What you need to sell online - The three-tiers of e-commerce

To process credit cards online involves 3 services:

A shopping cart
Payment gateway
Internet merchant account

For full ecommerce transactions you need all 3 services. Each of which involves charges; shopping cart hosting and maintenance, payment gateway retainer and transaction fees, and internet merchant fees. owever some service providers combine some of these service, and charge a combined fee.

The process - How does a an internet credit card transaction gets processed?

Lets look firstly at the sales stages.

Your customer finds goods/services on your shopping cart and clicks “Add to Cart” or “Buy now”.
The goods/services get added to the cart (or with Buy Now they go direct to checkout with the selected goods/services)
When they are ready to finalise the transaction, your customer completes a form with their details. Here’s an important detail; the form usually consists of a number of pages, with the last page usually the credit card details.
The credit card details (and other data) are sent to a payment gateway service, which is separate to the cart. The gateway service connects to the international banking system, to verify the card details.
Your customers’ credit card account is debited and your internet merchant account is credited.
Once all funds have cleared, you are then able to transfer money to your ordinary business checking account.

We call this setup the three-tiered ecommerce model (cart>gateway>merchant) and it’s the most common for serious players in ecommerce. Lets look at each of these services independently first.

Shopping cart

The words “shopping cart” mean different things to different people. In most cases it includes two distinct functions:

the software system that allows you to control the way your products are displayed on a website and the functionality to promote sales (eg. related goods, “customers who bought this also bought that”)
the software system that allow visitors to add their purchase to a cart and to checkout.

However sometimes it includes just one of those functions. I’ll start with the simplest systems:

A flat website with an external checkout cart

The starting point for many merchants is a flat website. There is NO software to control the display of the goods; you just create webpages, add the goods and prices, and “Buy Now” buttons. But what drives the Buy Now buttons? In this case the Shopping Cart must be an external service, and allows the visitor to add their purchase to a cart and to checkout. The customer does not enter any of their details until they are on the Checkout page, which is hosted by the external provider on their own security certificate. The most common Checkout Cart is Paypal, (and 2Checkout now accepts Australian merchants). There are other services which provide checkout services on their security certificate, and allow other forms of orders (eg. email orders, payment gateway orders, Paypal).

Monthly shopping cart systems

The next step for many merchants is to use a hosted shopping cart service. These services combine both the display of goods and checkout functions. As you are purchasing a hosted service you do not need your own hosting service or certificate. Many of these services include powerful marketing modules; email newsletters, affiliate tracking and other services. Some of these services also include payment gateway services, or even the whole 3-tiers; cart, gateway and merchant. Most of these services have a strong US focus. So you need to carefully assess “localisation” issues, such as GST, A$ pricing, and availability of Australian payment gateways.

Your own shopping cart software

Your web developer sets you up with your own shopping cart, which sits on your web hosting. This is the most flexible option as it allows for full control of your website. You web developer should provide guidance on what systems are available. For example, our company offers a stand-alone shopping cart solutions based on X-Cart system for fully featured shopping cart, or a CMS “module” shopping system which can be easily integrated into the look and feel of a website based around a content management system.

The system you choose will depend on the number of categories and products, and the features you require. Apart from the design and installation costs, the costs involved are the costs of hosting and maintenance and support. The hosting will cost more than flat website hosting as it will need to include the cost of database hosting and the monthly cost of renting a Security Certificate. Your own shopping cart can connect to a number of different payment gateways, and should give you a full range of options.

Payment gateways

A payment gateway is a separate service to your shopping cart. “A Payment Gateway is an e-commerce service that authorizes payments for e-businesses and online retailers. It is the equivalent of a physical POS (Point-of-sale) terminal located in most retail outlets. Payment gateways encrypt sensitive information, such as credit card numbers, to ensure that information passes securely between the customer and the merchant”. [Ref: Wikipedia]

How it works?

The shopping cart sends the transaction details to the payment gateway.
The payment gateway receives the transaction information from the cart and submits an authorization to the credit card holder’s bank.
The credit card holder’s bank receives the request, and replies to the payment gateway with an approved, declined, or error response code.
The payment gateway receives the response code, and then sends a reply back to the website, based on the response.

Your customer is not usually exposed to the payment gateway, as all the information is passed back and forth via the shopping cart. And your shop order details are also accessed via the shopping cart administrative interface. Each shopping cart is configured to “talk to” a number of different gateways. However 90% of the gateways are US-based! So you need to ensure (before you buy) that your shopping cart can work with the relevant gateway that you intend to use, or if you have already licensed a shopping cart, check that the gateway is compatible.

