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
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
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.
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
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
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
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
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
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
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
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
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