Cracking the Tough Online Payment Nut

The online sales channel continues to grow each day, touching every corner of the globe and nearly every type of merchant or marketplace. An obvious, fundamental component to the success of this channel is the payment system. With all the options available, choosing the right one may seem like a daunting task.

As with many other endeavors, one of the first questions to ask is whether to build or buy. Merchants should weigh the advantages and disadvantages of each option based upon specific business and market conditions, as well as long-term objectives. It’s important to keep these two questions in mind: Who are my customers? Where do I want to go tomorrow?

As you start to evaluate or reevaluate your options, you should consider the business, financial, technical, operational (and more!) implications of each model.

Business – What Works for Your Market?

It all boils down to the type of market you are targeting and buyer preferences.

To support this statement, let me mention that Innopay, in its Online Payments 2010 study, points out how different the European countries are when it comes to payment methods. Here are just a few examples: Credit and debit cards are used for the vast majority of online payments in the UK, while iDEAL — an e-wallet — is preferred in the Netherlands. Cash on delivery is the favored method in most Eastern European countries.

Both studies and practices demonstrate that you need to allow shoppers to order and pay in the manner most comfortable to them. Ideally, everything should be explained in their native language, and they should be able to pay with their local currency using their preferred method.

This business-specific consideration is one that also carries over into the technical/security sphere, as you must also gain the shoppers’ trust and assure them that their information is safe.

Another point worth reflecting on is how fast your customers want your products or services. What payment methods are best to match this need? For electronically deliverable goods, offer payment methods that allow instant delivery.

Besides the now classic card payment and, say, PayPal, what options have you got? Luckily, many. The tendency is to bring payment options from the offline world online: Wire transfers become instant online wire transfers — same for direct debit.

Don’t forget other PayPal-type services such as the giant Alipay in China or e-wallets like WebMoney, popular in Russia. Add to this mobile payments, and it’s clear there’s a wide pool of card and alternative payment methods at your disposal.

What good is instant delivery when your shoppers prefer to pay by wire transfer and it takes two to seven days for the payment to clear?

Financial – Do the Simple Math

Let’s say, for example, tha it costs you 10 percent to outsource your online payment system, and that you are expecting US$10 million in annual volume. Can you hire a team and pay the operational costs to provide a professional solution for $1,000? Or would adding a full time asset to your core business be a wiser move?

Now play devil’s advocate: Are you more likely to keep your payment system running when it is not your core business — or is your potential partner? One day of downtime — or even one hour when the services are most essential — can cost you a significant chunk of your customer base for the long term. Which is the safer bet?

For an in-house solution, bear in mind that there are costs with running day-to-day operations, payments processing and reconciliation, product delivery, dispute resolution and charge-back fees, shopper support, legal services, implementation of new payment methods, etc., etc.

It is also true that you may not be able to assess costs — or even sales — when entering new markets or geographies. Going for a payment system on demand with a cost-per transaction pricing system would give you at least the option to have expenses under opex instead of capex.

Technical – Do the “Five 9s” Scare You?

Integration, APIs, uptime (99.999 percent), maintenance, automatic order and payment processing, customization capabilities, implementation, reporting, etc., are just a few of the technical issues that need to be taken into account when it comes to managing an online payment system.

Integration of the online shop, for instance, is required at many levels and in many directions — with payment gateways (such as CyberSource), payment service providers (like First Data or Merchant e-Solutions), directly with banks or entities such as Paypal, and with back-and front-end applications.

There is also a great deal of automation required to help gain time, reduce human error and improve revenue. Even for payment reconciliation, you need special tools to match bulk transactions with their corresponding orders. Another good capability is automatic follow-up on abandoned orders within minutes from the shopping session, to catch the users still online and convert abandoned shopping carts into sales.

Take into account the resource factor — not only how long it takes for the initial setup but also what it takes to maintain the system.

The List Goes On

There are far too many issues concerning payment systems to cover them in-depth in the space of this article, but here is a quick list of additional factors to take into account:

• Operational – Can your team support another 24x7x365 operation?
• Legal – Setting up a merchant account (if necessary), contracts, legislation, different taxation.
• Accounting – payments, invoices, reconciliation, dispute resolution, follow-up on incomplete payments — this happens, for instance, with wire transfers, where banking fees are not borne by the payer.
• Security and Fraud Protection — This issue really deserves a separate chapter altogether. Each payment system comes equipped with a fraud protection mechanism — from basic to sophisticated. You need to decide what flexibility, fraud protection level and additional services would suit your business.
• Credibility — Do your customers trust you with their money? The payment system you use needs to inspire confidence and ensure your customers that their data is secure.
• Ethics – Beyond what the system can actually perform, you also need to use it wisely. I like Seth Godin’s suggestions on simple principles for ethical dealings online.

Going one step further, a payment system should bring you added value through improved localization (languages, payment methods, currencies, support), tools to increase average order value (“shoppers who bought this also bought that” type suggestions right in the shopping cart), optimization tools and services (for companies to survive in this global marketplace, constant optimization is essential) and business intelligence.

Bottom Line – Crawl, Walk and Then Run

It’s nearly impossible to operate a business in today’s economy and be unaware of the emerging markets and the ever-growing consumer base. We’d all like to tap the Far East markets, the Latin American segment or the emerging Eastern Europe/CIS online consumer base.

Before you invest a small fortune in building a product tailored for local consumers, chances are your e-commerce partner and payment provider can already transact in their language using their preferred payment system.

Put your business on the emerging market’s doorstep with the least amount of risk. Once you are able to establish a footprint, expand your offering and investment. Leveraging a partner in markets outside your expertise will almost certainly mitigate your exposure.