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Online and Electronic Payments
What are electronic payments?
Online electronic payments are transactions which take place through web based electronic methods as opposed to traditional methods such as cheques or cash. The focus of this factsheet will be on businesses accepting payments from credit and debit cards online. There are however other methods of
accepting electronic payments such as BACS (banks automated clearing system), bank transfers and direct debit but they are less suitable for online sales.
For full ecommerce it is necessary to accept electronic payments from customer’s credit/debit cards. Customers (both businesses and consumers) now expect to pay for a transaction online as they purchase products in this way from other businesses. Customers also understand the process of
making credit / debit card payments online and are comfortable with the risks. Many businesses accept electronic payments as part of an e-commerce website with shopping cart and checkout system.
Whichever type of approach to accepting payments is adopted, funds will be processed from a customer’s credit debit card and deposited into the
businesses current account. The route of payment, the commission levied, the time taken to receive payments and the risks may however differ.
What are the options available for taking electronic payments?
There are several options available for accepting electronic payments they include:• Internet merchant bank account (IMA) with offline payment
processing – An IMA is a special type of merchant account obtained
directly from a merchant bank such as Lloyds TSB, Barclays, HSBC or through a payment service provider. The end provider is always a merchant bank. Some ecommerce systems can securely take a
customers card details in the checkout process and provide the details to the business via an encrypted link. The business can then process the payment manually using a PDQ machine (credit card machine that is used in a shop) or terminal in order to process the payment. This approach is labour intensive and there can be security risks of
receiving and storing card details. IMA accounts usually have a set-up charges and charges per transaction i.e. 50p per debit card payment, 2-4% for credit cards (typically a minimum charge per month will apply). There will also be a cost to rent a PDQ machine or processing terminal. This approach is not recommended as it is a labour intensive method of processing payments and there are security risks.
• IMA with a payment processing service (PSP) – Many businesses choose this option. Similar to the above approach, an IMA needs to be applied for (see above for details) but instead of processing the
payments details manually, a PSP is used. This is connected to the ecommerce system and when the customer is going through the checkout process, the customer enters the payment details into the PSP website (it can be made to appear as it is the business website).
1 The PSP usually supplies the security (HTTPS connection) for the transaction, automatically processes the payment through the IMA and provides an indication of the risk of the transaction to the business (through provided tools). There is usually a monthly fee (or annual fee) for using a PSP and as above IMA charges also apply i.e. 50p per debit card payment, 2-4% for credit cards and typically a minimum charge per month will apply. Payments usually take 3-7 days to clear into a businesses current account.
• Bureau style PSP (no IMA required) – This is similar to the above approach but instead of requiring an IMA, some PSP’s offer payment processing and deposit funds into the business bank account. This option is often good for start-up businesses as banks will not always provide an IMA if there is little trading history as they perceive it as a risk. Many bureau style PSP’s have no set-up costs or fixed charges, so are ideal for businesses testing the market or with a limited value or number of transactions. Processing costs are usually higher than using a PSP with IMA when processing a large number or value of
transactions. Bureau services often operate differently to IMA’s, they are regulated in a different way to IMA’s and have different risks. Many of the personal style PSP’s listed below now offer bureau style
services. Examples of costs are 3.4% + 20p per transaction for both credit and debit card transactions (taken from Google Checkout, see resources for other providers). Payments can take 7-30 days to clear into a businesses current account, dependant on the PSP chosen. • Personal style PSP – These types of services are mainly designed for
casual payments between consumers, i.e. for goods bought on eBay. It is possible for a business to use these types of services to accept payments. This can be done by sending an electronic invoice from the providers systems or accepting payments made to the businesses email address. Usually these services require both the customer and business to be members of the service. Most personal style payment providers now offer a bureau style service that can connect to a shopping cart.
Examples of all the above types of provider are included in the resources section. Of the above two options, businesses mainly make a decision between using a bureau style PSP and a PSP with an IMA. Considerations usually include the charges per transactions, monthly/annual fees, quantity of sales and risk/regulatory issues. Typically, a PSP with an IMA is chosen by businesses with a trading history and with a larger amount (or value) of transactions. Start-up businesses or businesses that are testing the online market usually choose a bureau PSP due to easier availability and no fixed costs. It used to be perceived that a PSP with an IMA offered a more
professional image and more protection for the trader but it is no longer this clear cut.
If developing an ecommerce website, it is important that the chosen PSP is compatible with the shopping cart system chosen. Seek advice from the PSP, ecommerce system provider and/or the website developer. More information about taking electronic payments and a diagnostic tool to help assess what the best options are, is available at: http://www.electronic-payments.co.uk/
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What are the costs of accepting electronic payments?
