%7bc27322b6-3a8c-495e-ac33-c6c1fbd8d4b6%7d managing complexities of payment processing

8/12/2019 %7Bc27322b6-3a8c-495e-Ac33-c6c1fbd8d4b6%7D Managing Complexities of Payment Processing

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2013 cleverbridge


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2013 cleverbridge | cleverbridge.com | blog.cleverbridge.com 1

Managing the Complexities of Online Payment Processing

In ancient times, making payments and exchanging values (transactions) were direct and

straightforward. For example, John has a goat and Joe has a bag of flour. If John wants Joes bag of

flour and Joe agreed that Johns goat was of equal value to the flour, John and Joe would simplyexchange their items and document the transaction in front of eye witnesses.

However, in time, villages grew into cities and cities grew into states. Banks and monetary systems

were created where precious metals and paper records served as placeholders for the direct exchange

of valuable items between traders who no longer lived in the same village and could not transact

simultaneously with each other.

Fast forward several thousand years: Human civilization has developed into a global village with a

global economy facilitated by the instantaneous transfer of electronic data. Payment processing has

grown quite complex and involves a multitude of international parties exchanging payment data and

digital goods across the world virtually at the same time.

In order to succeed in e-commerce, merchants must know how to navigate this complex terrain of

payment processing.

Lets say youve developed a piece of software that you want to sell online. Youll need to create a

website that allows buyers to select your product and pay for it online. The shopping cart must connect

to a payment processor or the customer will be unable to pay for the product.

In todays Internet economy, credit cards dominate as the preferred payment method for online

shopping, so lets see exactly how these payments are processed.

Before diving into payment processing, youll need an overview of the parties involved in an online

transaction.

The main parties involved in a typical online credit card transaction are the buyer, the merchant, the

card issuer, the card acquirer (which is often substituted for the more robust payment service provider),

and the card association. Other things that come into play with these parties are the payment gateway

and the merchant account. Here are some definitions for these terms:

Buyer: The cardholdera person or company who wants a product or service and is willing to pay for it.

Issuer:A bank that provides credit lines and credit cards to buyers.

Merchant: A person or company that provides a product or service to a buyer. A merchant also

accepts money from a buyer. In order to process credit card payments for the products they sell, a

merchant needs a merchant account.


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Merchant Account:A necessary and prerequisite condition for accepting credit card payments from

buyers.

Acquirer: A bank that provides merchant accounts to merchants. A merchant acquirer also

transfers the funds authorized by the payment gatewayfrom the buyer to the merchant.

Payment Gateway: Similar to a credit card terminal found in a brick and mortar store. Its the software

equivalent of a point of sale (POS) terminal that creates technical transaction routes from the merchant

to an acquirer. However, the payment gateway has no settling capabilities. It does not route money.

Rather, the payment gateway lets the acquirer authorize and settle the transfer of funds from the buyer

to the merchant through the credit card association. A third party payment gateway service earns

money from charging about five cents per transaction.

Card Association: A network of issuers and acquirers who process credit card payments and

supervise the Payment Card Industry Security Standards Council (PCI SSC).

Payment Service Provider (PSP):A payment gateway and merchant acquirer on steroids. It provides

merchants with access to payment gateways and merchant accounts with multiple acquirers.

Now that we understand the variety of parties involved in online transactions, you might think its a

simple process to start accepting credit cards for your online store. All you need to do is sign-up for a

merchant account with a credit card acquirer and the money starts pouring in, right?

I hate to spoil your dreams, but accepting online credit card payments is quite challenging.

The diagram above illustrates a simplified path of an online credit card transaction: 1. A customer submits an order to a merchant and themerchant gives the payment information to a PSP (merchant account). 2. The PSP passes that information to the card association (cardissuer). (2) The card association authorizes the transaction and informs the PSP. 3. The PSP informs the merchant that payment wasapproved. 4. The merchant delivers the product to the customer. This entire process takes a fraction of a second. The final step, when thefunds are actually remitted to the merchant from the bank, may take up to two weeks.


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One of your primary concerns in accepting online payments is making sure that your buyers payment

data is secure and safe from theft and fraud. To address this issue, the various card associations (Visa,

MasterCard, American Express, etc.) banded together to create the Payment Card Industry Data

Security Standard (PCI DSS).

PCI DSS is a comprehensive roadmap to ensure that organizations handle cardholder information

safely and securely. This roadmap defines technical and operational requirements for payment

processing and data storage.

Before you can even contemplate contacting an acquirer for a merchant account, you must be PCI DSS

compliant. Without this certification, it is unlikely your application for a merchant account will be

accepted by an acquirer.

Alternatively, if you are not PCI DSS certified, an acquirer might offer you a solution where they assume

responsibility for the PCI compliance. The downside to this situation is that that it might limit certain

aspects of integration and create a less flexible payment operation. For example, if an acquirer took on

the burden of your PCI compliance, your checkout process might be branded by the acquirer, not your

company. This can create an inconsistent checkout process and lead to higher abandonment rates.

Once a merchant is PCI compliant, the next step toward accepting credit card payments online is

obtaining a merchant account. As described earlier, a merchant account is basically an agreement

between a merchant and an acquirer. At no point is a merchant going to be interacting with the actualcard associations like Visa or MasterCard directly. Rather, merchants sign up for the ability to transact

Visa and MasterCard credit cards through the acquirers.

One of your biggest challenges as a merchant is negotiating payment contracts with these acquirers.

Negotiating payment contracts with credit card acquirers is all about finding the perfect fit for your

business. There are many different acquirers out there. Some focus on:

POS in physical stores

Mobile payments

Digital goods like software and SaaS.

