attributes of payment products appear to be most relevant to the choices that are made of both merchants and their customers alike*. These six factors are:
capability

• cost
• convenience
• coverage
• confidence and
• confidentiality

Let’s look at each of these in a little more detail.
 
Capability

Capability refers to the functional ability to actually use a particular payment type or channel. For example, capability in cash transactions (the oldest and most ubiquitous of payment types) relates to a person or an organization being in a position to hand over a payment (having cash in an acceptable denomination/currency) and then receive the payment (also in an acceptable denomination/currency of course). This becomes a threshold issue in non-cash payments, which often involve technical issues such as the establishment of a means of communicating over distance, ability to verify the parties in a payment transaction, and many other factors.

Cost

All payment systems involve some costs (including cash). Both consumers and merchants are likely to seek to use lower cost payments if they can. This is especially the case if they can readily know what the use of each payment will cost them (sometimes this is transparent and sometimes it is not of course). The cost of a payment is not always spread evenly between the parties. Vendors of payment products will often seek to make some approaches appear to be no-cost or low-cost to the customer-but this may or may not be true. The cost structures of payment methods also differ; some have a fixed transaction charge while others are proportional to the size of the transaction.

Convenience

Convenience refers to the ease of use or “user-friendliness” of a payment method. A need for registration before using the payment method, or the speed of payment (for example, the time taken to approve a payment) can be factors affecting convenience. Consumers generally view cash as convenient to carry for small purchases at the point-of-sale. This means that to be competitive with cash, electronic payments systems have to offer a high level of convenience (hence all the current interest in mobile phone usage for payments). Businesses however typically have a very different perspective on convenience to that of consumers. They are likely to seek payment products and services that fit reasonably well into their broader processes and systems.

Coverage

Coverage refers to how widely a payment method or system is accepted by merchants and other recipients of payments, such as businesses receiving payments from suppliers. An important objective for all payment types and channels is therefore clearly to be widely accessible to merchants, traders, consumers and other users without high-entry or ongoing costs. Similarly, consumers should encounter as few barriers as possible in undertaking transactions using the chosen system.

Confidence

This refers to a customer’s belief that a payment will be successfully executed and completed, and that the value of a payment method will be respected. Confidence rises where arrangements are secure and value does not ‘leak’. The confidence that consumers have in a payment method also depends on the associated payment channel. For example, online payments with credit cards differ from offline payments, in that the card is not physically provided by the customer and the merchant does not obtain a signed confirmation from the customer. Some card schemes provide a system of cardholder authentication, usually through provision of name, credit card number and expiration date. To prevent illegitimate interception, this information is typically encrypted so as to increase levels of confidence in the payment system. 

Confidentiality

As a payment type only cash maintains payer and/or payee confidentiality. Non-cash payments often involve the collection of information that becomes valuable. Users of payment systems are often concerned about the collection and use of this often personal information, and its potential release to other parties, if not properly secured. For example, in general, credit card payments are made via an identifiable account, resulting in the loss of anonymity. This means that some individuals are uncomfortable or unhappy about using payment types or channels which cannot reasonably protect their personal information (and may increase the risk of theft or fraud).

Summary

Payment type or channel choices are complex for both a given consumer or merchant. However, in this article we have described six factors which seem to be most influential in the decision-making process. Although these factors all stand alone, they are not necessarily independent of one another of course. In other words, the boundaries between factors are often blurred of “fuzzy”.

In addition, it is also worth noting that any one of these factors can be primary, depending on a given individual or organizational perspective. For some consumers and/or merchants therefore, cost and convenience may be first and second (with other factors making little difference). However, for other consumers and/or merchants, capability, coverage and confidentiality may all have equal significance, for instance.

 

*The report by the Australian Government called “Exploration of future Electronic Payments” was extremely useful in assembling and describing the factors in more detail.

Will fees for processing online payments disappear completely?

For many years now, banks and other financial intuitions have been generating revenue from transactional fees of one kind or another. In fact, these fees can make up a large proportion of overall revenues and corresponding profits (in some cases constituting up to 50% of all profits in some banks). 

In general, fees fall into two categories-those that are charged to the end customer or the consumer and those that are charged to an organisation or merchant, when it wants to allow payment services to its customers.

