The Green Sheet Online Edition
December 08, 2008 • Issue 08:12:01
A few short years ago, a company called GoDaddy.com was introduced to the world during a Super Bowl game. Not many people had a clue who the company was or what it did, but the commercial generated enough interest and publicity to cause plenty of people to find out what GoDaddy.com was all about.
Imagine signing that merchant account.
And how about Priceline.com? Do you remember William Shatner's now famous line, "This is going to be big, really big"? Indeed it was. Priceline.com has turned into one of the busiest travel portals online - with a merchant account that processes astronomical volume.
Defining the opportunity
This article is dedicated to merchant level salespeople (MLSs) who want to jump into selling electronic commerce (e-commerce) solutions and need an easy-to-follow guide. First, let's review some definitions:
- e-commerce: the buying and selling of products or services over the Internet and other computer networks. The transactions are usually fully approved online at the point of check out.
- Internet protocol (IP): A method of transmitting information and communications between computer systems and networks via the Internet. Payment gateways use IP to send information to payment processing networks.
- Payment Card Industry (PCI) Data Security Standard (DSS): a set of comprehensive requirements for enhancing payment account data security developed by the founding payment brands of the PCI Security Standards Council - including American Express Co., Discover Financial Services, JCB International Co. Ltd., MasterCard Worldwide and Visa Inc. - to help facilitate the broad adoption of consistent data security measures on a global basis.
- payment gateway: an e-commerce system of technologies and processes that allow merchants to electronically submit payment transactions to the payment processing networks. Payment gateways enable payment authorization for e-businesses, online retailers, brick-and-mortar merchants who are also doing e-commerce transactions (bricks and clicks), or any merchant looking to process transactions online.
Payment gateways are the equivalent of physical POS terminals located in retail outlets. They encrypt sensitive information, such as credit card numbers, to ensure the information passes securely between customer and merchant.
- shopping cart: software used in e-commerce to assist people in making purchases online. The software allows online shopping customers to place items in the cart. Upon checkout, the software typically calculates a total for the order, including shipping and handling charges and the associated taxes, as applicable.
- virtual terminal: a merchant interface tool for manually keying in and submitting transactions through an Internet payment gateway. Transactions are completed similarly to those of a POS terminal, using unique user names and passwords provided by the payment gateways.
- 3D Secure: an XML-based protocol used as an added layer of security for online credit and debit card transactions. The 3-D Secure protocol was developed by Visa to improve the security of Internet payments and offered to customers as the Verified by Visa service. Services based on the protocol have also been adopted by MasterCard.
How does a payment gateway actually work?
Now, let's get into the nuts and bolts. With a virtual terminal, a merchant logs into a gateway and submits a credit card transaction to the gateway on behalf of a customer via a secure connection from a Web site, retail store, MO/TO center or wireless device.
After receiving the transaction information, the payment gateway passes the data via a secure connection to the merchant bank's processor. The merchant bank's processor submits the transaction to the credit card acquirer, which routes the transaction to the customer's credit card issuer.
The card issuer approves or declines the transaction, based on the customer's available funds, and passes the transaction results and, if approved, the appropriate funds, back through the acquirer. The acquirer then relays the transaction results to the merchant bank's processor.
The merchant bank's processor relays the transaction results to the payment gateway, which stores the transaction results and sends them to the customer and/or the merchant. This communication process averages three seconds or less.
The credit card acquirer passes the appropriate funds for the transaction (minus fees) to the merchant's bank, which then deposits funds into the merchant's bank account. A virtual terminal is a good option for a merchant who is not doing a high volume of sales online but desires to process transactions anywhere in the world by accessing the Internet.
As for choosing a gateway, Anna Solomon (known as FastTransact on GS Online's MLS Forum) recommends that you match the appropriate gateway to your customer. "Don't sell on price but on features," she said. "Not all gateways are created equal and can offer solutions where others cannot. Check what type of reporting capabilities the merchant is looking for.
"How many users may have access to the gateway? What are the fraud controls? Is it just a switch running the backend or is it a virtual terminal in a call center?
"So do your homework, learn the different gateways so you can sell the best fit for the merchant, and find an ISO that can not only educate you on how to be successful in this market but can take care of your merchant so they can be successful as well."
How does real time e-commerce with shopping cart work?
A payment gateway facilitates the transfer of information between a payment portal and the front-end processor or acquiring bank. When a customer purchases a product online using a real-time processing Web site, the transaction is approved online without the merchant needing to log in (as required when using a virtual terminal).
A customer places an order on a Web site by pressing the Submit Order (or equivalent) button found on the site's order page. The customer's Web browser encrypts the information to be sent between the browser and the merchant's Web server. This is done via secure sockets layer (SSL) encryption.
The merchant then forwards the transaction details to the payment gateway. This is another SSL-encrypted connection to the payment server hosted by the payment gateway. The gateway forwards the transaction information to the processor used by the merchant's acquiring bank. The processor forwards the transaction information to the card brand (Visa or MasterCard).