Fraud protection

There are two system commonly used to assist with fraud protection in gateways. “The Address Verification System is a system used to verify the identity of the person claiming to own the credit card. The system will check the billing address of the credit card provided by the user with the address on file at the credit card company. The other security features for the credit card include the CVV2 number and the expiration date.” [Wikipedia]. You should evaluate the fraud protection systems offered by your payment gateway, as the costs of charge backs (where a transaction is disputed by the cardholder) can be high. Note: Most shopping cart systems also offer Add-On fraud protection services.

Pricing

There is a lot of competition amongst Australian payment gateways, so you will need to shop around. Your web developer should help with this. However, one of the most important “hidden” pricing factors is the costs of integration with your Shopping Cart. Your web developer should provide you with some guidance on this, and in particular advise if your Cart and Gateway are compatible before making any decisions. Australian payment gateways also charge:

Setup fee (often waived!)
Annual or monthly fee (may or may not include bundled transactions)
Per transaction fee. These fees are often sold in a bundle. For example you pay 50c per transaction for 1000 transactions.

Internet merchant accounts

How it works?

In Australia most Internet Merchant Accounts are offered by the banks. You don’t necessarily need to use the same bank for your Internet Merchant Account as you do for your general banking. In fact you really should shop around and find the best deal.

Pricing

You need to look carefully at the costs. In particular:

Application and Setup fees
Transaction % - a percentage fee on sales.
Transaction fees - a flat rate on each transaction
Minimum monthly fee - what you will be charge regardless of the level of sales each month, and beware of hidden Statement fees.
Chargeback – cost per disputed transaction.

You should also consider the hoops that the bank will make you go through to gain an account. Some of the major banks will ask for 2 years of accounts just to set you up!

The alternative to Internet Merchant Accounts.

The alternative to an Internet Merchant Account with a bank, is a payment service that combines the services of a Payment Gateway and an Internet Merchant Account. For Australian merchants the options are:

Paypal
Provides a combined payment service and internet merchant account. Paypal also offers an integration tool called IPN, that allows Shopping Carts (or your web developer) to pass information between Secure Pages on your website and Paypal. For example, your Checkout form records the name and address details for your customer, which is then pre-filled in the Paypal interface. However, be aware that the Paypal interface has limited customisation.

2CheckOut
Is US based payment processor, which now accepts Australian merchants and Australian currency transactions. Payments can be made directly to Australian bank accounts. Probably less stigma attached than Paypal, but more expensive.

Worldpay
Is a UK service, but support Australian dollars and transfers to Australian banks. Transactions are completed in the WorldPay interface (on their certificate) or Worldpay can be used as a gateway provider in which case your customer is not exposed. Worldpay is more customisable that Paypal, and also does not have the same “registration” stigma as Paypal. It also allows for deferred payments – crucial if you are in a high fraud-risk industry.

Our recommendations?

Choose a web developer that understands eCommerce, as they can help you with the critical decisions, particularly the best Shopping Cart for your business and budget.
Work out the number of transactions you expect, then calculate the costs of 3-tier options against using a payment service.
Balance the additional cost of 3-tier implentation against the branding and trust issues associated with using a payment service.
If you choose 3-tier, then choose you Shopping Cart first. The customer comes first, and the feature and “look and feel” of your cart can make or break or your online business. Again we recommend you talk with your web developer about selecting a cart, as they should understand how “flexible” particular carts are in relation to design, functionality, and customisation.
Once you’ve selected a Cart, check the available payment gateways and Internet Merchant Accounts that work with that Cart.

If you would like to know more about this subject, contact me on richard@web2grow.com or visit us at www.web2grow.com

www.web2grow.com.au

Want a website that delivers real results for your business?
Your website is your interactive marketing partner. What it says, how it functions and looks says everything about your business. Developing a look for a website is easy. The hard part is ensuring your site delivers real bottom-line results.
That's where we come in...

Web2grow develops your web site and marketing plan to…
Get prospective clients to your site.
Engage your site visitors with powerful copy and stimulating design.
Drive positive responses from every visitor: Subscribe, Purchase, Visit and Call.

Measure your results, respond and grow an engaging web presence.

We will show you how you can make money in the new economy!

Our aim is to Show Mummy the Money!

LEGAL DISCLAIMER

Every effort has been made to ensure that this website is free from error or omissions. However the publisher, the contributors and their respective employees or agents do not accept responsibility for injury, loss or damage occasioned to any person acting or refraining from action as a result of material in this website whether or not such injury, loss or damage is in anyway due to any negligent act or omission, breach of duty or default on the part of the publisher, the author or their respective employees or agents.