Online shopping and its development is a hot topic- whether it’s about safety, business types or pros and cons in comparison to a ‘regular shop’. In the meantime, online payments, a matter equally important, is put on a back burner.
Payment processors are not in charge only of efficient mediacy and safety of our transfers- the choice of such providers should depend also on the type, size and outlook of your business. It might be worth then to get to know each provider to make sure your decision is a good one.
E-wallet is one of the easiest and most popular solutions. The idea behind it is that the provider creates virtual accounts, which you can then top up with as much as you want (just like a Pay As You Go mobile phone). Afterwards, you can pay with that virtual money in every online shop that accepts e-wallets.
You could ask yourself though- why would a client bother with topping up their account, if they can usually pay directly anyway? Here, the arguments are mainly of a psychological nature. Some people are still reluctant, at least in some shops, to enter their card or account details. A payment method that they are familiar with gives them sense of safety and reassures them that no third party will have access to their bank accounts.
Additionally, there is one more aspect, which is convenience. The client doesn’t need to enter their details every time they buy something- logging to their e-wallet will do instead.
From the point of view of e-business owners, it is worth including an e-wallet in their offer, but very rarely can it be the sole payment method available. After all, the more payment methods available, the bigger the chance of shoppers.
Payments based on aggregate accounts
This type of payment service requires the provider to set up an account in a bank and then ‘lease’ it to their clients. All payments are transferred onto that account, which then are filtered and sent further by the provider to the business the money belongs to.
If the provider wants to support also card payments, they need to set up a merchant account in an acquiring bank. So, in fact, on one hand they are a payment provider for e-businesses, but on the other they themselves are also an e-business that offers… payment services.
You could say then that payment providers make money on allowing other e-businesses use their merchant account.
What are the advantages of using such providers? First and foremost, red tape is minimal. Every client has to convince the acquirer that they are not a so-called high-risk business, which means they won’t cause them any loss (typical high-risk industries are gambling, pharmaceutics and porn). It is connected to fulfilling several requirements. In this case, the payment provider goes through all the formalities with a bank and then leases the account to their clients at their own risk. In other words, if an e-business causes loss, the provider that leased the account will suffer the consequences.
PSP – the real deal
PSP (Payment Service Provider) is a payment model that directly represents the acquirer (the previous type, where the acquirer offers aggregate accounts within a merchant account, is called IPSP – Internet Payment Service Provider. The main difference is that PSP supports merchant accounts that belong directly to e-businesses (in theory, IPSP could be a PSP client.)
What does that require? Setting up a merchant account. Some PSPs do it for their clients, others help them set one up, while some accepts only clients with an already existing merchant account. The whole process of opening an account can take up to 3-4 weeks and requires fulfilling several conditions and formalities. But if those initial difficulties and overcome, an e-business gains numerous payment possibilities.
It is impossible to list all the services without making this blog entry ridiculously long, so let’s focus on two of them.
E-business that already has a merchant account can use recurring billings. After completing a card authorisation, they can charge their clients each time on their own. It could be compared to automatic direct debits, but recurring billings allow payments to be defined automatically by the e-shop- the client doesn’t need to log in their bank and set the size of payment.
Another solution are dynamic transaction descriptors, which is the transaction information visible in billings. In case of aggregate accounts, it is usually the name of the provider and an ID. A business with a merchant account can define their descriptions. Of course, it’s a pleasant nod towards the client, but what does the e-business gain from it? Well, their clients have no problems identifying their payments and don’t demand hastily chargeback, which, even if the business is in the right, are a great headache.
What makes it a more prospective solution? A business that has its own merchant account is in a closer cooperation with institutions such as Visa, MasterCard, acquirer, card issuer, issuing bank, etc. With IPSP, the agent is a kind of a barrier between such companies and a business.
That was theory- what about the practical side? E-business is working for its own account and is building their payment processing history, which will be the basis for negotiations for better conditions of cooperation with an acquirer. They can also change the PSP that they work with, which in this case is a smooth and fast process, because they already own a merchant account. If such change is indeed needed (e.g. we weren’t satisfied with the provider or their competition offers a better deal), the processing continuity is maintained and there is no need to re-register.
PayLane is one of the PSP providers available in the payments market.
All pros and cons considered- which solution suits which e-business?
As you can see, an e-wallet cannot be used as the sole payment method. It is advisable though to offer more solutions, as the more methods available, the bigger chance a potential client becomes a real one.
It is also worth mentioning that one of the most popular providers, PayPal, is not only an e-wallet, but also an IPSP, which offers other payment methods. You can pay with a card (both credit and debit) the traditional way and as a back up for PayPal (if the e-wallet is empty, the needed sum with be automatically transferred from the card). Such a solution may be sufficient for a businesses at its early stage, e.g. a creator of a web app, who is starting to receive occasional payments.
The above example shows that the boundaries between models are not always that apparent, similarly to payment institutions that are both an acquirer and PSP.