Direct Customer fees

Transactional fees categories typically apply only to the customers of a given bank (as the bank has no direct relationship with other consumers) and even then, only when a customer has gone beyond what is deemed to be the core commercial relationship that the bank is prepared to offer at no direct cost. Hence, fees are typically charged to customers when they have overdrawn an account, written a cheque in circumstances where they are insufficient funds to cover it, or perhaps used an Automated teller machine or ATM in another banks’s network.. However, even here, a bank will allow many transactions without fees, if a customer maintains a positive balance (sometimes with a minimum threshold) or commits to regular income being paid in or saved every month. This is because banks worry a lot about customer “churn” and know that fees can often be a “switching factor” if they become too much of an irritant to an account holder (especially now that opening another bank account can be done online very easily in many cases).  The simple logic here is that it is more cost effective and profitable to keep good customers who transact regularly with a bank (and for the most part in the black) for what might be many years, than to risk losing them completely over a fair but nonetheless irritating fee that “pushes them over the edge”.  Even though this results in what might be seen as a better deal for the end consumer, banks still have to find ways to recover their internal transactional costs in some way. For some transactions, such as  bank cheques, wire transfers and transactions involving foreign exchange a customer will be relatively happy to pay (as these are often one off instances). However, these fees will not always cover the costs involved completely and it therefore often falls to the other major category to provide other fees that can cover costs and the bank’s overhead-the merchant.

Merchant fees

Although every individual commercial merchant relationship will be different, depending on a given organisation’s size, type of business, types of services offered etc, banks will typically charge a very wide variety of fees to most merchants.

The most obvious fees charged to merchants (because they have been around for a long time) are for cash and cheque handling. In both cases, these payment transactions are expensive for any financial institution because they involve human intervention and data entry (sometimes carried out multiple times). As with an end consumer, a merchant may be able to bring about lower fees by maintaining a positive balance or “float”. However, it is rare for any merchant these days to be able to operate without an overdraft at least some of the time, so fees in this area need to be monitored carefully.

Outside cash and cheque payments, the majority of fees that are charged by a bank a credit and debit card use fees. Cards are typically issued to a consumer without charge, and with no transaction fees when they are paid off regularly. However, the merchant will be charged for every transaction that a customer makes with a credit and/pr debit card and this may be a very complex affair. In some cases, the fee charged will be a single “aggregate rate” for say credit card use, such as 2.5% of the transaction size. Hence for a £100 consumer purchase, a charge of £2.50 will be made. However, this rate may vary from one transaction to another and this is because the aggregate rate is made up of many sub fees that every merchant needs to know about. Here are just some of the fee types that are typically charged:

The Discount Fee Rate

Credit and debit card companies (Visa and MasterCard being by far the largest of these) have what is called “interchange” rates. They range in price- so in order to make it easier, the merchant providers created three categories.

Qualified Discount Rate – a pre-set or agreed percentage is paid for each pound charged.

Non-Qualified Rate – a fee added to the qualified discount rate in certain transactions. For example, if a merchant does not use an address verification service (AVS) when they manually enter  or take a transaction.

Transaction Fees

This is a specific, flat rate that is paid on every sale processed through the credit card processor. (Sometimes the transaction fee is called the interchange fee, authorization fee, or per inquiry fee).

Address Verification Service (AVS)

Merchant banks charge a small fee for the validation service to ensure that the billing address provided in the online checkout process matches the issuing bank’s records. Not using this service will result in hefty charges on the processing of the card for that sale.

Batch Fees

Merchant banks require that customers close out their transactions a minimum of one time each day. The batch fee pays for expenses for the gateway or software that accesses the credit card processing network. If you don’t have transactions to process, there is no batch fee to pay.

Monthly Statement or Customer Service Fee

Most merchant banks charge a monthly fee in order to cover their monthly costs of operation (paying their customer service team for example).

Monthly Minimum Fee

Many merchant banks providers require a given organisation to process a minimum amounts of sales per month, or they pay a monthly minimum. Monthly minimums tend to range between £15 and £50 per month.

Gateway Fees

There are fees for internet and mail order merchants to use an internet gateway service such as Authorize.net, although some merchant providers will cover this fee on their customer’s behalf as part of the package deal. If you are solely an internet business, you’ll want to look for an internet merchant account that includes the gateway service as part of the package.

Annual Fees

These are often charged by Merchant banks  when free terminal equipment to take payment is offered. There are numerous merchant account providers that do not charge an annual fee, so you may want to shop around if the first few you look at require an annual fee. Sometimes it would be cheaper to purchase the equipment than to pay an ongoing annual fee.

Cancellation/Termination Fees

Most merchant accounts require a contract agreement of one or two years and if you cancel early, you are likely to be charged a termination fee.

Chargeback/Retrieval Fees

When a customer requests a refund (or the customer’s credit card issuer requests a refund), merchant account providers typically charge a “chargeback” fee.