As buyers, we are all too familiar with those little shopping cart icons on our favorite shopping sites. But, not all shopping carts are the same. It may seem that way for the person making the purchase. For the company on the other end of the transaction, the story is much different.

When a customer makes a credit card purchase in a bricks and mortar store, he or she swipes their card to initiate a secure electronic transaction. This is called a point of sale system. In the online world, a payment gateway is the equivalent of that. The solutions available to facilitate those transactions range from one-click simplicity to the Byzantine. It all depends less on the payment gateway itself and more on which gatekeeper (merchant account provider) is chosen.

Types of merchant account providers

“For any small business starting up, the easiest way to go is PayPal. They’ve been around a long time and most likely your customers already have a PayPal account, which is a huge advantage.” says Michael Miller, author of Choosing an Online Payment Service: Google Checkout vs. PayPal (Pearson Education, 2007).

Turn key solutions like PayPal or Google Checkout may seem like the obvious choice for the new online seller. But there’s another alternative: dealing directly with a credit card processor. Most credit card processing companies typically offer bundled in services like back end integration with your website and the shopping cart navigation. However, the costs charged back to the merchant can vary wildly; sometimes cheaper than the turn key providers, sometimes much more.

Brenda Mize, owner of Beacon’s Glow ^[1], an online collectibles store and her newer ecommerce venture, The Toy Bench ^[2], skipped right over turn key merchant account services like PayPal and Google Checkout and started out with a credit card processor. In the five years that she’s been in business, she’s never looked back.

“We’ve never had one bad transaction. Our Web designer picked out the credit card processor, who waived all the up front fees. Customer service has been great. We’ve even been able to negotiate lower percentage rates. We never even considered PayPal. Their fees were astronomical when we started,” says Mize.

Miller would consider Mize an exception to the rule who cautions smaller businesses, especially those just starting out, to avoid credit card processors. “It’s very complex. With a credit card processor, fees can vary. Make sure you shop around,” says Miller.

Clearly opinions are divided when it comes to weighing all options. Here’s a look at some of the more popular solutions and the advantages and disadvantages therein.

Turn key merchant account providers

PayPal ^[3] charges 2.9 percent of the sale price, plus 30 cents per transaction. It used to be much higher in their earlier days. PayPal has more than 60 million customers worldwide, operating in 190 countries. A major part of its customer base comes from its parent company, eBay. However, it’s not just the merchant account provider of choice for small businesses. Delta Airlines, CompUSA, and Overstock.com are just some of the large companies that use PayPal. “Five years ago, there was a stigma that PayPal didn’t look professional. Now it’s so popular, it’s ubiquitous,” says Miller.

• Advantages: PayPal can be as simple as embedding one click from your site to theirs to complete the sale. However, it’s scaleable too. Merchants can integrate the entire shopping cart process within their own site. It only takes about a week to set up an account and get it up and running.
• Disadvantages: Although distribution of funds back to the merchant is immediate, it is also manual. Meaning, it doesn’t happen until the merchant clears his account. PayPal then takes its cut and transfers the rest to the merchant. Miller cautions businesses to clear their accounts on a daily basis. “PayPal, especially, is very consumer friendly. So, if there’s a dispute, they tend to take the customer’s side. It doesn’t happen often, but PayPal has been known to freeze accounts until a dispute is resolved and that means everything in the account. You don’t want to risk money from other sales getting tied up in the event of a customer dispute,” warns Miller.

Google Checkout ^[4] charges 2 percent of the sale, plus 20 cents per transaction. It’s a much younger service than PayPal, less than two years old and only been operating abroad for about a year. Because it’s Google, one can expect its growth to make quick gains on Pay Pal’s market share.

• Advantages: “Google Checkout is pretty much the same system as PayPal,” says Miller. However, its percentages and fees are slightly lower. Additionally if a business is already using Google Adwords, those fees are reduced, if not waived altogether. “They’re clearly using Google Checkout to drive business to Adwords,” says Miller.
• Disadvantages:  Fewer people are using it than PayPal, so there’s the risk of more lost sales from first time buyers who don’t want to bother opening a new account. Though not measurable, there is also plenty of anecdotal information from former merchant account holders online complaining of technical glitches ranging from incomplete sales, funds collected by Google and then not distributed back to the merchant, poor communication notifying merchants of a sale, etc. Whether the complaints are valid or significant, perception is reality and a dicey reputation online is reason enough for merchants to think twice before they bite on that lower rate.

Volusion ^[5] is a much smaller (and newer) player in this market, with only 10,000 accounts to date. Percentage rates per transaction start at 2.17 percent of the sale   with no additional  transaction fees. This is a company to watch. Here’s why:

• Advantages:  It’s the only ecommerce solution that integrates with MySpace and Facebook, to date. Instead of that 20 to 30 cent transaction fee per sale, Volusion offers a flat monthly fee based on the number of products for sale on your site, ranging from $20 to $100 a month.
• Disadvantages: No one’s heard of it. That 2.17 percent taken out for the credit card companies is a teaser rate. No word on how high that rate can go.

Credit card processors

There are too many companies out there to mention. However merchants basically have two ways to go: dealing with the financial institutions itself or hiring a company to do it for them negotiating the best rates and using its own economy of scale to do so.

“Your bank is probably the worst place to go. You will always get the worst rate there,” says Miller.

Miller, whose wife works for a credit card processor (in the spirit of full disclosure), offers the following advantages and disadvantages to going this route:

• Advantages: There’s the potential of negotiating a lower rate, especially as the business grows selling in higher volume. Many sellers, like Mize, simply feel it looks more professional to have a customized cart than a PayPal or Google Checkout button on a site. “We also have a SSL certificate button on our site. I think it helps give our customers peace of mind,” says Mize.
• Disadvantages: Rates vary and can go up without warning, depending on the contract. There are often up front costs and monthly fees. No two merchant account providers are alike. Business owners really have to shop around for the best deal. “It’s very complex,” says Miller.

One last piece of advice for online merchants shopping around for a credit card processor, some of the likely places to get the best deals include: trade organizations, co-ops, buying groups, even Costco or Sam’s Warehouse.