updated 5/29/2014 11:47:23 AM ET 2014-05-29T15:47:23

This excerpt is part of's  Second-Quarter Startup Kit  which explores the fundamentals of starting up in a wide range of industries.

In Start Your Own e-Business, the staff at Entrepreneur Press and writer Rich Mintzer explain how to build a dotcom business that will succeed. In this book, you'll find recipes for success, road maps that pinpoint the hazards, and dozens of interviews with dotcom entrepreneurs who've proved they’ve got what it takes to survive in this sometimes fickle marketplace. In this edited excerpt, the authors discuss the two types of online payment processors you can use on your ecommerce site.

Thanks to the growth of ecommerce sites over the past ten years, credit card accounts are now very easy to set up on your site. The common methods of accepting credit card payments is either by using your own merchant account or by utilizing a payment gateway account, also known as a third-party merchant.

An internet merchant account gives you the ability to process credit cards and can be obtained through a bank. It's viewed by the bank as a line of credit that's extended to you. You must apply for this, just as you would any loan.

A good place to start your search for a merchant account is your own bank. Most issue credit cards, and if you have a long-term relationship with the institution, that’s a big plus. What if your bank says no? Try a few other local banks and even offer to move all your accounts there or at least set up a business account. You just may be rewarded with merchant status.

You'll also probably need a payment gateway account, which is an online credit card processor or transaction handler that's capable of hooking into credit card accounts belonging to the online shopper and your internet merchant account. The payment gateway handles verification and transfer requests. It interacts with the card issuer’s bank to authorize the credit card in real time when a purchase is made on a website.

The leading providers of payment gateway accounts targeting smaller merchants include:

If you don’t have a merchant account, these providers can help you set one up and offer a payment gateway in one convenient package.

Credit cards aren’t processed cheaply, at least not for a startup. A typical fee schedule for a small-volume account (fewer than 1,000 transactions monthly) would include monthly processing fees ranging from $10 to $100, plus transaction fees of about 3 to 5 percent per transaction. Some providers also charge startup fees, but shop around--in many cases the startup fee will be waived if you ask.

PayPal enables any individual or business with an email address to securely, easily and quickly send and receive payments online. PayPal’s service builds on the existing financial infrastructure of bank accounts and credit cards, and uses advanced proprietary fraud-prevention systems to create a safe, global, real-time payment solution.

PayPal has quickly become a global leader in online payment solutions. There are two major PayPal offerings for merchants.

1. Website Payments Standard. This is an easy way to start accepting credit cards online. A simple integration into your shopping cart allows customers to pay securely and easily. (PayPal seamlessly integrates with hundreds of compatible carts or custom-built storefronts.) If you don’t have a shopping cart, the free PayPal Shopping Cart can be set up quickly and easily as well.

After setting up the system on your website--which takes just a few minutes--you'll be able to accept all major credit cards, debit cards and bank transfers. Website Payments Standard is secure, and you don’t need a separate merchant account or gateway. Your customers don’t need a PayPal account. Transaction fees are low.

2. Website Payments Pro. This all-in-one solution gives you features comparable to merchant accounts and gateways, through a single provider and at a lower cost. There's a $30 monthly fee but no setup fee. Transaction fees are listed on the PayPal website under PayPal Website Payments Pro.

With this service, customers paying by credit card stay on your website for the entire transaction; PayPal is invisible. Website Payments Pro is already integrated into many popular shopping carts, or it can be easily added to a custom-built shopping cart.

Website Payments Pro includes a virtual terminal, which allows you to process payments for phone, fax and mail orders.

Both merchant and third-party accounts (aka gateway accounts) have their advantages and disadvantages. The primary advantages of having a merchant account include:

  • Ease of transaction
  • Protection. Banks are protected by the FDIC and merchant accounts typically come with fraud protection.
  • You maintain control since the transaction is directly between the customer and your merchant account. There's no intermediary handling the money or getting the customer’s information.
  • Typically you’ll receive payments faster than if you use a third-party payment service.
  • Your business name is on the transaction statement.

Disadvantages of a merchant account include:

  • Cost. Collecting credit and debit cards comes with a price tag for entrepreneurs.
  • You must handle disputes. If you have your own merchant account, you'll be responsible for disputes, chargebacks and any compliance, fraud or security issues that may arise.
  • Hidden fees. You can get hit with them, so read your contract very carefully.

Advantages of a third-party merchant account:

  • You don’t need to get approved for merchant services by a bank. If you have low credit scores or no credit, you can sidestep the approval process.
  • You have a company on your side when disputes arise. They can play middleman and work on behalf of your business.
  • PayPal, if you choose to use it, is a very well known and trusted service for transactions.

Disadvantages of third-party merchants:

  • Potentially higher fees.
  • Their name is on the transaction and possibly links to their sites or those of other businesses.
  • Reputation. Not all third-party merchants are PayPal, and while many have excellent reputations, others are known for working primarily with adult websites. Still others have been cited for fraud. You need to choose carefully.

Copyright © 2013, Inc.


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