This month, we had an opportunity to catch up with Jason Daniel, director of operations and Webmaster of The Processing Network. TPN is a Web company in Seattle which specializes in the development of electronic commerce enabled sites, as well as payment processing over the Internet. Jason could rightly be called one of the more experienced developers on the Internet. With over a dozen commercial applications in his portfolio, experience as an Internet trainer for several major corporations, and one of the developers tasked to the redesign of MSN in 1996, he has certainly earned his cyber-stripes. Aside from his duties at TPN, he is also involved in the University of California's Pathway online application system.

Since e-commerce is such a hot topic on the agenda of most corporations these days, which have even a 1% probability of turning a profit from the Web, we thought it would be a good idea to ask Jason a few questions about the one thing that Web builders have the hardest time understanding about e-commerce - Active Server Pages? No. Security? Nope. Building a shopping cart? Wrong again, but we do have a nice consolation prize... Payments and processing options. Before we get into our chat with Jason though, we should warn you that any information contained within is intended to act as a guide, and not the letter of the law concerning payment processing over the Internet. The information is provided to help Web builders find a starting point when searching for ways to process transactions. We present the information, but what you do with it, isn't our responsibility...

So, all legalities aside, let's get on with the questions:

WBB:As an introduction, can you tell us just what happens, or should happen for that matter, when a user submits a form from an e-commerce enabled site, plus a bit of information concerning the process as a whole?

JD:If the site is a SSL (secure socket layer) site then the transfer of all this information is secure. Before each packet is sent it is encrypted using very strong encryption. In fact, it was banned outside of the US until about a year ago as a munition. Of course the data is most likely stored on a server somewhere and it is more likely that the information will be taken from there. The data will be only as secure as the machine it is going to. Honestly, it is more secure to do credit card transactions on the Internet than it is over phone lines, via faxes or even at the store if they do not dispose of their slips (which they are required to keep for up to 9 years) correctly.

WBB:What does a site or a developer typically need to set up a merchant account to process credit cards or checks over the Internet?

JD: The first step is to have a merchant account with a bank. If you have a good relationship with a local bank, you should ask your banker. The processes typically involves opening an account with a bank called a holding bank. This bank has a special relationship with a processing network that contacts the issuing card holder's bank to verify funds. This bank holds the funds that you have charged until the batch (or the group of transactions for a particular time period, typically a day) is closed. Then the money is routed through the Federal Reserve and into your deposit bank. The holding bank and the deposit bank can be the same place but typically they are separate institutions. A business can open this merchant account with a large variety of banks depending on the size of the business, how long it has been in operation and how much it is willing to pay. If a business sets up through a local bank, the sign-up is free but it will require the business to fill out a merchant application form. This form will ask for the typical information on the business (location, size, years in business etc), and will some times require accounting statements from each of the principals in the company. The bank will also want to know what your average transaction and monthly volume will be.

It is often easier to get an account with a low monthly volume and a low prices. However, if you exceed this volume greatly the bank will raise a red flag and likely freeze or terminate your account. After a long period of waiting and little to no information (read your merchant account agreement carefully) your money will be released. There will also be some kind of promissory note that an individual will be legally and financially responsible for the account in the event that anything goes wrong.

In contrast, if a business goes through a merchant service group, there will typically be a fee involved of [usually] no more than $200US. The thing to watch out for here is a software licensing fee or the lease of hardware or software. If you wants software or hardware you should purchase it straight out, although if the account is purely for Internet use neither should be required.

WBB: Doesn't a company, organization, or individual who wishes to set up a merchant account normally need some way to prove their credibility in terms of showing they're not some fly-by-night operation, or in other words, that they'll still be around in the near future?

JD:It is fairly easy to obtain a merchant account for a low-level transaction volume (less than $30,000.00 US), and requires little more than a signature promising to be legally and financially liable if something goes wrong. If something does go wrong, that person will be placed on what is known as a terminated merchants list. Once you are on this, you are not going to be able to get a merchant account for a long time. If you are able to get an account it is going to charge very, very high rates.

Most banks will require a photo of your business location along with marketing material. Giving them a copy of your web site, and any ads that you may have placed will normally be enough. They want to make sure you are not a fly-by-night as much as you want to make sure you get your account. Remember, the bank holds your money, and if they feel that there is anything strange going on, they are going to hold it for up to 18 months. The banks take as little risk as they can when issuing merchant accounts.

WBB:In connection with the previous question - Since most Internet sites which may want to set up merchant services are usually small, one or two person operations, and probably will not initially generate enough sales revenue to meet most payment processor's requirements, how do these types of sites establish payment services?

JD:I am not sure what the requirements are outside of the US. I know that [it] is fairly difficult to obtain merchant account status in the UK and in Canada. In fact, most places outside of the US have far stricter restrictions on merchant accounts. In the US, an individual can open a merchant account inside a week for $200 if they are willing to pay a rate of 2.5% - 4.5%.

WBB:Does the fee amount taken by the payment processor vary greatly between organizations? If so, what is your advice when shopping around for a payment processor to handle transactions, and finding the one that best fits the site's needs?

JD: The fee varies based on several different criteria. First is the age of the account and the age of the business. Newer businesses are generally regarded as high risk and rates will be higher, as much as 5% and $.30 per transactions. Another a factor is whether the transactions will be card present transactions or MOTO (Mail Order Telephone Order). Card present accounts have rates as low as 1.6%. An average price is 3%. It is important to not volunteer the fact that you will be doing Internet transactions. Don't lie to the bank, as that can be grounds to terminate you, but don't volunteer the information unless the bank asks. Say that you are a mail or telephone order establishment that has a Web site (if this is the case). As soon as a bank hears Internet transactions, prices start to go up.

Finding the right bank is very important and a critical choice. You want to find out the holding time of your funds. Many processors hold for 5 business days for a MOTO account. Ideally you want something that turns around in 48 hours. Of course if it is your first account, the five day wait might not be bad so long as you can get the account. The other things to look at are tech support. Do they have a toll-free number for support? Is support available 24/7 [hours/days a week] or are there set hours? Who do you call with problems on deposits or authorizations? How can you access your data? Do they have online support? You will most likely not deal directly with a processor but through a bank or merchant service group. You should ask them these questions.

The biggest question of course is how much can you afford to spend and how important are credit card sales? When starting out, it is not unheard of to have to pay up to 8% and a per transaction fee after all of the players who are involved (bank, processor, online gateway) have gotten their cut. A good place to shoot for is 5%. Online transactions are not going to be much lower than that with all the costs included. You should ask yourself if this percent is justified with the amount of volume you are going to do in credit cards. I of course would say yes. It is a fact that sales go up at least 20% with just adding Visa/MasterCard and can go as high as a 200% increase.

So the total range of price will be in the neighborhood of 3.5% - 8% of each transaction. Weighing all the factors can help you determine which bank and online service you should go through.

And with that in mind, you should be well on your way to understanding the payment processes of doing business on the Internet, and how to set up services for your e-commerce ventures. Once again, we'd like to thank Jason Daniel and TPN for their help in answering all of these nagging questions, with the hope that we won't have to ask them again...