A Guide To Online Payment Processors
This guide to online payment processors is a continuation of our payments series, designed to help you pick the right payment solution for your business.
If you haven't already, make sure you listen to podcast episode 63 on how to come up with your requirements, BEFORE you go looking for a shopping cart.
One of the things you need to understand is how your transaction actually takes place.
As the name implies any payments you make or recieve need to go through a payment processor. This is the plumbing that facilitates the validation of credit card information and the moving of funds from one place to another.
These processors can be, and usually are independent of the payment solution or shopping cart.
A good way to think of it is the real world example of a retail store. If you walk into a store and want to pay with your credit card, they will usually have a little swipe machine behind the counter.
They swipe your card and, you enter your PIN or sign and voila, your payment gets processed. The money comes off your account and gets passed into their account.
The swipe machine exists independent of the actual retail store. If they decide to close that shop and move to another location the swipe machine goes with them. Or conversely if they want to switch banks, they may get a different swipe machine for the same shop.
Translating that to the online world. The swipe machine is your online payment processor and the retail shop is your online shopping cart software.
In many instances, if you wanted to, you could swap out your payment processor and keep exactly the same shopping cart. Or conversely, keep your payment processor and swap out your shopping cart software.
So you can see, picking the right payment processor is pretty important, especially in a subscription model business.
Types Of Online Payment Processors
Payment processors fall into three broad categories
- Merchant accounts through your bank
- Account based payment gateways
- Direct
Merchant accounts
This are issued through your bank. You would need to apply to your bank for a merchant account and have it approved. Then many banks will have their own proprietary payment gateway service you are then allowed to use. The problem with these is that there are so many permutations that often shopping cart makers don't even bother to build integration to these into their platforms.
So check integrations for any bank provided solutions
The upside is that you can often get better transaction rates from your bank than you can through direct online gateways.
Since there are so many variations of this type of gateway, we won't spend much time talking about them.
Account Based
This is where a user will set up an account with a payment provider and all payments will go through their account rather than directly from their credit card. PayPal is probably the most common example of this type of payment processor.
If somebody pays you with PayPal, the money comes out of their PayPal account to you. On their side they may have paid with an existing account balance, or it may have pulled the funds from a bank account or from a linked credit card. However none of that matters to you, you just receive a payment from their account to you.
Direct Processors
These payment processors just process the transaction from a persons credit card and then transfer the funds to you. They may or may not have additional functionality like their own payment forms.
Stripe is probably the most common example of a direct online processor. They are usually much easier to set up than getting a merchant account from a bank, however the transaction fees may be higher.
Things To Consider When Choosing a Online Payment Processor
Transaction Fees
All online payment processors will have some sort of transaction fees. Usually this takes the form a combination of a flat transaction fee plus a percentage of the total transaction. This can also vary from country to country for the same payment processor.
For example, Stripe in the US charges 2.9% + 30¢ per transaction.
While in Australia they have a tiered system depending on where the buyer's card is from.
So using the US rate, if a customer buys something for $50 you would pay $1.45 (2.9%) plus 30¢, for a total of $1.75.
Some processors will have a flat monthly fee instead of the flat, per transaction fee, but will still take a percentage of the sale price. Some will also have a different rate for 'card present' and card not present transactions (meaning you are swiping it through a card reader rather than taking in over the phone or Internet)
See PayPal US fees below.
In addition they may also charge refund and other types of fees. So check out the fee structure of processor before committing to anything.
Volume
How many individual transactions will you be putting through the system and what is the total dollar amount.
If you are doing a few transactions at first, you might not worry so much about the transaction fee. However the larger and larger your transaction volume becomes, the more the transaction fees start to hurt. At large volumes a small percentage saved can equal a big dollar amount.
Whether they advertise it or not, most processors will negotiate on the fees if your volume gets high enough. You don't ask, you don't get.
Compatibility / Integration
Integration is a big one. The wider the integration choices, the more future proof your business is.
You want to make sure your payment processor integrates with a wide number of shopping cart and payment page solutions, so you aren't locked into any particular cart solution.
Software comes and goes and there is always the next bigger, better deal around the corner so you want to make sure your payment processor is flexible enough so you can chop and change the front-end easily.
