Handling money with eCommerce (Feb 2008) by Toby Stack

Introduction

NOTE: You may also wish to read our ecommerce concepts article which expands on many of the points made here.

When running a business that is using or considering investing in a e-commerce system you need to know about the various manners in which you transfer money.

Payment can be split into two main areas ...

  • customer side
  • business side.

Customer side

The customer side deals with issues relating to the decisions made by the customer, such as the method of payment

The business side

This involves methods of receiving payments.

Therefore it is important that a business has a system for taking payments that meets the preferred payment methods of its customers.

Forms of payment

Taking payments on-line is by far the most common method of payment for e-commerce stores, however many stores do allow for payment by other methods such as sending a cheque by post and even paying by cash either on collection or via an affiliated company, this can be useful for customers who either dislike paying on-line or are unable to use certain payment methods due to issues such as poor credit rating.

Many business consider it advantageous to provide the broadest range of payment methods, rather than try to force the customer into a particular payment route, although some business may decide that the increase in profit gained from using one method of payment outweighs the possible loss of business due to the restriction on payment type.

Here are some of the primary methods a company can take payments for product and services marketed on its website ...

Process Payment method Pros Cons
Phone/mail order Cheque Known and trusted method for the customer. No setup fees. Too slow/inconvenient for impulse buyers. Requires staff to take order. The seller will have to dispatch the product
Phone/mail order Credit / debit card Known and trusted method for the customer. Only setup fees for the seller are arranging to take card transactions with their bank Requires staff to take order. The seller will have to dispatch the product. Transaction fees payable to bank
3rd party shopping cart systems (PayPal etc) Credit / debit card Secure and simple. Minimal setup costs for business. Trusted method for customers Higher per transaction fees for seller. Too cumbersome for large inventory of stock. The seller will have to dispatch the product
Integrated shopping cart facility offered by the sellers hosting company Credit / debit card Secure and simple for the customer. Minimal setup costs for seller. Automated system for seller which can also track stock levels. No distribution or retail costs for the seller Often high transaction fees for the seller and/or monthly fees for the service. The seller will have to dispatch the product
On-line shops (such as Amazon) Credit / debit card Works just like a shop for the customer Like a high street shop, a high percentage of the sale price goes to the shop

 

Credit and Debit cards

For the customer, on-line payment systems can provide several flexible options options such as, buying on-line vouchers or making payments via phone services where the payment is put onto your phone bill. However, the primary form of transaction on any e-commerce site is taking payments from credit and debit cards, either as a once off transaction or from stored customer information. Although both payment methods hold a resemblance to each other there are certain differences.

Credit card transaction

A credit card transaction is not immediately deducted from you account but paid for by the bank and added to your tab which you then settle up at a later date. This means you are borrowing money, and so you pay a fee (interest on the loan) based on a percentage of the amount borrowed. The seller will also be charged a fee by the card issuing bank for the transaction. This fee may be based on a percentage of the total transaction or a fixed charge per transaction whatever the amount.

Many credit cards offer greater protection than debit cards from fraud, and are the preferred method of payment for many people when buying from web only businesses who do not have a physical high street presence.

Debit card transaction

This involves taking money out of your account immediately the transaction is complete. It costs the buyer nothing but the seller pays a fixed charge to the bank for the transaction. Again, this fee may be based on a percentage of the total transaction or a fixed charge per transaction whatever the amount.

Sometimes it is impossible to directly take money from your account and so your debit charge is recorded and settled at a later date. For the consumer the difference is minimal however it can be a concern for the supplier who may be liable to pay these charges, however for most small and medium businesses all on-line sales are handled by a third party who will charge a base rate AND a percentage fee on all transactions covering both possibilities. As a business you may have to build this fee into the price of your merchandise/service to keep your profit margin up.

Transaction fees for sellers

When a buyer takes a credit or debit card payment online they incur transaction fees from their hosting ecommerce system and/or bank. The fees they pay may be based on some or all of the following ...

Fixed charge for each transaction

If you were charged 35p per transaction, this would be ok if you were selling a relatively small number of cars. Not so good if you are selling a high number of small items, such as ring tones for 99p each.

Percentage charge for each transaction

If you were charged 4% per transaction, this would not be so good if you were selling a car worth £20,000. Much better if you are selling a high number of small items, such as ring tones for 99p each.

Percentage of turnover fees

Many shopping cart systems offered by hosting companies will charge you a percentage of your total sales, sometimes in addition to transaction fees!

What's best?

There is no simple answer, but in business everything is negotiable. Clearly a seller must make a decision based on analysing ...

  • the value of the items they are selling
  • the number of transactions they expect
  • the setup costs for an ecommerce system

A simple rule is ...

  • the cheaper the system to implement (eg 3rd party and hosting systems), the more you will pay for the service
  • the more expensive the system to implement (eg paying for your own ecommerce system to be built), the less running costs you will incur

Amazons shopping car, stock tracking and dispatch system cost many millions of dollars to build, and the company only started turning a profit after many years of operating, and long after they became an established brand. However, because they will be paying lower fees to operate it, they can price goods much more competitively.

NOTE: You may also wish to read our ecommerce concepts article which expands on many of the points made here.