Billing: Stick Shift or Automatic?

Rand Pate
Driving a stick shift automobile can be a lot of fun for the experienced driver. But I wouldn't want to put my ride in the hands of someone who had never driven one before. And that manual transmission can be really tedious in heavy traffic.

I've written a lot of articles over the years about online processing. It's not a very sexy subject but it's certainly one that anybody selling anything online has to consider carefully. And nowhere is this more true than in the space of adult entertainment.

Online billing in the high-risk space is an ever-changing methodology, which evolves through technology, risk analysis, and ingenuity. New laws, bank rules, and even progressively sophisticated fraud schemes make online billing a dynamic and complex process that must balance risk management and sales while remaining within association rules and international law. There is no doubt that using an experienced gateway or processor is not only advantageous — at this stage in the game it is practically a requirement as banks have begun aggressively enforcing their rules and seeking out companies that have found ways to circumvent them and abuse the system.

Imagine this scenario: A customer walks into a store to buy an item. He wants to pay using a credit card. He's wearing a bag over his head and refuses to show the clerk his credit card, but agrees to tell the clerk the card number. The clerk agrees to proceed but the customer also refuses to sign the sales draft. The customer leaves with his purchase without showing the clerk any type of ID or providing any other reliable or specific information. Then the customer goes home, calls his bank and claims he didn't make the purchase and gets a refund (chargeback) issued from the bank. This is the scenario online merchant’s face. That situation is nothing new for online processing except it has become exponentially more complex since the early days of the mid to late 90's as bank rules have become more strict and fraud schemes more inventive and sophisticated.

Obviously, the card associations could never have envisioned the idea of becoming the currency of the Internet. In fact, it is evident by many of their rules and philosophies that a virtual and global marketplace where transactions and product delivery could be instantaneous was never considered. Yet, this is where they find themselves today.

The card associations have had to adapt to the intricacies of global billing and still continue to do so. However, they wasted little time finding ways to protect their brands. Acquiring banks impose heavy restrictions and requirements on merchants and can enforce enormous fines (or worse) against those who exceed their stipulations. While at the same time, the issuers side generously with their cardholders who are, let's face it, their recurring source of income.

To accept payments from your website in this space, you first need to make one important decision. Should you use an Internet Payment Service Provider (IPSP) or a gateway service with your own merchant account? It all depends on your experience, how much risk you are willing to assume, and how much of your time you want to invest in this aspect of your business. If you are a number cruncher with a love of customer interaction, a personal merchant account at a well-known bank might work for you, assuming your credit is sufficient and you don't mind having your name attached to a merchant account in this space. If you would rather not get involved with managing credits, chargebacks, customer service, and maintaining the various ratios imposed by association and bank rules, an IPSP can do all this for you, allowing you more time to market and manage your sites.

There is a generally accepted notion that it is less expensive to operate your own merchant account, and in some cases, this can be true if you are willing to spend more of your time managing your business. In the final analysis, most companies end up spending slightly less than the same amount as they would if they used an IPSP. For a well-managed company that doesn't have a lot of issues with credits and chargebacks, low incidence of fraud, and a good understanding of association rules, the gateway model can work well for them.

An IPSP charges a flat fee, which is a percentage of sales. Generally, IPSPs do not charge any set-up fees and very few additional fees (for things like wire transfers and processing of chargebacks). Webmasters located in the United States are however required to pay a registration fee with Visa (true with both the IPSP model as well as the gateway model). The IPSP processing fee is typically based on volume and scaled as volume increases and decreases. Most IPSPs offer all inclusive services for processing, reporting, risk management, customer service, cascading, password management, and technical support among other things. The value of experience in this space and the ability to act quickly to avoid fraud, and help ensure that your sites remain within association rules is very valuable to your long-term business strategies.

With a payment gateway, your choices (and fees) are more a' la carte. Once you find a bank that will work with you and a gateway you wish to use and you ensure you are processing on the correct platform, have chosen the card types you wish to accept, and your sites are approved by your bank, you should be ready to accept transactions. Your fees will be paid to your gateway and your bank. Gateway fees usually include a card processing fee, a per-transaction fee, a monthly fee, and fees for customer service. Additionally, your merchant account bank will also charge a processing fee and a per-transaction fee, as well as a refund fee, a chargeback fee, and a fee for declined transactions.

Some things to consider as well... typically an IPSP accepts more payment types than you will be able to with your personal merchant account, thus increasing international sales. Also, IPSPs excel at translating your payment forms into several languages and various currencies providing less friction to the purchase button, thus increasing your sales to an international marketplace. And, an IPSP is the best way to be able to offer cross sells to other sites, since the IPSP is the merchant of record and cardholder data isn't transferred from one merchant to another (transferring credit card data between merchants is a violation of credit card association rules).

Not every decision should be made on cost alone. Some companies have the time and means to process their traffic through their own merchant account and like that sense of control of their funds. In the final analysis, it is really a matter of choice determined by where a company chooses to spend its time and resources and what level of risk it is willing to assume.

Epoch is an Internet Payment Service Provider enabling online companies to accept global payments without the need to obtain and manage their own merchant account. Epoch offers worldwide acceptance, multiple currencies, state of the art merchant tools, subscription and per-unit billing, world-class customer service, and a full suite of marketing and revenue features.


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