Beginners guide to ecommerce and accepting credit cards

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Beginner's Guide to Ecommerce
by: June Campbell of NightCats.com

Whether you call it Internet commerce, or ecom, or ecommerce, or immerce, it basically means the same thing. These terms mean buying or selling something electronically, and the time has never been better to jump in. If you have something you'd like to sell on the Net, new technologies have opened up an array of ecom options -- there's one to suit every need and requirement. Most importantly, ecom is safe. Experts tell us that online transactions are every bit as safe as face to face transactions-- although neither can be guaranteed to be 100% risk free. You're just as likely to be mugged on your way to the Bank Machine as you are to run into security problems with Internet commerce!

But ecommerce can be a confusing subject and many of us need a little help sorting it all out. If some of the jargon is confusing you, read on and I’ll explain some of the basic concepts. This document contains three categories of information:

Definition of Terms
Facts About Accepting Credit Cards Online
Ecommerce Solutions Compared

Definitions

Commerce Service Providers (CSP)

CSPs are business or web sites that provide ecommerce solutions.

Digital or Electronic Cash or E-cash or Ecash or Digital Money

These terms are also used interchangeably, and they refer to any of the various methods that allow a person to purchase goods or services by transmitting a number from one computer to another. The numbers are issued by a bank and represent sums of real money. Digital cash is anonymous and reusable. Unlike credit card transactions, the merchant does not know the identity of the shopper.
Yahoo’s Listing of Companies Providing Digital Cash
Cybercash and Digicash are two well known methods.

Electronic Checks or Cheques

Customers pay for merchandise by writing an electronic check that is transmitted electronically by email, fax or phone. The "cheque" is a message that contains all of the information that is found on an ordinary cheque, but it is signed digitally, or indorsed. The digital signature is encoded by encrypting with the customer’s secret key. Upon receipt, the merchant or "payee" may further indorse by encoding with a private key. When the cheque is processed, the resulting message is encoded with the bank’s secret key, thus providing proof of payment.

Various companies are selling Electronic Check software and services.

Electronic Wallet

Electronic Wallets store your credit card numbers on your hard drive in an encrypted form. You then make purchases at Web sites that support that particular type of electronic wallet . By clicking on a Pay Button, customers initiate a credit card payment via a secure transaction enabled by the electronic wallet company’s server.

Electronic Commerce or Ecom or Emmerce or EC

These terms are used interchangeably, and they all mean the same thing — the paperless exchange of routine business information using Electronic Data Interchange (EDI) , email, electronic bulletin boards, fax transmissions and Electronic Funds Transfer. It refers to Internet shopping, online stock and bond transactions, the downloading and selling of "soft merchandise" (software, documents, graphics, music, etc.), and business to business transactions.

Extranet

An extranet is an extension of a corporate intranet. It connects the internal network of one company with the intranets of its customers and suppliers. This makes it possible to create e-commerce applications that link all aspects of a business relationship, from ordering to payment.

Disintermediation

Disintermediation is the process of bypassing retail channels or mail order houses and selling directly to the customer.

Hard Goods vs Soft Goods

Hard Goods are items that exist in the real world, as opposed to soft goods, which exist virtually or electronically. For instance, an Internet merchant selling a book that is shipped to the customer in a print version is selling hard goods; a merchant offering a book for download in electronic format is selling soft goods.

High Risk Processors

High risk processors (or brokers) are financial institutions or companies that that issue merchant status accounts to high risk businesses. They offset their risks by charging higher transaction fees and higher rates than traditional banks do. However, the initial outlay of cash that you will be required to put up is usually much less than the large deposits required by traditional banking institutions. Some brokers may offer other added features such as shopping cart software, web site templates, forms or secure lines for ordering.

Immerce

Immerce is the new term being used for commerce that is transacted totally over the Internet.

Merchant Account

A Merchant Account is a relationship between a business (i.e. a merchant) and a merchant bank which allows the retailer or merchant to accept credit card payments from customers. Many banks or financial institutions, especially in Canada, have stiff requirements and regulations regarding the issuing of a merchant account. Many small or home based businesses report that they have great (sometimes insurmountable) difficulties acquiring Merchant Status. If Merchant Status is obtained, the merchant then rents or buys special software that is used to process the transaction. In some cases, depending on the bank and depending on the type of business that you are operating, you will also need to purchase or rent a piece of hardware known as a processing terminal.

