Understand Online Payments – Transform your business

An online payment is a payment that is made by a customer to a merchant for a service or product. This payment is routed through various services to ultimately settle in the merchant’s (the seller’s) bank account and be deducted from the customer’s bank or credit account. The service or product does not have to be digital for an online payment.

I’m sure you already knew all that but if you’re a merchant or an accountant who provides services for merchants what do you need in place to accept online payments? Additionally, how are online payments transforming traditional business payments and bank transfers?

Firstly, if you want to withdraw money from sales into a place you can spend it freely you’ll need a bank account, this might be a traditional bank account or one of the new digital-only accounts that are springing up like Monzo, Starling or Tide (the only digital business account); basically, you need somewhere for your money to end up. But, if you don’t want to withdraw it, you may not even need a bank account, you can keep it within the ecosystem of your payment gateway and spend it with other compatible merchants and traders, think PayPal balance and then spending your PayPal balance on Ebay or another retailer that accepts PayPal.

What is a payment gateway? Well, first up I’ll address what is a merchant account because that’s where things started. A merchant account is an account that creates an agreement between you (the merchant) and the credit card issuing companies (VISA, Mastercard etc), this allows you to accept these types of payments. Many merchant account providers also provide payment gateway solutions and as the name suggests this is the entry point for taking a payment. A payment gateway is the point at which you want to transact a payment with your customer, an example of a payment gateway that most people will know is PayPal, but traditional banks also offer payment gateway solutions for their merchant accounts, it’s just that traditionally, these have been expensive to use and not particularly compatible with online software like e-commerce solutions.

So a typical setup and chain of payment events would look like this:

Customer – Online shop – Payment Gateway – Card issuer – Merchant account/Bank account – Merchant

You could have a much simpler online payments setup, for example, if you wanted to take payment over the phone for a product then you could use Stripe’s Checkout service and key in the customer’s card details directly into this via the Stripe online payments page (called Stripe Checkout). Stripe is a payment gateway (in simplest terms); this is still an online payment since the payment details were entered into an online form. This removes the need to have a physical point of sale terminal sitting on a desk connected to a phone line. So it could look like this:

Merchant – Phone call – Payment Gateway – Bank account – Customer

So what are the current challenges with online payments?

• Which merchant account or payment gateway do you choose?
• How do these payment gateways work with my other software e.g. accounting, e-commerce, CRM etc?
• Do I need a merchant account or any other technology in the payments chain?
• Reconciling seemingly anonymous online transactions for accounting purpose can be a nightmare. Imagine you’ve got lots of transactions hitting your bank account from online sales with no further information.

To help you decide which merchant account or payment gateway you choose for your business depends on a few things and for some businesses they have a pre-existing relationship that makes sense to continue with, purely from a convenience point of view. Firstly, which territories do you want to sell in? This will be the biggest limiting factor to employing a payment gateway since not all accounts/gateways are available in all territories across the world, this might be due to higher risk territories being less desirable and certain regulations in a territory.

Secondly, The type of product or service you sell will limit what gateways you can use, if you sell something that is deemed as high risk or politically dubious then you will need to find a friendly gateway who will charge you higher fees for the privilege, someone like Skrill can be considered.

Thirdly, consider the fees and services that are attached to each payment gateway, these differ wildly from provider to provider and are different depending on what territories you want to sell in.

Fourthly, what payment methods do you want to offer or are relevant for your customers? Do you just want to accept cards or do you want to accept another form of payment: e-check, Direct Debit or SEPA for example? There are further payment twists offered by companies like Klarna, who think they can increase conversion by letting customers pay later.

Fifthly, what’s the experience that you’d like your customers to have and what in-house resource do you have for deploying these solutions? Do you want customers to pay on your website or on a PayPal page for example, what are the advantages for your business sector? Sometimes sending customers to a payment page can enlist greater trust in the payment process, but often a frictionless, seamless, branded payment process is preferable to convert a sale.

Then there’s the challenge of finding a payment gateway that integrates with your existing technologies, you’d think this would be easier than it is, for example, if you’re using QuickBooks Online and you would like to have your invoices paid online you can only use QuickBooks merchant services, PayPal or GoCardless payment gateways. This is highly restrictive but you can understand why QuickBooks doesn’t offer any more options since they’d have to have relationships with all these gateways and create and maintain the technology. Selling into the territories that you want to reach may require you have more than one payment gateway in place because a single gateway might provide cheaper rates but not have a presence in a territory or currency you need so you need another, the problem here is that it’s not always possible to run multiple gateways with your other software, or the gateway you need is simply not integrated.

Do you need other elements in the chain, do you need a separate merchant account or another point of sale device and payment gateway? It’s really a cost-benefit equation you need to weigh up, would it increase your sales and would that outweigh the costs of cutting in these other elements plus the integration overhead?

Reconciling online payments is often an afterthought that comes too late in the day and your left clearing up a mess with a string of bookkeepers and accountants at your side. On one hand, a series of anonymous payments hitting your bank account isn’t a bad thing. But if you ever need to refund one of these, or work out why the payment amount is different to the invoice, split out the fees and shipping or do any kind of customer service or intelligence from this then you’re in trouble. The ‘paper’ trail isn’t there and management accounting brings a whole new benefit to your world.

To compare merchant accounts and payment gateways to find out which ones might be right for your business you can google ‘payment gateway comparison’. Before you do that here are some handy tips on what to look out for:

1. Security: PCI DSS Compliance Level
2. Ease of Integration
3. Uptime & Reliability Record
4. The Right Level of Fraud Detection
5. Payment Options Accepted
6. Multiple Currencies Accepted
7. Real-Time Reporting

And you should look out for these associated costs:

1. One time Set-up Fee:
2. Monthly Fee:
3. Transaction Fee:
4. Transaction Rate: (may be charged by your merchant account provider rather than payment gateway provider)

In conclusion, online payments are here to stay and according to a UK YouGov survey, 50% of respondents would end a sale if their preferred payment option wasn’t available so improving your customers’ payment experience as well as your back office administration goes hand-in-hand and is a must.