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.

Different ways to pay online

Receiving Electronic payments incurs extra costs. When you pay for a good or service in a shop using a credit or debit card the retailer must pay a commission to the financial institution processing the card details; additionally there will be operating costs for the system used to process the cards. This is the same for non-retail merchants who accept credit or debit cards to pay for their products and services.

These systems are often costly, challenging to implement and sometimes technically difficult to understand. These hurdles represent a ‘barrier to entry’, which, if overcome, can give a merchant the competitive edge. 

Electronic business is real and continues to grow as a medium with over 35% of UK adults in 2012 having used the Internet to order tickets, goods or services.

There are several approaches to taking Electronic payments. These are:

•Traditional Card Payments
•Mail-order
•Online Payments
•Acquiring Banks
•Payment bureaus
•Secure order forms
•BACs
•Alternative payment options
•No payment option

Let’s look at each of these:

Accepting credit card payments

Many businesses can take offline Electronic payments through their credit and debit card facilities. All banks can process these transactions and some will also process Internet based transactions.

To take offline Electronic payments you usually need to apply for the appropriate facility from your bank or other payment processor or provider.

Here are some key electronic payment terms to consider:

•Merchant service: this is the generic term for the service provided by banks that allow you to ‘swipe’ credit and debit cards at your place of business.

•PDQ machine: this generic term for the machine that is used to ‘swipe’ a credit or debit card.

•Acquiring bank: once you have ‘swiped’ the card, the customer’s details are passed to an acquiring bank for processing. The acquiring bank checks the details of the card and authorizes the transaction. The acquiring bank is the bank that provides your merchant service.

Ten steps to setting up offline electronic payment:

1.Apply to a bank for a merchant service.

2.Negotiate the costs.
3.On acceptance, pay the set-up costs.
4.Receive and install a PDQ machine.
5.‘Swipe’ the customer’s card to collect their credit or debit card details.
6.Wait while the card details are passed to the acquiring bank for approval.
7.Ask the customer to sign the sales voucher.
8.Verify the signature and process the payment.
9.A transaction charge is automatically paid to the bank.
10.The customer leaves with the goods or service.

For electronic payment in a shop, the customer is present to sign the sales voucher. If the transaction takes place via the phone or the Internet, the customer is not present so there is an increased fraud risk.

Any merchant service (whether offline or online) is provided at the discretion of the financial institution concerned. There are few set rules as to which businesses can and cannot be approved for a merchant service. Be prepared to negotiate the product at a price that suits your needs. There is information in the Costs and Considerations section to help you with this.

Payments by phone, post or fax

Mail order payments involve more risks for banks and financial institutions than transactions where the customer is present at the point of sale. Consequently, acquiring banks usually ask for more commission per transaction (perhaps 3.1% instead of 2.79%) and a more detailed agreement on the fraud checks you use.

With proper planning, your mail order operation should be able to get a customer not present merchant service from your bank without difficulty. If you already have an offline service negotiate with your bank to avoid paying another set up charge.

The bank will approve each application individually but there are other equally valid options available if you cannot get a merchant service.

Taking online payments

All the electronic payment methods we have examined use an Acquiring Bank and Merchant Service to process the transactions. To take online Electronic payments you need to get a specific Internet Merchant Service and also a Payment Service Provider to collect the card details over the Internet. Let’s review these elements.

An acquiring bank: is a high street bank that offers credit and debit card processing services. They acquire the money from the customer, process the transaction and credit your account. You need to apply for a merchant service if you want a bank to handle your Electronic payments (other options are explored later).

Merchant Services fall into three categories:

1.Standard Merchant Service for use in shops when the customer is present;

2.Mail-order Merchant Service for customer not present transactions when the customer orders remotely by phone or post / fax;
3.Internet Merchant Service for transactions generated over the World Wide Web.

Obtaining an Internet Merchant Service from an Acquiring Bank is quicker and easier if you already have “offline” card processing facilities set up with the bank. In this case, just ask your bank for an additional Internet Merchant Service ID for use exclusively with Internet transactions. This process is normally quick, especially if the risk to your business does not change.

If you have no prior card processing the bank will carry out a thorough credit check (lasting anything up to 8 weeks). The delay can make it worthwhile using a Payment Bureau that can be upgraded when the Acquiring Bank application is ready – or when you feel your Internet turnover justifies the slightly higher fixed costs of an Acquiring Bank. Alternatively you could look at Post Paid Account services, some of which remove the need for an Internet Merchant Service ID.

When you obtain multiple merchant numbers for both online and offline, you may need to pay separate set up fees and rent a PDQ swipe machine for customer present transactions. The acquiring bank could charge around £25 per month for this rental. If you are getting a combination of these services negotiate the costs with your provider as they may only charge one set-up fee.