Just like the retail shop moving to a new, better location. Imagine they got the ideal location for their new shop front but their swipe machine didn't work in that spot.
Access To funds
Now that you have taken all that money, how easy is it to access? Some processors will hold the money for a certain amount of time, others require a manual transfer to actually get at the cash.
For example, Stripe will hold the money for two days and then automatically transfer it in bulk to your bank account. With solutions like PayPal, the funds sit in your account, and you can spend them via PayPal, however if you actually want the cash in your hand, you need to login to PayPal then transfer the money out, to your nominated account and then wait 3 to 5 days for the bank transfer to complete.
So make sure you research how you actually get to the funds.
Availability
Not every online payment processor is available in every country. So you will need to check the availability or your prefered vendor to determine if they will be available for you to use.
Redundancy
If you make your living online and your livelihood depends on those online sales coming through, it pays to have a bit of back up.
The Internet is rife with horror stories of people getting their accounts frozen for no good reason. Some misunderstanding happens and the processor freezes the account, no more sales, no more access to the funds, no mulah, no fun, you starve and you die (well that might be a bit dramatic, but you get the point).
It pays to have a backup. Many cart solutions will let you swap out payment processors relatively easily. Even better some will let you have two or more simultaneously.
For example, some cart solutions like SamCart allow you to have Stripe and PayPal simultaneously. Not only does that mean the customer can choose whichever one they like best, but if one goes down you can continue to process all your payment through the other. Redundancy.
Some Online Payment Processors to Consider
If you haven't gathered by now the top two most popular gateways are PayPal and Stripe
Some pros and cons of both
Very popular with users and the biggest account based payment processor.
Pros:
- People who use it, like it and it is easy for them to pay.
- Easy to whack up a PayPal button on your site in a matter of minutes.
Cons:
- People without an account, often don't realise they can pay by credit card without having an account and will abandon the transaction rather than create an new account.
- It can introduce friction into the checkout process. If customers are directed off your site to PayPal to complete the transaction, a certain percentage will abandon the transaction.
- You must manually transfer funds out to your bank account.
Very popular direct credit card processor.
Pros:
- Integrates with almost every cart solution out there.
- Easy to create an account.
- Also integrates with accounting solutions like Xero.
- Automatic daily transfer to your nominated bank account.
Cons:
- Two day delay between the purchase and when the funds get transferred to your bank.
- No native payment forms, you either need to create your own or plug Stripe into another shopping cart solution.
For redundancy and flexibility I would suggest having both Stripe and PayPal as payment processors and a shopping cart solution that can use both.
Account Based Online Payment Processors
PayPal - top recommendation
Alipay
Very popular payment system in China. However, it is also growing quite quickly throughout Asia, it currently has over 400 million users.
Amazon Payments
Close behind with over 300 million users is Amazon Payments, which allows you to take payments from Amazon customers. However like Alipay it has a somewhat limited geographic footprint and integrations.
Apple Pay
While still in its infancy, never bet against the reach of Apple.
Google Wallet
Google answer to PayPal, but like so many Google based consumer apps it never really took off and is limited to the US.
Direct Online Payment Processors
Stripe - top recommendation
Authorize.net
A payment processor that can handle both online and in-person card transactions, as well as e-check processing.
Braintree
Owned by PayPal. It aims to be a relatively easy way to plug credit card, and other types of payment processing into other apps. It is growing and has a decent list of app integrations
eWay
A well integrated payment solution. However is has a relatively limited geographic footprint and does not include the US.
Square
Another up and comer that includes a card reader and point of sale support, but still only available in a few countries (US, Canada, Japan, and Australia).
There are a limited number of cart solutions that give you the flexibility to include both credit card and PayPal options on the same checkout page. Check out some of these.
Easy Digital Downloads (WordPress Only)
Gravity Forms (WordPress only)
Related Links
TAM 063 - How To Choose An Online Payment Platform
TAM064 - Introducing ActiveRelay
If you need more help with payments, integrations and online sales check out The Active Marketer Academy membership community, where I help people just like you design, automate and scale their online business.
