Online Payment Processing Options for Small Businesses

This post comes from good friends of mine who recently designed, manufactured, and are now marketing an educational board game that helps children learn to read. In prior posts about how to start a business, they shared their experiences from the early stages of their entrepreneurial adventure to develop Er-u-di-tion, an educational sight words game that jump-starts the road to reading. In this and subsequent posts they will share more experiences and provide some tips and tools to help you bring your idea to fruition.

When selling a product or service on-line, you will need a method of collecting payment. On-line entrepreneurs have a number of options, each with pros and cons when selecting a payment acceptance method. In this post we will share how we analyzed our options and what we learned from the process.

One method of accepting payment is to only accept cash or checks. This is by far the simplest approach and may work well for locally based service providers. By accepting only cash or checks, business owners avoid both fixed and variable fees charged by 3rd party services. Accepting checks is also an option when selling products on-line, but if it is your exclusive payment option, you will likely lose sales to potential customers that prefer paying with credit cards or Pay Pal.

If you decide to offer your customers the ability to pay with credit cards, your analysis becomes more complex. Personally, we were somewhat overwhelmed when we began to sort through our credit card processing options. One of the first things we learned is that two elements are required when processing credit cards on-line:

  1. Internet merchant account and payment gateway (both of these services are often offered by the same provider), and
  2. Shopping cart software and SSL certificate.

Most service providers charge a fixed monthly fee for these components. Some also charge a variable monthly fee if transaction volumes falls below certain thresholds. In addition to monthly fees, credit card processing companies charge transaction fees that generally range between 2 and 4 percent. The exact percentage depends on the service provider as well as the type of credit card your customer uses. There are generally three credit card categories (ranked from lowest to highest fee):

  • Qualified rates – credit cards issued to individuals,
  • Midqualified rates – represents debit cards, and
  • Nonqualified rates – represent business and government cards where no personal name is attached to the card (given the riskiness this rate is the highest).

Many small businesses new to the on-line world choose PayPal – and for good reason. It is easy and more affordable if the number of payment transactions is low. When using the “no fixed cost” Pay Pal method, the payment gateway and shopping cart are included in one bundled package for free; all costs are calculated at the transaction level.

While Pay Pal’s fee per transaction is a little higher than other payment processing services, there are not fixed fees or minimum transaction level penalties. Pay Pal is also a recognizable name that most potential buyers know and trust. Even if customers do not have an existing Pay Pal account, they can still pay using a major credit card. In addition, Pay Pal’s integration into your website is simple. If you are a start-up or expect relatively small transaction volume, Pay Pal is probably your best option. Once volume increases you can upgrade within Pay Pal or switch to another processor.

Even though Pay Pal is the best option for many small on-line businesses, it has some shortcomings. Pay Pal requires you to submit requests each time you transfer money from your Pay Pal account to your business checking or savings account (credit card processing services generally deposit your funds directly into a specified checking or savings account). Pay Pal also does not integrate directly with many accounting software packages, which means a more manual accounting process. Pay Pal’s basic package does not have a virtual terminal, which means you will not have the ability to accept credit cards over the phone.

Another way to approach your internet business is to obtain the internet merchant account from one vendor and the shopping cart from another. One benefit to this approach is that you can accept credit cards via telephone or at point of sale. Most shopping cart vendors also allow you to customize the secure check out process so that while visitors are directed to a secure third party site, it has the look and feel of your website. This method has fixed costs as well as variable. The fixed cost hover around $70. The variable transactions fees are slightly lower than Pay Pal’s, but still are slightly over 2 percent.

Originally, the Pay Pal shortcomings caused us to choose separate gateway and shopping cart providers. We were willing to pay higher fees to integrate with our accounting system and deposit funds directly into our account. However, after paying an extra $75 per month for a few months, we chose to go with Pay Pal and save these monthly fees and spend an extra hour per month addressing Pay Pal’s more manual aspects.

Denise and Kelly Bossard formed Acumen Associates, LLC to develop and market educational games. Visit their website to learn more about Er-u-di-tion and an assortment of sight word games.

Topics: online business

4 Responses to “Online Payment Processing Options for Small Businesses”

  1. Interesting post, but it seems to end abruptly and not really provide much information of value. While the author mentions payment gateways, merchant accounts and ssl certificates…

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