The credit card acquirer that you want is the one that matches the complexity of your business.

A payment service provider (PSP) is like a credit card acquirer, except that they offer additional

services besides credit card processing and are more expensive as a result. Some of their additional

services are fraud screening, providing access to payment gateways, managing PCI DSS compliance

or taxation processes for foreign markets. The PSP can also handle all the negotiations for a variety of

acquirers in different regions on behalf of the merchant.


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Negotiations with an acquirer or PSP start with an RFP process after which the acquirer/PSP presents

their capabilities and prices to the merchant. Final negotiations and contract signing can be very

cumbersome and lead to haggling by corporate legal teams on either side of the table hammering out

minutiae related to the language of the contract.

There is also the continuous managing of the relationship between an acquirer and a merchant. It's not

like a merchant does a single negotiation upfront and then everything about the merchants online

credit card processing is in place for the next 20 years. There is often a renegotiation process every

one or two years.

Consider the following areas when negotiating with and managing an acquirer or PSP.

Fee Structure

Depending on the acquirer, pricing for payment processing fees can range anywhere from 1.5% to

2.5% per transaction. Where an acquirer will charge lower fees, a PSP might administer a fixed fee of

up to 50 cents per transaction on top of that percentage fee.

Other pricing models include interchange plus pricing. Interchange plus pricing is where the actual fees

of credit cards like Visa and MasterCard are communicated openly to the merchants and the acquirer

only adds a surcharge amount of 0.1% to .25% of each transaction.

Reliability and Service Level Agreements

During negotiations with an acquirer or PSP, merchants must concern themselves with reliability and

Service Level Agreements (SLA). Its important for merchants to ask for hard data related to uptime,

maintenance periods, etc. Important areas for merchants to negotiate with their acquirer/PSP include:

Quantifying service level expectations;Outlining how these levels are measured;

Defining mutual requirements and expectations for critical processes and overall performance;

Outlining communication paths between acquirer/PSP and merchant, including a process for

conflict resolution;

The last thing an online merchant wants is to find that their payment processing capabilities are down

and there is no way to communicate with their provider. SLAs and open communication are important

tools for ensuring maximum performance.

The Issue of Exclusivity

Unforeseen technical issues mean that an acquirer can never guarantee 100% uptime. This meansmerchants need to have a backup system in the event of an outage. As a result, opening a merchant

account with just one acquirer is never enough.

Merchants must sign up with multiple acquirers and never accept exclusivity. It is especially true if you

are processing a large amount of transactions because losing the capability to process transactions can

cost you a lot of money in the end.


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Refunds, Chargebacks and Fraudsters

Refunds are another important factor that needs to be negotiated

with your credit card acquirers and PSPs. Some acquirers might

charge additional fees for processing refunds to buyers. Given the

variation in fees, this is definitely a key area for negotiation.

The image below illustrates the impact of fees for merchants when

purchases made and then returned for refunds.

Even more critical than refunds is chargeback management. If you don't handle this issue correctly, you

could easily run your business straight into the ground. If, for example, over 1.5% of all your

transactions become chargebacks, your acquirer might cut you off and that will kill your capability to

process credit cards. This is absolutely lethal for a business. And even if you don't reach that threshold

for chargebacks, each chargeback carries its own heavy fee.

Many merchants neglect to consider that they also need someone to screen their transactions. Without

this capability, you are exposing your business to a lot of risk from fraudsters.

If you do allow a third party to manage your fraud risk, you have to make sure you are not losing money

from overly cautious fraud prevention which denies legitimate transactions. Another important factor to

consider is that these third party fraud prevention teams are costly and require additional integration

processes.


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Payment Methods for Foreign Markets

In addition to signing up for merchant accounts for credit cards and PayPal, there is a lot of market

research to be done in regards to alternative payment methods used in different regions around the

globe.

If you want to sell internationally, you have to know which types of payments are used in which

countries. Raise your hand if youve heard of Boleto Bancario. Raise your other hand if you know whatSofortberweisung is. How about iDeal and Konbini? These are all examples of popular payment

methods that are used almost exclusively in the countries where they were created.

Understand that PSPs will charge you more if you want these additional payment options for a certain

region. Since it is very difficult to find a PSP that meets all your needs, this complicates your

negotiations with acquirers and PSPs even further: If you negotiated with a service provider that

specializes in North America, for example, and you want to enter Europe or APAC, then you will need

to find another service provider to complement or replace your existing one.

In the end, you can always sign up with a one size fits all service provider that offers 35 out of the 80

relevant payment options in the world and go that way initially. But the larger your transaction volume

and the more you expand internationally, you will inevitably encounter obstacles and ultimately decide

to do a direct integration with other providers who offer region specific payment methods.


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Instead of dealing with all of these niggling details many merchants opt for a full service e-commerce

provider where a lot of these aspects are already in place for you. Not having to deal with these types

of headaches is a big benefit to online merchants.

ou now

As a full-service e-commerce provider, cleverbridge manages all of the end-to-end payment

processing complexities associated with merchant accounts, acquirers and payment service

providers so you can focus your resources on the things that matter the most.


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cleverbridge is a full-service e-commerce provider for companies that sell software and

SaaS. Its flexible cloud-based platform and unrivaled service drive the performance of

B2C and B2B businesses around the world, enabling the implementation, management

and optimization of clients global online sales and marketing initiatives. Drawing from

years of experience and expertise, cleverbridge provides a customized, multi-channel e-

business solution in record time. More than 300 international corporations like Acronis,Avira, Dell, Malwarebytes and Parallels count on cleverbridge to support their traditional,

SaaS and subscription-based e-commerce needs. For more information, visit

www.cleverbridge.com or theBuilding Keystones blog.

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