E-Commerce - A guide to prospective Merchants

We get hundreds of calls about starting e-business from people everywhere in the world, so we finally decided to put together a comprehensive series here about the pros and cons you will be faced with.

Starting an E-commerce business is exciting!  You have a dream that you want to make a reality.  You have all your products picked out and have designed your website.  You have managed to find a host  for a reasonable price and you are almost there.

If you don't have a physical business location that already has a merchant account and are only doing business on the net, you need to be able to accept payment.  You start looking at the options and some are overwhelming.  Not only the cost, but who you might be dealing with.  Your transactions need to be processed electronically - are you going to do them manually or get a shopping cart that will process automatically?  What are all the fees involved?  Gateway fees? Discount rates? What is a mid-qualifed rate?  What about places like Pay-Pal or similar companies?

First of all, you must either be incorporated or have a business DBA checking account.  If you have one that is well established and can do your internet business using that account, do it.  The more business history you have, the better your rates.  You also may be able to get started without having your deposits held for some period of time through the processors. 

You will be asked to provide that information as well as the "average ticket" and the total of your projected monthly credit card or e-check business.

Processing Payments

For someone just starting out, you might want to set up a Pay-Pal or "3rd party processor"  business account.  I recently used the NEW Pay-Pal and they accept as many credit card as you have set up, but there are several alternatives.  A new one is Cyphermint which offers an alternative to a debit/Visa check card.  You pay cash money into a "wallet" and then can use it to buy things on the net or in some stores (they just landed Seven-Eleven).  

The reason for using an alternative processing method is that it will allow you to get your site promoted and start getting business without paying up-front costs before you really start raking in the cash. A debt free business with some liquidity has a better chance of survival than one that is sitting on a pile of bills with no income or cash.

You should NEVER pay more than $200 for a reputable online processing service.  We have used both Authorize Net and Card Services International and prefer the latter.  We keep in the loop on Merchant Fraud and we see lots of complaints about Authorize.Net who seems to be one of the largest processors, but only through advertising and affiliate programs.  Whoever you choose, the first line of this paragraph should be your rule.

The company selling their merchant account packages should have the COMPLETE COSTS listed on their website.  If you submit an application to someone who wants to call you or email you before they are giving you rates and fees, they are probably going to use a high-pressure tactic to get you to sign some contract that you will regret... They're going to send you something - you have to get it back in "so many hours" to avoid paying an "application fee."  There will be insufficient time for you to have the contract looked at by anyone.  Our advice is to skip them and go on to someone who has published rates for everyone to see.  

**We do NOT recommend E-commerce Exchange, LEASECOMM or any other 3rd party processor that does not publish their rates on their pages.  There is a lot of information about the outrageous costs and some unethical practices of LEASECOMM on the internet.  LEASES of ECX's service can cost $2500 and you don't own your login at the end of the lease. Lawsuits including a class-action suit have been filed against Leasecomm over this service. E-Commerce Exchange is a reseller of Authorize.net. Authorized.net has some other resellers who are acceptable.

Online transaction fees are higher than face2face transactions. Generally the MC/VISA DISCOUNT RATE (the percentage you pay to be able to get your money) is 2.25 to 2.30%.  American Express charges 4.1% on all internet transactions (no setup fee).  Discover is a separate $50 one-time application fee and charges 2.50%.

TRANSACTION FEE - charge PER transaction usually $0.25-$0.30 each.

BATCH FEES - every "day" you process cards constitutes a "batch" - fees average $0.25 or $0.30 per batch (if you process 30 cards you only pay 1 batch fee).

GATEWAY FEES - a fee paid to the processor to get the information from your computer to the issuing bank - average $15 to $20 a month

BANK STATEMENT FEE - until you are processing enough transactions to cover this cost, you will pay it anyway.  Usually $5 to $25 a month.

PROCESSOR STATEMENT FEE - this is a mailed printed statement that is a compilation of all the charges for the month.  CSI has an online statement you can print to avoid the $5 monthly fee.

AVS FEES - Address Verification System (fraud protection available on US transactions ONLY)  $0.5 to $0.10 each. 

Shopping Carts

Then after you have gone through all of that, you have to find a shopping cart.  Maybe it came with your website for a higher monthly fee (Miva Merchant is the most common).  Maybe you got a free one with your site - but it doesn't have any type of interface to process live transactions so you have to process them by hand.

There are hundreds of shopping carts out there.  Some are free if you know anything about CGI or PHP and can adapt them. You can find some at http://cgi-resources.com.  But the others average $200 to $400 each and are only good for one store or website.

If you are processing by hand, you don't have a problem.  You can use that free cart you got with your site as long as you don't have too many items.  Some carts will calculate shipping costs using FedEx or UPS based on the amount of the total order or by weight per item.  If for some reason you have to charge tax, they will calculate that for you as well.

The ideal way to begin is to find something free or has a low monthly cost attached to it.  Because now on top of your goods and website, you could be up over $500 easily!  

Credit Card FRAUD

So now you are all set up - one way or another and you get your first order using a credit card. You go to look at your "approval code" and there is a long string of letters and numbers in it.  Your processing company didn't bother to tell you about what they mean, but they approved it, RIGHT?  WRONG!

I am unable to imagine how much places like Amazon.com and other big companies lose on automatically processed transactions, but it must be horrendous!  You have already shipped the goods - they're gone! Now, 2, 3 or even 6 months later, your processor sends you a "retrieval request" ($5 to $7) to find out what you did to make sure the purchaser was the valid card holder.  Did you have them sign something?  Not places like Amazon.com.  Did you talk to them?  Did they call you on your incoming 800 number from the number listed in the phone book? These are all valid ways of proving that the cardholder placed the order.  (We recommend having caller ID on your business phone - it can sometimes save a lot of trouble).

If the customer didn't ask who you were but told the card issuer to just refund their money, the funds are suddenly missing from your account.  NOT ONLY THAT, but your processor has "fined" you by tacking on an additional paperwork processing fee - it can range from $15 to $25 or more per chargeback.  If you are selling services and charging a monthly fee, you may have charged that card several times.  Each charge can have it's own separate chargeback.  If you aren't sure about whether the person was "real" or not, you could refund the other charges to avoid fees.  But you are still out your cost of goods or services.

The reason we are telling you this is that we are giving you years of hard-knocks experience from our business as well as other merchants on the internet.  Some of the stories are nightmares and involved a lot of money.  And in some cases, the merchant did EVERYTHING right. In one case of $11,000 fraud, the merchant had called Visa several times to make sure everything was legit.  Finally, after a lot of deliberation, they shipped the goods!  It was over 6 weeks before they found out it had been fraud.  

Our policy is that all foreign orders for actual hard goods are paid for by wire transfer to our bank prior to shipping.  What happened to that poor merchant would never have happened to us.  And even letters of credit are not good.  In some countries, you can buy a million dollar LC from a bank for $10.  They don't care.  If you ever decide to allow a customer to use a LC, you must obtain an IRREVOCABLE LETTER OF CREDIT CONFIRMED BY A US BANK.