03.10.04
 By
Mario Sanchez
If you want to sell online, you need to be able to accept credit card
payments. The traditional way is to open a merchant account. However,
opening a merchant account is expensive, especially for small businesses
who are just starting.
In the last few years, however, a number of companies have entered
the market with a new concept: third party credit card processing
services (for example, Paypal). This option offers small businesses
a quick and easy way to accept credit card payments. It by-passes
the need to open a merchant account, plus, the sign-up process is
much easier and faster: you can literally sign-up, be approved and
start accepting payments online in minutes. |
Traditional
merchant accounts are expensive primarily because they charge fixed
fees that you will have to pay even if you don't sell anything.
For example, depending on the case, a merchant account will require
that you pay:
- An application fee (whether you are approved or not)
- A set-up fee (once your application has been approved)
- The discount rate: usually between 2% and 3% of every sale.
- A per transaction fee.
- A monthly minimum fee (if the dollar amount of the discount rate falls below the amount of the fee).
- Statement, gateway and connection fixed fees.
Third party credit card services usually just charge a percentage
of sales and, in some cases, a per-transaction fee, so you only pay
when you sell something.
If your sales volume is not very high, a third party service can save
you money.
For example, lets assume that you make 10 sales a month at $25 per
sale, to compare the merchant account option vs. the third party option:
If a merchant account charges you a $25 montly minimum fee, $50 in
gateway and connection fees, a discount rate of 2.0% of sales, and
a fee of $0.30 per transaction (for simplicity's sake we're not factoring
in any application fee or set-up fee), the charges you would have
to pay your merchant account provider amount to $83.00.
If you use a third party service that, like Paypal, charges you 2.9%
of sales plus $0.30 per transaction, it would only cost you $10.25.
However, the advantages of using a third party service start to diminish
as your sales start growing. In other words, since the discount rate
charged by traditional merchant account providers is lower than the
percentage of sales charged by third parties, the higher your sales
the more the fixed fees of the merchant account will be offset by
its lower discount rate.
For example, let's assume that instead of making 10 sales per month,
you make 1000 sales, at the same $25 dollars per sale (total sales
per month: $25,000). You will then have to pay your merchant account
provider $850.00 (the $25 minimum will be waived because the dollar
amount of the discount rate will be greater than $25).
If you use the third party service, you will pay $1025 for the same
$25,000 in sales.
Your break even point in this example would be 222 transactions (sales)
of $25 dollars each: if you make 222 sales or less, you would be better
off with a third party service. If you make 223 sales or more, your
best bet would be a merchant account.
The more you sell the more you should consider opening
your own merchant account. However, if you are a small business just
beginning to market your products on the net, or if you want to start
quickly and don't expect huge sales in the near future, you may want
to go the third party route.
The two best known third party credit card services among web marketers
are Paypal and Clickbank.
PayPal began in 1999 as a tool for transferring money for payment
in eBay auctions and is currently the most popular online payment
system of its kind, with over 35 million accounts at the time of this
writing, and a fee structure of 2.2% - 2.9% of sales
plus $0.30 per transaction.
Clickbank specializes in serving web marketers that sell digital products,
which are directly downloaded from the Internet. These products are
offered through Clickbank's extensive network of over 100,000 affiliate
sites. Merchants of digital products simply place a sales link on
their site and Clickbank handles the credit card processing. At the
time of this writing, Clickbank charged a one time $49.95 set-up fee,
a processing fee of 7.5% of sales and a $1 fee per transaction.
In summary, check all your options first and choose the one that is
most likely to fit your needs in the long run. Remember that cost
is only one of the variables you should consider in your analysis.
Spending some time visiting the websites of merchant account providers
and third party credit card service providers, and doing your due
diligence early, can save you thousands of dollars in the future.
About the Author:
Mario Sanchez publishes The Internet Digest ( http://www.theinternetdigest.net
), an online collection of web design and Internet marketing articles
and resources. You can freely reprint his weekly articles in your
website, ezine, newsletter or ebook.
|
60-day risk-FREE meter trial + postage coupons. | From the Forum: | | Paypal | Hi
My website uses the Paypal shopping cart for retail - it's going ok but I wonder if customers are put off with having to register with Paypal first?? I've recently heard a few bad reports of Paypal but when I did a web search all the criticisms seemed to be from a few years ago - 2000, 2001 - has anyone any advice or warnings or even anything good to say about Paypal? Have they fixed all their problems?
Thanks
Maxine
|
 |
|
