If you are running an e-commerce website selling merchandises or services, you might be wondering if you should get a credit card merchant account (a.k.a. merchant services)? Is it important to be able to accept credit cards online? Does it really matter? I asked myself the question for a long time before I “took the plunge” too. Now you can use me as your case study.

There are popular online payment methods such as Paypal, Amazon Payment which accept credit cards from the customers. (I used to use Google Checkout too, but they are history now.) If you use these payment methods, you can say that you already accept credit cards, though indirectly. These online payment services all charge similar fees of around $0.30 per transaction plus a percentage of about 2.5-3% of the transaction amount. So why would you bother to get a merchant account?

Obviously, accepting credit cards directly gives your customers more options. It is always good to have more options available. (If I am a customer, I don’t like to create another account with my bank information if I don’t have to.) You don’t want a customer to abandon the cart just because his/her preferred option is not available.

The pay options show up when customers click the checkout button in your shopping cart. After customer adds item(s) to cart and proceeds to checkout, he/she is prompted to select a shipping method. Total charge including shipping is calculated. A web form is presented for his/her personal information. (Information entered on this page is supposedly SSL encrypted before being sent back to your server.) On the form, he/she will see an additional option of paying by a credit card if available. Paypal Express Checkout (as well as Amazon one-step checkout) skips a lot of these steps aiming to get customer’s money before he/she changes mind.

The Experiment

If you were a customer, which pay option would you prefer to use? Don’t guess. I’ll show you an order log from one of our websites below.

This is from a zen cart admin panel. The order log shows 40 consecutive orders (from 2011) from the site with different pay methods. You can see that we accepted Paypal, Google Checkout (which was retired on 12/20,/2013), and we accept credit cards (gateway_services_cc).

Among the 40 orders, 13 transactions were paid by Paypal, 5 by Google Checkout, and the rest by direct credit card – a whopping 55% of the customers chose to pay by credit card directly! Our experience indicated that by accepting credit cards directly, our sales increased by nearly 100%. (i.e., the sales almost doubled.) This percentage is a little different from the percentage of transactions paid by credit card (55%). Some customers might have “succumbed” to choosing between Paypal and Google Checkout, while others simply left if they really did not want to use Paypal or Google Checkout.

Are you still wondering whether to accept credit cards online? I have no way of knowing what people think, but I can try to guess, based on common sense.

Possible Explanations

Why would some people prefer to pay by credit cards directly? Here are some of my guesses:

• A lot of credit cards give 1% (some even up to 5%) cash back or some type of equivalent incentives, such as airline mileage.
• Going through Paypal or Google Checkout means your personal information goes through an additional party. If you are going to pay by a credit card anyway, why should you go through an additional 3rd party? This is true especially if the customer does not already have a Paypal or Google Checkout account. Don’t we all have enough of “accounts” already?
• More (privacy) sensitive internet users can be concerned that Google or Paypal is collecting their preferences and personal data.
• Some of them might have had bad experience with Paypal or Google Checkout.

Paypal Restrictions

It is not just about the customer’s choice. Other than giving your customers more options to pay, there is another reason to accept credit cards for your e-commerce website. Paypal Terms of Services actually explicitly prohibits transactions for a lot of items. For example, they do not allow weapons (including some knives), drugs, tobacco, or even paintball items. I sold a lot of knives and paintball products. Because of that, I had to spend time to take down some ‘possible suspects.’ The compliance with their TOS is really at their discretion. If they happen to not like the items you sell, your Paypal account can get restricted. It was a painful experience to get the restriction lifted. I don’t think credit card merchant accounts are as strict, even though I know that certain credit cards won’t let you use them for online gambling. This is another reason that you want to accept credit cards online.

Merchant Services

To accept credit cards online, you need to use merchant services. You setup a merchant account with a merchant services provider. The merchant account will link to your bank account. When a customer pays you, the money goes from the customer’s credit card to your merchant account. At the end of the day, the money is deposited directly into your bank account (called ‘settlement’). If there is a chargeback ruled in favor of the customer, money will taken out of your bank. For that reason, they will normally demand a credit check in the process of merchant account application. However, there is not going to be a chargeback if no money comes in first. So I would imagine the risk to them is low. The credit check is usually not very strict.

A chargeback is equivalent to a Paypal dispute. You will be given notices and chance to tell your side of the story. It is important that the buyer’s shipping address and billing address are the same. It is up to your judgement and the risk you are willing to take when it comes to shipping to non-billing addresses. The risk exists for both Paypal and merchant accounts.

Merchant services will also include something called a ‘virtual terminal’ which is a form in your merchant account interface. You can manually enter customer’s credit card number and personal information in the form to process a transaction. This is useful, for example, if someone gives you their credit card number on the phone, or even in person. If you operates a storefront, you can also use a reader to swipe a credit card.

Credit card merchant account fees are similar to Paypal fees. With either service, you can get better rate when your sales volume is large. For paypal, the transaction fee is 2.9% of the transaction amount. If your volume is larger than $3000 a month for 3 consecutive months, the rate is 2.5%. If you have more than $10,000 a month, it becomes 2.2%. An additional  $0.30 surcharge will be added to each transaction. The fees of merchant services vary with the providers. For more details, see Paypal and merchant account comparison.

The merchant services provider that we have been using is this one. Their fees and rates are reasonably low and we have never had any problems with them. If you want to get a merchant account, give them a try.

Merchant Account and More Options

Speaking of giving customers more options to pay, having a merchant account adds more than just one option. With a merchant account, you can add 3 major options: MasterPass (launched in Feb, 2013), Visa Checkout (launched in July, 2014), and Google Wallet. These services are free and work just like Paypal Express Checkout. They are, however, different from Paypal because they do not actually ‘touch the money.’ A major goal of these services is to reduce cart abandonment especially on mobile devices. To integrate these options onto your e-commerce website, you need to have a payment processor, i.e., merchant account. I will talk more about these options in a separate article.

Conclusion

Should you accept credit cards online? Yes, and the reasons are: merchant services let you provide many more options for your customers to pay. You have fewer restrictions on items to sell. It is proven by my experience that accepting credit cards directly significantly increases the sales.