An Internet Merchant Account is a special account that permits the acceptance of credit cards online. Transactions are processed online, in real time. While the customer waits, the system checks the credit card to be sure that it has not been reported stolen, has not expired, and is listed to the same address that the customer has given. If the card is approved, the customer and the merchant are both automatically notified that the sale has transpired. This type of account is a stricter banking relationship than one involving face-to-face transactions. Web transactions do not gather signatures from purchasers and therefore there is a higher risk of fraud.

Merchant Brokers specialize in obtaining credit card accounts for online businesses. Brokers charge a setup fee and lease or sell the software and hardware as needed. Expect to pay a discount rate, which is the percentage you pay for each transaction processed, as well as various other charges that differ among services. If obtaining a merchant account through a traditional bank is proving to be a problem, merchant brokers are a good alternative.

Yahoo’s List of Credit Card Merchant Services

Microtransactions or Micropayments

Microtransactions are transactions of tiny amounts – a few cents or a few dollars, typically made in order to download or access graphics, games, and information.

Phonecash

Still under development at the time of this writing, Phonecash allows customers who prefer not to use credit cards to buy items on-line by having the value of the purchase transferred from their account to another account within the Internet Banking System. For details, visit Cybank

Telephone Billing Systems

A very new approach, telephone transactions allow the customer to purchase an item or service, and the amount will be billed to his or her telephone bill. To date, this is being used for soft items such as downloads, time measured services (i.e. time spent at a Web site) or for making charitable donations online.

For a sample, check eCharge Corporation

Facts About Accepting Credit Cards Online

Before you can accept credit cards (either online or offline), you must have a Merchant Account, which is a special arrangement with a banking institution. Small and home businesses often experience difficulties qualifying for a merchant account, and Web based businesses run into even more problems.

The situation is this: Online transactions don’t take place at the point of sale (POS). They are considered to be "non-face-to-face" transactions. Since there is no way of ascertaining the customer’s identification, there is no way to be sure that the customer is the legitimate card holder. Therefore, financial institutions are leery about the high potential for fraud.

Moreover, the major credit card companies offer their card holders the right to contest charges on their statements that may be the result of theft, fraud or error. A contested charge is referred to as a chargeback. When a chargeback occurs, merchant will end up paying the charge to the issuing bank, in addition to a chargeback fee that can be as high as $30 or more. For example, if you sell a book for $20 through a credit card transaction, and the cardholder later contests the sale, you will end up paying your bank the $20 PLUS a chargeback fee of $10 to $30 dollars.

Consequently, many banks require a reserve fee when issuing merchant status. Typically, face to face sales have a chargeback rate of 1% of all sales. The potential for chargebacks is greater when it is an online sale, so the risk to both bank and merchant increases.

To minimize their risks, most banks have stringent requirements that a business must meet to establish eligibility for merchant status. Factors considered include cash reserves, length of time in business, tax returns, credit history, debt load, refund policies, volume of business, cost of item being sold, and other sources of income.

High Risk Processors are merchant acquirers that specialize in high risk business. They offset their risks by charging you higher transaction fees and higher rates. In the US, the Electronic Card Systems Inc. and Card Service International are two of the better known examples. Merchants living outside the US will be required to find a service that works with their own banking institutions.

Other Associated Expenses

The chargeback expense is the first and foremost concern for a merchant hoping to acquire a merchant account. Chargebacks can result in serious financial loss to the would-be merchant. Also, merchants who encounter too many chargebacks are at risk of losing their merchant account.

However, there are other charges and expenses to factor into the budget as well. Merchants will need to investigate hidden equipment costs, setup fees, line charges, bank transactions fees, holdbacks, and discount rates, etc. These vary considerably among service providers, so compare, compare, compare!

Ecommerce Solutions Compared

There are dozens, perhaps hundreds of businesses and organizations eager to assist you sell your product online. Basically, they fall into four categories: credit card transactions, digital cash transactions, electronic fund transfers and telephone billing systems. No solution is perfect and each comes with its own set of pros and cons. The right choice for you depends upon your specific business requirements.

