How to pick the right payment gateway

There are now over a dozen ways to accept credit card payments on your new website. How do you pick the one that is right for you?

Some banks and payment gateways charge large setup fees, or high monthly fees. Some banks will offer only a transaction fee (Merchant Service Fee) of 8%. If you are importing goods and selling on a mark-up of only 10%, then that 8% transaction fee will erode your entire gross profit. Transaction fees are applied to your total retail price, which also includes GST and freight. That's not a good business proposition.

The best you can hope for is around 2% for card not present transactions, however 3%-4% is more common. A card not present transaction is a special rate for online and telephone based businesses where the actual credit card is never swiped nor sighted. Thus the bank is taking a risk that the card number used may have been fraudulently obtained. A 2% transaction rate will only be achieved by reputable businesses with high credit card turnover or high ticket price (item price), and those that can provide proof of that history. Note, that irrespective of the rate offered by the bank, it is negotiable on a continued basis, so after one year you should renegotiate.

For new businesses, which are unsure of their future earning potential, it will be almost impossible to beat the transaction fees offered by the likes of PayPal, PayMex or PayMate. These low cost offerings provide the ability to accept payment by credit cards on your website, with no setup fee and no monthly fee. They all have a fixed transaction fee schedule of approximately 3% + 50 cents, give or take a few basic points. The only problem with these services is that the merchant account is actually owned by that third party, and it typically introduces a delay of an extra business day before you receive payment to your bank account in cleared funds. The other issue is with refunds and charge backs. If it turns out a transaction was fraudulent, these third parties tend towards favouring the cardholder. This means your funds may be reversed, even if you can demonstrate that goods had already been couriered to a known address.

Another warning about online wallet providers such as PayMex and PayMate, is that you need to login to their websites to withdraw your funds. This can be a hassle for many, but in extreme situations you might also lose your money. For example, in 2008 the company providing the PayMex service went bankrupt and took their merchant account balances with them. Someone quickly restored the PayMex service under a new financial structure, but the funds in each users wallet had disappeared. This is a good reason to withdraw your funds on a very regular basis. This is not a reason to avoid using PayMex, it was just one fraudulent customer that took them down, but it is something to consider in how you use these services. Another issue regarding online wallets, is that the IRD consider such services to be a bank account for your tax purposes. This means that you must account for your online balances (and currency conversions thereoff) prior to actually receiving those funds into your real bank account. This introduces a complexity. Also note that money may be in "transit" for upto 2 days, and this needs to be coded to a suspense account.

Not sure which low cost option to pick?  Well, PayMex is based in Tauranga, NZ and they have the most competitive fee structure. PayPal is more recognised world wide, however you pay 0.5% more in transaction fees. Both have multiple currency options, however you should consider an additional 2 - 2.5% on top of that for any currency conversions. PayMate is Australian based, but their NZ$ option is better than the Australians get, with a fixed 3% transaction rate and automatic deposit to your bank account over night. If you want to accept AU$ on Paymate, you will also need an Aussie bank account.

Existing businesses that have an existing customer base with dependable turnover would normally obtain a merchant account from their bank, and then apply to a compatible online payment gateway, perhaps one preferred by their bank. These payment gateways are fairly compatible with all banks, so it may pay to shop around. However, note that ANZ customers would normally use eGate, provided by Eftpos NZ and BNZ customers would use Buyline provided by the BNZ. For all the other major trading banks, the main payment gateway choices are DPS, Flo2Cash, eWay and PayStation. The bank normally charges a percentage fee on transactions (otherwise known as a Merchant Service Fee). The payment gateway normally charges a minimum monthly fee that includes a set number of free transactions. Please note that you need to price the banks fees and gateway fees together when making comparisons, because the banks fee may differ depending on the gateway chosen.

You should note the payment gateway’s normal transaction fee, as 50 cents is equivalent to 2.5% on a $20 transaction or 0.5% on $100. If you have a lot of low value transactions, then this fee will add up.

Another option to consider when selecting your payment gateway is the choice of credit cards accepted and/or debit account options. PayPal and PayMex both accept American Express, but you will need to apply directly to American Express if you wish this service to be added to other payment gateways. Other credit card providers may have differences in the time they take to settle, in their transaction fees, and in any monthly and setup fees. PayStation and DPS now support Pago from the ASB bank.

If you wish to accept multiple currencies, you need to consider many more issues. Not only do you need to consider the obvious need to be able to accept payment in a foreign currency, but also where that payment will end up and what currency conversion fees will be charged, perhaps over 2% with PayPal. In addition to that, a good shopping cart system should be compatible with multiple currencies. There is a big difference between a currency convertor and a multiple currency shopping cart. Each product must have fixed prices in each currency, so that the prices won't change day to day. This means that the merchant is taking the hit on currency fluctuations. The benefit of offering checkout in multiple currencies is ease of use for the customer, and customer trust in the true value of the purchase.

The technical capability of the shopping cart software used must be able to offer different fixed prices in different currencies, or the ability for multiple shopping carts to exist on one website, each transacting in a different currency. The invoice produced at the end of the transaction must be in the currency that the shopper believes they are purchasing in, and the total amount should not be different from that charged to the customer's credit card. The customer should not end up being charged any fees for currency conversion by their bank, if they believe they are purchasing in their own currency. Good shopping cart software should allow you to accept multiple payment methods, so that you can minimise the transaction fees for certain methods of payment or currency. They should also hide any payment methods that are not applicable to a given currency.

Customers who do not possess a credit card are now more easily able to obtain similar prepaid cards from some banks and post offices. From the merchant’s point of view, there is no technical barrier to accepting these, as they are processed the same as any other Visa card. However, if the merchant faces a consumer market with debt issues, and a need to provide prompt services, they may wish to promote this facility to their customers.

In addition to payment by credit card, businesses might like to consider accepting payment by online banking, or cheque. There is a number of foreign exchange services who will make it painless to accept direct banking payments internationally in foreign currencies, and to convert that to NZ$ at far better rates than your own bank. This will overcome the international transaction fees that banks tend to charge at each end of a traditional international transfer, and make the customer’s experience better.

Posted: Monday 7 July 2008