If an AmEx or Discover card is used, the processor acts as the acquiring bank and directly provides an approved or declined response to the payment gateway. The card brand routes the transaction to the correct card issuing bank. The issuing bank receives the authorization request and sends a response, including a response code, back to the processor (via the same process as the request for authorization).
In addition to determining the fate of the payment, (i.e. approved or declined), the response code is used when transactions fail to define the reason for the failure (such as insufficient funds, or bank link not available). The processor forwards the response to the payment gateway.
The payment gateway receives the response and forwards it to the Web site (or whatever interface was used to process the payment) where it is interpreted, and a relevant response is relayed back to the cardholder and the merchant. All of this takes place typically in two to three seconds.
The merchant must ship the product before being allowed to request to settle the transaction. The merchant submits all approved authorizations in a batch to the acquiring bank for settlement. The acquiring bank deposits the total of the approved funds into the merchant's designated account. This could be an account with the acquiring bank, if the merchant does banking with the same bank, or an account with another bank.
What should I expect in terms of pricing?
First, a potential merchant must have a valid merchant account. Typically, a gateway fee varies from $5 to $10 per month; you may expect to pay up to an additional 10 cents per transaction. Most gateways offer the ability to submit sales via virtual terminal, and they offer real-time e-commerce as described herein.
With real-time processing, merchants need shopping carts. The cost of a shopping cart can vary drastically from free to over $500, based on the needs of individual merchants. For example, some merchants sell one product, for one price, with no shipping cost to calculate. Others like Amazon.com Inc. sell millions of products and have multiple shipping options. In the latter type of environment, merchants need a much more robust shopping cart.
What about underwriting and risk?
Anna Solomon had the following thoughts to share about underwriting and risk:
One of the things that really kills an e-commerce account is not knowing the underwriting parameters. There are seven criteria that underwriters look for when reviewing a Web site. If the requirements are not met, the site will still be able to process, but many ISOs will place a 100 percent hold on the account until the requirements are satisfied.
- Refund/cancellation policy
- Terms and conditions
- Products and the corresponding pricing listed
- 128-bit, SSL page where personal and credit card information is obtained
- Telephone contact number
- Shipping and handling method and time shipped after the sale (if applicable)
Also, make sure you put the URL in the identifier line. Many chargebacks can be avoided when this is done. For instance, you might contest a charge if you order an awesome pair of shoes at www.redshoes.com, but you receive your consumer statement, and the identifier is Joe and Sue Enterprises. And be sure to include the customer service number in the identifier.
I concur with Anna's advice. I would also suggest you include accurate information on the merchant processing application, including a valid e-mail address, fax number, true average ticket, expected high ticket and estimated monthly bankcard volume.
It is up to the MLS to educate the underwriter about a merchant's operations and plans for growth. One of the ways to accomplish this is to prepare a cover letter with every application submitted, giving an overview of each merchant's business and future plans.
Who are e-commerce prospects?
E-commerce merchants fall into three categories:
- Brick-and-click merchants who have traditional storefronts and sell products and services via the Internet.
- Internet-only merchants with no storefronts. These merchants rely on their Web sites for all their sales. They may inventory and ship items themselves or use fulfillment houses.
- Web-based auctions. Many merchants and individuals are selling via online auction sites such as eBay Inc., and higher-volume sellers are looking for alternatives to PayPal Inc. for many good reasons, including the high fees and inconvenience to customers.
While I've provided a generic overview, selling e-commerce is a contact sport that requires education on your part and an interview with your potential merchants to understand what they need.
Until you know what you have available and what individual merchants need, selling e-commerce will remain highly challenging.
Recently, one of our sales partners signed a large association with a group of merchants who had typically called their offices from the field to run credit card sales. This association was presented the idea of using a virtual terminal and gave it a try.
The association's salespeople now collect money at the POS and can log in via a secure portal and receive authorization online using their laptops.
These merchants are producing an average of $42,000 per month in processing volume and find it is much less expensive in the long run than paying wireless fees for a fleet of trucks.
I'd like to thank everyone who contributed resources for this article. I challenge all MLSs to research selling Internet-based solutions. This is a tremendous niche market that can prove very lucrative.
Should you have any questions about this or any article I've written, please feel free to contact me directly.
The number of success stories for those who understand and harness the power of selling e-commerce is unlimited. Are you ready to write your success story?
Jason A. Felts is the founder, President and Chief Executive Officer of Florida-based Advanced Merchant Services Inc., a registered ISO/MSP with HSBC Bank. From its onset, AMS has placed top priority on supporting and servicing its sales partners. The company launched ISOPro Motion, its private-label training program, to provide state-of-the-art sales tools and actively promote the success and long-term development of its partners. For more information, visit www.amspartner.com, call 888-355-VISA (8472), ext. 211, or e-mail Felts at firstname.lastname@example.org.
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