1. Merchant Internet Accounts.

If you have a merchant status, you will need to consider the following factors:
Pros:

Consumers are familiar with credit cards
With credit card transactions, consumers don’t have to download and install special plugins.
Credit card sales lends itself to impulse buying.
You have the customers' contact information for follow up sales and marketing purposes. (This is a pro for the merchant but a con from the point of view of many customers, who prefer anonymity.)

Cons:

Consumers still have concerns regarding providing financial information online.
Not everyone has a credit card.
This method does not lend itself well to the purchase of down loadable soft goods, such as software, art, graphics, etc. Vendors wanting to sell down loadable soft goods will will need to find a way to ensure the product is paid for, once downloaded.
You will have to deal with chargebacks.

If you can’t or won’t get a merchant account through your regular banking institution, you still have the broker option open to you. Brokers can often arrange merchant accounts for businesses who are deemed high risk. Setup fees and discount fees apply.

2. Electronic Cash Transactions

Electronic money is an arrangement whereby the customer pays for the merchandise using, well, electronic money. Examples of this are the well known DigiCash, Cyberbucks, CyberCash, etc. As consumers become more comfortable providing credit card information over the Net, these methods are less utilized.

The Pros

No credit card transactions are required.
No concerns re chargebacks.
Lends itself well to micropayments.

Cons

Many people are unfamiliar with the concept and shy away from unknown entities.
The process is perceived as "a hassle" to some shoppers who prefer to simply give credit card information.
Both merchant and customer must be participating in the same scheme before this method of ecom can be used.
Eliminates the possibility of impulse buying, unless both customer and merchant are already in same scheme.
May not be available globally.

Check out Digicash and Cybercash

3. Electronic Fund Transfers

Funds are transferred electronically from the customers bank account to yours. (This is a highly simplified explanation, and is accurate in the most general sort of way. However, the bottom line is that the customer buys, and at some point the funds are removed from his or her account and ultimately deposited into yours.)

The best known method is the issuing of electronic checks

Customers pay for merchandise by writing an electronic check that is transmitted by email, fax or phone. The "check" is a message that contains all of the information that is found on an ordinary check, but it is signed digitally, or indorsed. The digital signature is encoded by encrypting with the customer’s secret key. Upon receipt, the merchant or "payee" may further indorse by encoding with a private key. When the cheque is processed, the resulting message is encoded with the bank’s secret key, thus providing proof of payment.

NetCheck, QuickCard Systems Inc. or Cybank are examples.

Pros

No credit card worries
Available to persons who don’t have credit cards

Cons

A very new technology that some perceive as being less secure than other forms of ecommerce.
Many customers aren’t set up to issue electronic cheques; time required to make the arrangements eliminates impulse buying.
May not be available to international consumers.

4. Telephone Billing Systems

A very new approach, telephone transactions allow the customer to purchase an item or service, and the amount is billed to his or her telephone bill. To date, this is being used for the sale of soft items such as downloads, time measured services (i.e. time spent at a Web site) or for making charitable donations online. eCharge Corporation is a pioneer in the use of this technology.

Pros

Eliminates worries about credit cards (for both consumer and merchant)
Safeguards soft merchandise – no possibility of theft or pirating.
Available to customers without credit cards
Coverage includes the US and points in Europe. Canadian coverage is expected soon.

Cons

Customer is required to download and install a plugin.
Currently only available for soft merchandise but can do some limited transactions for hard goods.
Not currently available for Mac users.
Currently available for sales using telephone modems, and will not work for transactions over cable modems and ISDN lines.

5. One-Stop Shops

More recently, with the huge interest shown in ecommerce, a multitude of services and products have become available. It's now a possibility to find a service that will broker your Internet Merchant Account, as well as providing web site storage, a template for designing your site, shopping cart software, a form generator, a secure line for safe online ordering, and more. IBM, ICAT and Vantage are examples of businesses offering these all-encompassing services. They are excellent starting points for the entrepreneur who wants to delve into ecommerce.

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Article by: June Campbell is a professional writer whose work has appeared in several international print and online publications. Her business resource web site offers guides for proposal writing, business plan development, joint venture contracts and more. (www.nightcats.com)

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