Online Payment Services

By Jamie D

The rise in popularity of alternative online payment services such as PayPal and Bill Me Later have begun to change how consumers shop online.  If you've never used one of these services, the idea may sound confusing but in reality is quite simple.  Check out this quick guide to understand what these alternative payment options are, how they're used, who uses them, and if they're realistic options for your small business.
 

What is an online payment service?

Online payment services allow business and consumers to exchange money electronically over the internet.  These services can act as a replacement or a supplement to accepting credit cards and have recently become very poplar with merchants and consumers.


What do they do?

These services allow businesses to receive payment from any customer with an email account.  With an online payment service, your business can directly deposited funds, issue and mail checks, and store account funds to be used through a debit card.


What's the attraction?

With the dominance of card payment options, one may ask, "Why would I opt for an online payment services?"  For starters, opening an online payment services account is often faster,easier, and less expensive than setting up a merchant account (required to accept credit and debit card payments).  They also offer low fees per transaction and do not require the heavy additional fees of a merchant account.  For many small businesses with multiple small transactions, an online payment service will cost your business less money than choosing to accept a card payment.


Are there any drawbacks?

As with all payment methods, these services have drawbacks as well.  Most of these services require customers be redirected to the online payment service website to complete a transaction.  Being forced to leave a merchant's website can be confusing to customers - especially those that are not experienced with online shopping.  In some cases, this will lead to a customer to abandon a purchase they may have otherwise made.

In many cases, a small business would not get enough value out of offering both an online payment service and accepting card payments.  On the other hand, if your business chooses to offer a service such as PayPal, rather than accepting card payments, some customers may be turned off by the lack of options.  Finding the right balance of payment options is something that differs for every business.


What is PayPal?

PayPal* is the world's largest online payment system and one of the most popular online payment methods.  PayPal enables merchants to accept online payments from any consumer, with an email address, through their credit card, or checking account.


How does PayPal work?

Business that register and set up an account with PayPal will be directed to add their 'Web Accept' button to their website.  When a customer decides to make a purchase they simply click the button that will redirect them to the PayPal website.  New PayPal customers will complete a one-time, free registration to receive an account number.  This account number will allow them to securely make online payments to registered merchants.  After registration, the customer will complete their purchase using their account number.  The payment is then processed and sent directly to the merchant's PayPal account.  The customer is then returned to the merchant's website.


What businesses use PayPal?

Although PayPal can be used by anyone, it is a very convenient option for small businesses with many small transactions.  The low transaction fees and lack of additional registration and monthly fees enable merchants to make the most money possible per transaction.  PayPal services are also popular among new online businesses - it is often simpler and cheaper process for an e-business that isn't ready to make the jump to accepting card payments.


Is PayPal really safe?

PayPal has made large efforts to increase their fraud management expertise and to provide features that enhance security.  PayPal has a good record of providing their members with safe and secure money transactions.  They also offer additional security options for merchants such as the modified login process using a security key.  If merchants request the security key feature, they are given an electronic key that generates a random six-digit code.  This code is required to sign into your account in addition to your password.  This two-factor authentication makes third-party scams extremely rare.


What is Bill Me Later?

Bill Me Later* is an online payment services that allows consumers to "buy now, pay later".  Through this service, customers make a "purchase" online without actually making a payment at that time.  Customers are billed for the purchase after several weeks and can then chose to pay either online or through the mail for that purchase.


How does Bill Me Later work?

When a merchant registers with Bill Me Later, a "Bill Me Later" option is added to their website upon a customer's checkout.  When a customer selects the "Bill Me Later" option, they are prompted for their birthdate and the last four digits of their social security number.  With this information, the customer is quickly approved or denied for this option through a credit check.  If approved, the transaction is completed through the same infrastructure as most credit cards.  Customers are then billed for this transaction within the following 14 days.  Upon receiving a bill, customers can choose to pay through the mail or online at the Bill Me Later website.  Bill Me Later merchants are charged a small fee, generally smaller than that of a merchant account, for each transaction made through Bill Me Later.


What businesses use Bill Me Later?

Bill Me Later is generally used by businesses with very large annual revenues.  These business take advantage of the increased impulse buying that comes with the "Bill Me Later" function.  Consumers are much more likely to make impulse purchases online if they aren't required to pay immediately and if they don't have to have their credit card on them at the time.