On internet business

DirtyDirtyVagrant

If I'm selling something on the internet. Say...adspace. Or ponies. Is paypal a universally accepted method of taking payment? Or would I register as a merchant?

WildEEP

This sorta depends, I mean - if you are selling one pony or two ponies, then its not worth setting up a merchant account. If you expect many, many, many transactions from a variety of buyers then yes a merchant account works fine.

Merchant accounts are great when you need paypal + Creditcard acceptance. Drawback is their overall cost - if you plan on using this for an ebay based business then you've run afoul of the problem with the business plan. Between ebay & paypal fees, there is almost no room for any profit.

So yeah...it depends.

DirtyDirtyVagrant

Well, theoretically, if I sold all of my ponies, it would be 20,000 ponies.

At...uh, $100 apiece.

So..merchant?

mspencer

I work for a merchant service company, so I have to tread carefully here. I won't say which one and I'm not trying to get you to come to us. But take what I say with a grain of the right kind of salt: I'm an expert but I'm biased. So, that said:

There's a tradeoff. Paypal would get you a higher per-transaction cost but not have a contract term or whatnot. So if you start off thinking you'll do $2 mil in volume but unexpected things happen and you only sell 10 of your $100 ponies, you'll be glad you didn't lock yourself into a contract.

A merchant account may have a contract term (ours is usually 3 years) and an early termination fee if you close early. Also probably a minimum bill amount per month, and other charges for various things that I won't go into detail about until you ask. The tradeoff is you can get a significantly lower (closer to cost) processing rate per sale, so if you REALLY end up doing $2 mil in volume you'll save a ton of money with a merchant account.

PLEASE PLEASE do not sign up for a merchant account unless you're really sure you'll need it. I'd recommend you start with Paypal and wait and see how things go. Barring unforseeable things like "who knew Amazon would start selling $30 ponies, driving me out of the market" you want to make SURE your business will work like you think it will.

Also if you have questions for me and I don't respond, please remind me by sending a PM. I want to help.

If you are seriously considering a merchant account after reading this, say so and I'll share more things that I think you should know. Understand though that I'm biased, and in the process of telling you what to look out for I may unintentionally make my employer look better by concentrating on things that we happen to look good at. I'm not doing it deliberately -- I just don't know what the competition does because I only work for one company.

Edit: also there are other important things you need to learn to safely do business on the Internet. Mostly: what best practices do I follow to reduce (never fully eliminate, just reduce) the risk of fraud? Also that payment card transactions are reversable and can be charged back, and you need to prepare to defend yourself against customers who try clever things to rip you off. Don't start selling in full swing until you're confident you understand these things.

DirtyDirtyVagrant

Then I can start off with paypal and see how things go I suppose.

Now...what's this about fraud prevention? Is there somewhere I can read up on this? What kinds of scams am I looking at here?

mspencer

Depends on what you're selling. I'll assume you're selling some kind of tangible good that people could in theory want to steal, but different risks become more or less likely depending on how widespread the appeal of the item is, how easily it could be resold for cash, etc.

First major class of threat is fraudulent transactions. Someone pays you with an account that doesn't belong to you. You run the sale, you ship the merchandise, money arrives in your account and all seems well . . . and then you get a chargeback notice and the money is taken back out again.

Second major class of threat is customers committing fraud. The customer actually does order and receive the item, but they claim they never ordered it, or did order it but never received it. Or they claim the item is not as described or defective when that's not true. These are less common.

For credit card fraud, you protect yourself by establishing a kind of chain of evidence: you use AVS (address verification service) to get automated confirmation that the address the customer provided really does match the issuing bank's records; you only ship to an address that AVS confirmed; and you get signature proof of delivery from your carrier that shows the item really was delivered and signed for.

Yes I know many merchants don't require those things. They are taking extra risks by doing so, because their business model has made affordances for those risks. You don't have to do what they do. Yes many sites let you enter a different shipping address from a billing address. You are increasing your risk if you also do that. You can instead require that customers call their issuing bank and tell their bank to update their records to match their gift recipient's address, or their work address, or wherever they're having something shipped. Yes a bank can have multiple addresses on file.

For the other kind of fraud, get a signature proof of delivery to protect against customers who claim they never received what you sent. If you are shipping something to a country where the package delivery service cannot be relied upon to get a signature proof, you are taking a risk by shipping there. If an order is coming in by phone via a relay service, know that relay services are frequently abused by criminals so be extra careful. If you are selling something that's individualized for each customer (and so cannot be resold if they return it) make sure you are clearly communicating the terms of the sale. Be aware that email addresses are NOT proof of identity, so just because you received an email saying something doesn't mean you can prove that email came from your customer.

You do need advice that's specific to your products and business, so either tell us what kind of ponies you're selling or have this conversation with a merchant processor.

If you're in the USA and you can PM me your phone number, I will call you and discuss these things. I'm a tech support and customer service guy, not a sales rep. But do realize that you're talking about $2 mil in volume, well in the small-to-medium business range. You are a tasty morsel for any merchant processor's sales team and people are going to want to fight to get your business. (quotes and counterquotes and whatnot.)

Edit: By that I mean, some sales reps are shady so you should have mental shields up when talking to anyone about this, even me. Essentially it's a competitive market and you should be prepared to become a well-informed customer.

Edit edit: By "tasty morsel" I mean $2 mil in sales will cost you at least $25k in processing fees. Maybe $3k to $5k of that is profit. How much effort would YOU expect someone to expend to get that much profit for their employer? It's certainly plausible that people will lie to you to get your business, or at least withhold important facts until after you've signed a contract.