A Payment Service Provider (PSP): is a “virtual” PDQ swipe card machine that collects the card details over the Internet and passes them to the acquiring bank. To take Electronic payments over the web, you will need a PSP at a small cost. Some acquiring banks offer PSPservices as part of their product and there are other less expensive options available.

Your choice of PSP will depend on its cost and compatibility with your chosen e-commerce software solution. A fixed monthly fee starts around £10, but there are some cheaper option available starting as low as £0.05 per transaction. Usually, the higher your transaction volume the cheaper the rate you will be charged.

Acquiring Banks

As previously mentioned, the Acquiring banks are an essential element of taking Electronic payments. If you wish to take card payments directly you will need to apply for a Merchant Service with an Acquiring Bank.

The Electronic payments tool does not advise you directly about which acquiring banks to use as this is a decision that is determined more by your current banking arrangements than individual price or service differences between providers. Acquiring services tend to be offered by the UK banks as an additional service that runs alongside a suite of other services offered by the bank concerned. The banks look on the merchant acquiring service that they sell as one revenue stream of many.

For instance, a low rate for taking card payments may reflect that your bank is generating revenues from you in other respects – a loan interest would be an example. Rates for card processing are for this reason, highly variable and should be considered alongside all your other banking charges. Furthermore, because of complex rules governing the way acquiring banks assess risk (of allowing different businesses to take cards) it is difficult for the online payments tool to model or predict exactly what the costs might be.

Please click the following link to register for the free to use Electronic payments comparison tool. As the tool can’t be used to predict your exact acquiring costs, we have used a set of assumed values that you can change after you have spoken to your business bank about its likely rates. The typical rates we have used, produced in conjunction with the banking industry are:

Typical Rates

Setup Fee: £200
Monthly fee: £10 
Debit: £0.35 per transaction
Amex: 3.0-4.0%
Diners: 3.0%
MasterCard & Visa: 2.5%
Bond: £1000

You may also find that the following list of Acquiring banks useful in progressing your enquiries, either with your own business bank or with a new provider if your bank cannot satisfy a particular need:

UK providers

•Allied Irish Bank Mechant Services
•Alliance & Leicester
•American Express Merchant Services
•Bank of Scotland
•Barclaycard Merchant Services
•DinersClub
•HSBCi /Global Payments
•Lloyds TSB cardnet
•Royal Bank of Scotland & NatWest Bank
•Ulster Bank

Overseas providers

•euroConex – Euro zone transactions
•Paymentech – US and Canadian transactions

Specific card type resources
•STYLE
•Discover
•Maestro
•Switch
•Visa EU
•MasterCard

A Payment Bureau

A Payment Bureau like Worldpay or Netbanx is a one-stop solution collecting and processing the card details on behalf of the business without requiring an Internet Merchant Service with an Acquiring Bank or a separate PSP to be set up. Their simple application process makes bureau services a popular choice for online payments and an ideal solution for a SMEs first step into e-commerce.

A bureau collects funds via credit or debit cards using ITS OWN acquiring service. The bureau collects money for multiple retailers (tens of thousands of retailers for a large bureau service) to achieve the trading volumes necessary to make the service profitable. The bureaus in the UK will generally accept most types of business with a business bank account and an address that confirms the identity of the business.

A bureau reduces the risk of accepting almost any type of business through one principle mechanism - the bureau holds the collected funds for 30 -60 days (settlement period) in the initial period of accepting a business. There is a cost to this in terms of cash flow to your business and possibly interest charges. You can accurately model these costs using the free online payments comparison tool. as factors such as settlement period and overdraft interest are included in the cost calculations.

As most fraud and refunds occur within the first 30 days after a transaction, this is a very effective means of reducing the exposure of the acquiring service that the bureau uses. In so doing the costs of charge-back recovery are minimized as the bureau can simply refund before the retailer banks the money. Additionally, the bureaus normally charge more for card payments, at least 4% for credit cards and 50pence per transaction for debit cards.

Advantages

•These services will accept most types of business
•Trading record or length of trading will not usually be an issue
•Fast turnaround for applications - a few working days compared to weeks - for a new merchant acquiring applications

Disadvantages

•Merchants’ funds are held for 30 - 60 days
•Transaction charges are higher( 4-8% )

Doing business over the Internet can be daunting but if you enable customers to pay for products online, you can generate actual revenues and make a return on the time and money you have spent developing your website. A bureau service is the simplest way to begin taking payments online.

You can also get the same service from a Post Paid Account provider as they use trusted third parties to bring all elements of the service under one roof. This usually includes all elements of payment management from billing the customer to chasing any late payments.

Secure on-line transactions

An order form is a simple page on your site that the customer fills in with details of themselves and the goods they want to buy. There is no automation and the fields in the forms are sent to you as an e-mail and do not use a PSP.

As a very basic method of taking orders through your online catalogue this can be very manual and labour intensive. An automatic ‘buy product’ button can take the user to the order form page where product details are already filled in but customers who want to buy separate products need new forms for each one and it soon becomes clear that a simple shopping cart product is more effective.

