Payment Processing

Placing an Order (Ecommerce software/shopping cart software)

Many online businesses setting up shop for the first time will consider procuring shopping cart software for payment processing, or they might choose a complete hosted payment processing and shopping cart solution from a provider.

Many choices are available. In all cases, however, the Seller will remain responsible for delivery and fulfillment. Sellers (in addition to any third party software provider) are responsible for the protection of consumers’ personally identifiable information as well as for safeguarding and proper disposal of credit card or other payment information

What kind of payment processing system should I use? Making Payments & Getting Paid
Most online businesses will establish merchant accounts with their local bank or another financial institution to facilitate payment through one of the leading credit card companies. Major credit card companies also offer customer verification tools to help the retailer determine whether customers possess legitimate cards.

Other providers specialize in providing merchant accounts for online businesses. These providers may also offer security features and fraud prevention tools. While using alternative payment providers may be les expensive than paying the merchant account transaction fees, accepting major credit cards may be a selling point to customers.

Consumers will want the flexibility to pay by several methods. Each Seller can permit or restrict acceptable forms of payment. Consider all or some of the following options:

Credit Cards
Credit cards are the leading payment type for online purchases because they allow for fast and easy funds collection. The entire process is fully automated. Sellers get immediate good funds. Consumers benefit from strong protections against billing error and problems with the merchandise or services. Consumers also have limited liability for unauthorized transactions under federal law (Truth In Lending Act). Most of the major card associations (e.g., Visa and MasterCard) protect consumers against any loss associated with credit card purchases – a “zero liability protection.”

Sellers subsidize credit card purchases by paying the processor a 2-4% fee for each purchase. Internet purchases are known as a “card not present” situation. Until recently, sellers bore the liability for unauthorized card use because they could not see the physical card. However, sellers who now require the security code on the back of the card, in addition to the account number and expiration date, are not liable. Sellers should understand that the card issuer can automatically withdraw funds it gave the seller at any earlier time if the card issuer sides with a consumer in a dispute. To process credit cards, a seller must open a merchant bank account with a bank that participates in the Visa or MasterCard system. The bank will submit the charges through the system and post payments to the seller’s account.

Debit Cards (Association branded)
MasterCard and Visa-branded debit cards work as easily as credit cards, however federal law (the Electronic Funds Transfer Act) does not give consumers as much protection for unauthorized use or problem purchases in connection with debit cards. The card associations provide similar “zero liability protection” for unauthorized use. Debit card transactions are processed in the same manner as credit card transactions.

Checks are a comfortable and familiar form of payment. They are especially useful to sellers doing business with consumers who do not have credit cards or debit cards. There is no processing cost, as long as checks clear. A purchaser must deliver his check to a seller. Sellers must process checks manually, keeping records and taking checks for deposit to their banks. Clearing times (time between receipt of check and time the seller can use the funds in its bank account) are shorter than they were in the past, but not nearly as short as they are for credit- or debit- card payments. Sellers generally wait for the check to clear before shipping the goods so that they know they are getting “good” funds. Returned or “NSF” checks increase the costs of taking payment by check. Many sellers impose a bounced check fee to help cover those costs. (Collection of bounced check fees sellers impose is not automatic and often is difficult.

An online seller seeking to accept checks for payments should establish a mailing address, possibly a post office box, solely for payments if high volume is expected. The seller also should establish a business account with the seller’s local bank.

Newer Payment Types
PayPal and other online payments services offer sellers and buyers in Internet sales transactions the means to make payments through a secure third-party system. Consumers’ bank account or credit card account information is protected. PayPal and other services offer protection to the seller and also offers the buyer fixed insurance for transactions. These systems essentially permit sellers to take payments by credit cards without formally contracting with an association merchant bank. Consumers may feel more secure dealing with a seller they do not know when they do not have to send the seller sensitive personal financial information (credit or debit card number, expiration date, and security code (CID)) over the Internet.

Sellers should consider whether fees for online payment services make economic sense for them. Sellers’ estimates of anticipated volume may help them decide whether to use an online payment service.

Direct Debit
Sellers can also set up online sites to accept an electronic funds transfer from a consumer’s checking account. Federal law – the Electronic Fund Transfer Act – provides special protections for consumers in this context. Direct debits are fast and safe for sellers. Sellers with larger transaction volumes may use an Automated Clearing House to process consumer payments. To accept this type of payment, a seller must establish a business account with a local bank which will perform the transfers, or use a service provider that specializes in Automated Clearing House transfers.

Consumer may be unwilling to pay through an EFT/direct debit when they do not know the seller. Consumers may fear that the Seller or hackers will withdraw more money or commit identity theft. The federal law does not provide as much protection for consumers against unauthorized use as do laws and rules governing payments by credit cards and does not provide any problem purchase protection. Neither the MasterCard nor Visa associations protect these payments because this is a card-less transaction. Direct debit payments may involve a slightly more elaborate payment process than with credit cards. Certain online disclosures are necessary to get the consumer’s consent. Consumers must be holding a paper check to give their check number, bank name and bank routing number.

Gift Cards (Association branded)
Gift cards are a popular new payment method. Consumers can use them just like credit cards, and although they are processed similarly, gift card transactions present some unresolved legal issues. Rules governing consumer liability for unauthorized use and dispute resolution are not clearly established under federal law. The associations provide some unauthorized use liability limits and some states have laws that may address these issues, but which laws apply to customers in different states is unclear.

Gift Certificates / Gift Cards (Seller branded)
(internal link: Selling Gift Certificates and Gift Cards)
Gift certificates and gift cards help sellers lock in value through up-front sales (gift certificates) and back-end fulfillment (merchandise). Certificates and cards build consumer loyalty and give sellers nearly complete control over the purchase and redemption rules for their gift certificates and gift cards. Sellers can institute an easy and inexpensive redemption process. Sellers can use purchase or develop redemption verification software that works hand in hand with the payment software.

Certificates and cards carry some fraud risk on the validity of the certificate or its amount. Banks do not verify the certificates or cards, although third-party software may fill that gap. Sellers will want to avoid a manual verification process. The faster the process, the faster the determination that the funds are good and the order can be shipped. Partial redemption of value on certificates and cards requires sophisticated tracking. Sellers may wish to require 100% redemption on one order.