Obz

Aren't paypal fees like 3%?

If he sold those 20k ponies at $100 it essentially comes out to $60k in fees, but he would still have 1940k. It's always a drop in the bucket really, not exactly wiping out his profits.

What exactly are you selling?

mspencer

Yes, but I'm assuming he'll stay on Paypal until he's confident his business will be the size he thinks and will last as long as he thinks, and then start looking for a processor. Instead of 3% per sale he could get more like 2% per sale plus $20 to $30 a month in other fees, for example. (That 2% is extremely rough. Extremely large businesses can negotiate rates really close to cost, down into the 1.???% range. Smaller businesses may get in the low 2% range. It's a competitive thing, it depends on who you talk to.)

Net savings if he really does 2 mil, or even 200k. But if he signs that contract and then finds out he's only selling $5000 a year, he'll be hating his processor very quickly.

mspencer

Oh also, at the size of business you're talking about, there's one other important thing to consider: risk management. A processor needs to be convinced the sales you're running are legit, and that your business is strong enough to remain solvent even if you get a few chargebacks.

Not many people understand this, so I figure this is a good place to describe what risk management looks like from our side of the fence, so many people can read and benefit.

First, understand that credit card processing is risky for processors. Think about what could happen if you cash a check for a friend. The friend gives you a check and you give them money. You take the check to the bank and expect to get money from them. What if the check is bad? You've lost the money, and now have to go try to collect it from your friend. You might not succeed.

It's the same story for credit card processors. You give us some data that describes a sale, we process the sale, and we pay you. What if the customer charges the sale back? We're responsible for paying the issuing bank back and then collecting from you. We're a bank -- we have deep pockets, so we'll certainly be able to repay the bank. But what if we can't collect from you? That's a loss of 100% of the sale amount, when we were only collecting 1% to 3% of the amount in fees, and maybe keeping 0.01% to 0.2% of the sale amount as profit. Not a good trade.

So what things make us start to worry that maybe you're not a good risk?

Most obvious is a high chargeback rate. If a significant portion of your sales keep coming back as chargebacks, maybe there's something wrong with how you're doing business. Maybe you are about to have a lot more chargebacks, as soon as more of your customers open their statements and see what you've charged them. A high chargeback rate makes us nervous.

Maybe your sales volume has increased dramatically all of a sudden. If we're used to seeing you do $5k in sales a month and suddenly you settle a batch for $10k in one day, that looks really weird. We know that there are some merchants who decide to deliberately commit fraud, by taking all the customer card data they've saved up over the last year or so, running fraudulent sales on them, collecting the money we would pay in your next deposit, withdrawing it from your local bank, and running for the border. It kinda looks like you're doing that if your sales volume suddenly shoots way up with no explanation.

Maybe you've run a single sale that's much larger than what you previously told us your sales would be. You sell $100 ponies, but now suddenly here's a $2000 sale. WTF? (Or worse, you think you're being clever by breaking that $2000 sale up into lots of $100 sales. Don't do that.) First, we may want you to explain that sale because it looks different from your normal way of doing business. It's not fraudulent, is it? Second, what if that one single customer files a chargeback and you have to repay all that money. If we look at your credit score, are we confident your business can support that unexpected loss? If you're one chargeback away from bankrupcy, we're not comfortable with that risk.

So what happens when our risk department gets nervous? They have various tools they can use to mitigate risk.

We can suspend payment of a single sale and call you. Maybe all your other sales for that day will be paid, and that customer from the $2000 sale is still going to be billed, but we're going to hold the money until we're confident the transaction is safe.

If we're confident the transaction is unsafe, we'll just refuse to pay you for it, and advise you to refund the customer and collect from them another way. Yes I know that's painful to hear. Sorry. :-(

We may decide to suspend all further payments to you until a problem is resolved. Why did your business grow so much? Can you show us some documentation for those sales? Maybe we'll pick some sales at random, contact issuing banks, and have them confirm these sales with their customers.

We may decide that we're only comfortable with your level of risk if you let us keep a pool of money as a buffer. For example maybe we'll keep $10k in suspense. Or $1k or $100k, depends on the amounts involved. Once we're holding $10k of your money we'll pay whatever sales you run in excess of that. This way we have some protection: if catastrophe hits your business (everything you sold last month is defective and people are only now finding out, for example) and chargebacks start coming in, we have some money to repay your customers with if your business fails.

Or, worst case scenario, if we decide that all of your sales are too risky for us, we will put the sales on hold until their chargeback rights expire. (3 months on a "check card", 6 months on a credit card.)

I know this whole thing sounds evil and cruel, but all credit card processors have to do this. Those that don't quickly go out of business because fraudulent merchants take all their money. The best you can do is be up front with your credit card processor, don't surprise them, and (here's my bias) pick a processor that handles risk management with good, proactive customer service. Don't just put money on hold with no explanation -- make phone calls, have conversations, explain why things have happened and what the merchant can do to fix the problem.

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So if you're going to be doing $2 mil/year in sales, you probably need to have an established business credit history (trade references, bank references, documentation from previous years you've been in business if any). I don't know what you're actually selling or how long you've been selling it without credit cards before, but if your credit history might be a problem, there are other options. There are high-risk credit card processors out there who will, for example, hold all your sales proceeds for 2 or 3 months and then pay you, on the assumption that if you were doing naughty things at least some of your customers would have filed chargebacks by then.

I know you didn't ask for this, but hopefully it helps.