A simple form is NOT a secure way of collecting card details. To be secure you, the Merchant, must use a secure order form, which uses a secure server to email the customer’s credit card information.

Like the code machines used in World War Two, a secure server encrypts the message making it hard for criminals to decipher (and steal) credit card information.

An offline PDQ swipe machine, available for a small cost, will enable you to process the credit card details when you receive them.

 A slightly more advanced option is available by using a shopping cart software product as most carts have the ability to either store credit card numbers securely so you can view them over the Internet or send them securely over e-mail. By making use of an existing merchant account, payments can be processed by using a PDQ swipe card machine or by old-fashioned credit card slip.

Advantages:

•Secure forms require a minimal outlay
•Avoid paying for a Payment Service Provider facility.
•Avoid an extra internet merchant number for online transactions
•Merchants can manually screen orders as they come in and reject risky transactions
•Site superficially appears to be fully credit/debit card enabled

Disadvantages:

•Secure forms have limited use for more than one product on your site.
•Some bank acquiring services disapprove of merchants using an offline merchant number for Internet transactions so the merchant may be in breach of their acquiring bank’s terms and conditions.
•There is no “live” authorization of card details so incorrect details will still appear to have been accepted. Contact (by telephone) may then be necessary.
•Transactions are processed manually - time consuming.

BACS

This payment method is ideally suited to business-to -business (b2b) transactions with regular or repeat customers. It is already used to pay over 70 per cent of salaries of the UK workforce. BACS payments are usually processed as batches using dedicated software linked in with the banks system. Currently these payments can be facilitated directly through a business bank via a “file” of transactions or via dedicated software that links to the bank account making the payment.

The advantages of BACS

1.Regular automated payments

2.Reduces time and cost of administering bulk payments
3.Helps manage cash flow and improve financial control
4.Reduces risk of loss, late payment and theft for customers

At the enterprise level, BACS can be integrated with an e-commerce b2b purchasing system to allow automated settlement of accounts between organizations.

Benefits:

As the BACS process is electronic, it removes the need to write cheques, which can be a costly process, subject to human error. Payments can be made much later in a business day, up to 9pm and are cleared within two business days to any bank account. The payment method is suitable for customers who are making more than 150 monthly payments.

Other Alternatives

There are other ways of taking payments online which can allow payments from customers without credit cards. You can directly compare some of these alternative payment methods by clicking here to register to use the e-payment comparison tool.

These payment services can stand alone in certain cases but mostly exist alongside a mature PSP/Acquiring solution to give customers extra choice. Although less well established, they can offer substantial benefits to the customer. They may be worth considering if the other bureaus or PSP are not an option - risk is assessed differently by these services due to their added security or reduced susceptibility to credit card fraud.

Person-to-Person - consumers set up an account using their bank account details and the person-to-person solution will then allow eligible merchants to debit this account directly when you make a purchase. This form of payment is common on auction sites but can be used as a general entry-level payment solution. more detail...

Mobile Commerce - allows a sale that has been conducted over the internet to be confirmed by sending an SMS to the customers mobile phone. The customer will normally need to set-up an account to do this but once they receive the SMS they can then accept or decline the sale that will (on acceptance) be charged to their bank account or mobile phone bill. There is also a growing market in ‘drop-charges’ to mobile phones where the call cost is charged at a premium to recover transaction costs. more detail...

Pre-paid Cash Card - These cards can be ‘charged’ by the consumer using cash, credit / debit cards or direct debit from a bank account and then used at participating websites and high street stores. Commonly used when an e-cash environment is required for children without credit-cards but also useful for small transaction amounts (even down to a few pence) where the minimum credit card transaction charges would disproportionately affect the profit in the sale.

Micro-billing - Many micro-billing type payment solutions offer a premium telephone number billing service that is essentially pay per view internet content hosted in a private area of the web. Customers pay for this content via their Internet Service Provider (ISP) or their phone bill. Charges are typically high for this service and it is really only suitable for niche content areas.

 
No Payment Option
If you have no online payment mechanism, the customers manually contacts the merchant by phone or mail and refers to the online catalogue to place the order. Although less expensive, this method lacks efficiency, especially if customers want to order multiple products.

The expectations of online shoppers have grown in past years and a flawed system may deter customers from putting their trust in your product. They may feel the system lacks security and may be reluctant to proceed with their purchase.

A phone number for the customer to call is better than nothing, but are you missing sales by failing to offer an electronic payment system to your customers?

You may be surprised to know that you can engage with several online and electronic payment systems for very low or zero fixed costs. These providers charge you a fixed or percentage cost of every transaction with no monthly, annual or set-up fees. You can compare these providers with the providers that charge fees by registering to use the free online payments comparison tool. Please remember that even if a provider charges you no fixed fee, you may still wish to pay an e-commerce agency or web designer to implement the payment solution on your website.