Whichever option is chosen, the business will incur a cost in accepting credit or debit card payments. Charges vary between the type of PSP and the suppler chosen. The charges can include set-up costs, monthly/annual costs, percentages of the transaction or a fixed cost for every transaction. Examples of costs for using a bureau style provider and an IMA will be explored below. Both examples are based on a business making £1000 (20 sales @ £50) of sales via an ecommerce website.
Examples 1 – PSP with an IMA (Based on Sage Pay and an IMA arranged through Sage Pay)
• Set-up cost – No set-up costs.
• Fixed monthly costs – £20 per month.
o Consists of £20 for ‘Sage Pay’, the PSP. o IMA no fixed cost per month.
• Per transaction fees – £20 This consists of:
o IMA account fees at 3% per sale for credit cards and 50p for debit cards, i.e. £15 credit card charge (for £500 of transactions) and £5 for 10 x sales totalling £50. Total transaction fees for £1000 via a mixture of credit debit cards are likely to be £20.
o PSP fees – No fees per transaction with this provider. • Total charges for £1000 sales would be £40 per month.
Example 2 - Bureau style PSP (information taken from Google Checkout)
• Set-up cost – No set-up costs.
• Fixed monthly cost – No fixed costs. • Per transaction fees – £38 this consists of:
o 3.4% + 20p per sale. Therefore total charges by this method for £1000 of sales would be £38.
• Total charges for £1000 sales would be £38 per month.
In the above scenario, the bureau style service is the lowest cost provider. If there were a higher amount of transactions or more customers paid via debit card then the PSP with an IMA would be the cheapest option. Therefore it is important to review costs on a number of projected sales scenarios. There may also be other differences such as consumer perception and risk between the services. The resources section provides more examples of PSP’s and PSP’s websites include an overview of services with costs.
What are the risks and legal issues of accepting electronic
payments and trading online?
Trading online has different regulations and legal issues to high street trading. It is recommended that legal advice is taken before trading is undertaken. Some of the key areas to consider are:
• Terms and conditions – Any website accepting online payments must have terms and conditions that explicitly state the terms of the contract.
3 The shopping cart system should make it compulsory for a customer to agree to the terms and conditions before the sale is made. There should also be a link to the terms and conditions in the confirmation email. The terms and conditions should aim to protect the businesses interests as well as applying with consumer law. Many businesses write their own terms and conditions or use one of the many website
providers who will write the terms and conditions for a small fee. It is best practice to seek professional legal advice regarding terms and conditions before trading online.
• Legislation – Legislation and regulation can have an impact on eCommerce trading. Relevant legislation includes: the Electronic Communications Act 2000, Office of Fair Trading: Enterprise Act, The Communications Act 2003, The Consumer Protection: Distance Selling Regulations, The Data Protection Act 1998, Consumer Credit Act 1974 and The Directive on Privacy and Electronic Communications.
Businesses need to undertake research into the potential impact of legislation and to seek legal advice before beginning to trade. Websites with information on these issues include www.berr.gov.uk, www.out-law.com and www.ico.gov.uk
• Chargeback’s – This is where a customer demands a refund from their card provider, either for card fraud or a customer service issue (i.e. goods not received or faulty). The merchant service agreement that a businesses has with the merchant account provider usually means that liability is transferred to the merchant, i.e. the refund is issued from the merchants account. This is an issue that needs to be understood as although it is a rare occurrence, when it does happen the best case is a time delay for resolution and the worst case is the business loses goods and have to reimburse the customer’s credit card provider and also pay a penalty fee. There are steps that can be undertaken to minimise risk, they include:
Chargeback’s originating from non-fraudulent activity: o Good terms and conditions.
o Good customer service.
o Proof of delivery & good fulfilment strategy. Chargeback’s originating from fraudulent activity:
o Ensure that the PSP offers address & card verification systems - AVS & CV2.
o Only ship to cardholders address or insist on this for the first order.
o Fully utilise the PSP’s risk warnings service & risk management tools.
o Chargeback insurance can be taken out from some PSP’s and IMA providers.
o Choose a PSP that uses a payment verification services such as ‘Verified by Visa’.
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Resources
Personal PSP
Paypal www.paypal.com/uk
Google Checkout www.google.co.uk/checkout
Nochex www.nochex.co.uk
Bureau Style PSP (do not require IMA)
Google Checkout www.google.co.uk/checkout
Paypal www.paypal.com/uk
WordPay www.worldpay.com
PSP that require an IMA (some may be able to supply one)
Sage Pay www.sagepay.com
RBS WordPay www.rbsworldpay.com NetBanx www.netbanx.com
Links:
Business Links Information on IMA: http://tinyurl.com/2z8gg6
Guide to electronic payments with examples of providers and tool to select providers: www.electronic-payments.co.uk
