Now that you have your online store you need the ability to charge your customers for the goods they purchase. While it is possible to have customers send you a check or money order, at which time you would release their goods, the more traditional method of online commerce involves setting up some type of merchant account which processes customer’s credit cards and then puts the money in your bank account. What is a merchant account you ask? A merchant account is any company (often a bank or other financial institution) who processes credit cards on behalf of a merchant (you). Most of the large American banks such as Bank of America, Chase, etc. have merchant services while other companies specialize in merchant services and don’t have other banking facilities such as branches, ATMs and traditional checking and savings accounts. Merchant accounts apply to your online store; however, this is the same type of merchant account you may have for your in-store credit card terminal.
Once the internet gets involved, there needs to be a “gateway” between your website, and your credit card merchant. Often companies will lead you to believe that they process your credit cards online when offering you their services, when really they are bundling their services with an online gateway. One of the most well known online gateways is Authroize.net. Authorize.net offers many services that allow you the merchant a way to process credit cards including setting up a custom website, integrating your merchant account with eBay and setting up automated recurring billing for your customers services and subscriptions. However, Authorize.net does not process your credit cards, not a single penny. Authorize.net acts as the go between, between you and your bank. You simply give Authorize.net your merchant ID number and they facilitate your transaction. Often customers such as yourself may be turned off by this process because what ends up happening is you are paying your merchant a monthly fee – often around $20 plus the 2-3% fee per transaction, and Authorize.net charges an additional $20 – $30 per month for their services.
There has to be a better, more convenient way to do all of this online stuff, right?!?! Well, there is. PayPal, whom most know as those people you use to buy stuff on eBay has a significant amount of merchant services. PayPal will act as both your merchant and your gateway all for one inclusive price of $30 a month. This is not PayPal in the traditional sense either. PayPal has an API which allows you to process credit cards on your website without customers knowing that PayPal is acting like the merchant. Customers never leave your website. Another plus is if you are a new business just getting off the ground, PayPal does not even require a tax ID number to setup your account (although it is highly advisable to register your business – I’m just a blogger, not a tax attorney – I digress). Now you may be thinking I just saved $10 a month and I only have to deal with PayPal, not two different companies, so what’s the question – PayPal it is! Not so fast.
As I mentioned earlier that 2 – 3% you’re paying on every charge – that adds up. If you choose PayPal as your merchant provider, then it REALLY adds up. PayPal charges slightly over 3% per transaction on all Visa, Mastercard and Amex charges. For those familiar with Amex, they tend to dictate their own rules and no matter whom your merchant provider is you will be locked in to a rate somewhere around 3%. However, Visa and Mastercard tend to be much more flexible often offering terms around 2% (sometimes a bit lower or higher) for online charges depending on which merchant you choose. This means if your process $1000 in sales a month online, that 10 bucks you just saved with PayPal as you merchant is gone, because a traditional merchant would have only cost you $20 at 2% (on top of your monthly fees) and PayPal has taken $30 or 3%. Not to bore you with too much math, but at $2000 of gross sales PayPal would take $60, a traditional merchant, $40.
As you can see, unless you sell less than about $500 a month in goods or rely heavily on American Express sales, the PayPal route, while surely more convenient to setup will cost you more money in the long run in per charge transaction fees. Feel free to email me with any comments about credit card processing. It can be confusing at times, but well worth knowing what you’re getting into.