For one reason or another you might be thinking of moving away from PayPal to your own merchant account and payment gateway. We did just that for our CMS product, Perch. However the process of getting set up with such a system is often fairly opaque to a person who hasn’t dealt with it before and the processors and banks don’t exactly help to make it easier. So here is my guide to moving away from a reliance on PayPal.
Please note that this article is based on my experience for our own product and when working with clients. Please add a comment if you have any additional thoughts or recommended suppliers. We are based in the UK so this article is UK specific however the situation is similar in my experience in other countries.
What do you need?
You will need a merchant account with an acquiring bank – this is the thing than enables you or your business to accept credit cards at all. You will also need a way to validate and process card transactions from the internet to that account – Payment Service Provider (PSP) sometimes referred to as a “payment gateway”. As we are talking about a direct replacement for PayPal here, you are looking for a PSP which offers a payment page – this is a page hosted on their servers where your users can enter their card details. There will also be some functionality that allows information to be passed back to your site as to whether the payment was successful (much like PayPal’s IPN).
Many UK banks also offer merchant accounts, however you don’t need to go to them, you can use any bank that offers you good terms. We’ll discuss terms later.
Your merchant account provider will probably also have a PSP that they encourage you to use. You don’t need to use it – the two things can be completely separate which gives you the ability to find the bank which offers you the best terms and the PSP which offers you the best integration.
Example merchant accounts
In the UK the following acquiring banks offer merchant services – this isn’t a full list. You will see that they all promote their own PSP as well as the merchant account, however all of these will work with third party PSPs.
Example Payment Service Providers
If you visit either of the above sites you will see they offer services for people without a merchant account. What this generally means is that they will find the merchant account on your behalf. In my experience this isn’t a bad way to proceed, find the PSP which offers the best integration for your site and get them to negotiate with the acquiring banks to find the one who will offer the best terms. You will still end up with a PSP and merchant account, and will be billed by both, however you don’t need to deal with the acquiring bank yourself and the pressure from them to use their PSP solution!
The practicalities of obtaining a merchant account
You are going to be asked to jump through some hoops to get your merchant account. The bank is going to want to know a lot of information such as details of your company, your trading history and what you will be taking payment for (be that software, subscriptions or events). They will use this information to decide if they can offer you an account and what terms that will be. These terms will include how much the bank takes from each payment they receive and also any “rolling reserve” or delay in transferring payments to your account.
Rolling reserves and payment delays
When you hear stories of PayPal hanging onto huge sums of event organisers money, what they are doing is holding a 100% rolling reserve. The rolling reserve is an amount of money the acquiring bank keeps in case of chargebacks – this is where the customer decides they will claim their money back from the credit card company, who then need to claim it via the acquiring bank from you. The problem with PayPal is that they don’t ask for details of what you are doing up front, therefore they suddenly slap on this reserve without warning when they decide that you are doing something risky. It’s the without warning bit that can be crippling to a business. With a proper merchant account they will find out what you are doing up front and, if they feel it is risky, may offer you an account with a rolling reserve in place – so for example if they hold a 20% rolling reserve they will always hold 20% of cash on an ongoing basis. This covers their risk that you go out of business and people start claiming money back.
Another way that banks can cover their risk is to delay transferring payments to your account. When the acquiring bank transfers the money they have taken to your business bank account this is known as settlement – payments from each day being processed as a batch. If you are an established business, have a good credit rating and are not selling anything deemed particularly risky the bank will settle each working day any amounts taken. In practice this means they show up in your business account about 3 days after the person make payment with their card. However the bank may offer you an account with a settlement delay of a few days, even up to a month. Both rolling reserves and delays are not usually permanent and if you accept an account with one of these in the terms, you should be able to negotiate their removal or reduction once you have a trading history and the bank can see you are not getting a lot of chargebacks. Of course this works both ways – if you do get a lot of chargebacks you will probably find the bank imposing one of these on your account.
Things to consider when selecting a PSP
If you are sorting out your merchant account and PSP separately it is worth knowing who you want to use when setting up the merchant account as they will also want to know how you will process the online payments.
As we are going to use Pay Page then you should look at what functionality that gives you. If you have been using the PayPal IPN you will need to check that your systems can be changed to use whatever system the PSP uses for their callbacks. You should be able to get hold of the integration documentation for any PSP you are thinking of using to check that.
You should also look at their reporting, what functionality you get in terms of doing things like refunding payments and whether you can configure the templates of the payment page in any way.
While we didn’t want to fully rely on PayPal with Perch we did know that some of our customers would still want to use PayPal, so we selected a PSP that allowed PayPal as a payment method. There are lots of other features offered by PSPs in terms of services they integrate with so it is worth thinking if any of these might be beneficial to your business.
There is a general assumption that moving away from PayPal is going to be more expensive. This isn’t necessarily true. However if you are doing a very small number of transactions that may be the case. With your new system instead of just paying a transaction fee per transaction you will have to pay some or all of the following:
- Initial set up fee for the merchant account
- Initial set up fee to the PSP
- Monthly set fee to the PSP
- and/or % of transaction value to the PSP
- % of transaction value to the acquiring bank
So even if the % of transaction values add up to the same or less than PayPal you will also have the monthly and setup fees to take into account. At the point we moved Perch to this setup it made very little difference in terms of cost, however as we process more sales the new setup will work out cheaper in comparison to PayPal.
How it all fits together
Once you are all set up and have replaced the PayPal payment page with your PSPs payment page you can wait for your first transactions. Assuming you don’t have a rolling reserve or a delay on your account you can expect the following.
- Customer pays via your payment page and you will get emails and notification from your PSP
- At the end of the day all payments are processed via the acquiring bank as a batch and settled as one combined transaction as a payment to your business account
- The batch will then appear in your business account 2 or 3 days later
- Each month you should receive a statement from your acquiring bank with details of all transactions and batches so you can reconcile your accounts with this. The statement will include the amount owed to the bank (a % of each transaction) which usually is then taken from your business account by direct debit
- Each month you will also get a bill from your PSP with monthly and per transaction charges as per your agreement
Things to avoid
Your PSP will have all kinds of other things to offer. They may allow you to take credit card payments over the phone using a virtual terminal or to integrate via an API meaning that you can keep payments on your site rather than going out to a Pay Page. I would suggest you think very carefully about doing either of these things because they will make your compliance with the PCI DSS that much harder and more expensive on an ongoing basis.
The Payment Card Industry Data Security Standard (PCI DSS)
As this blog post was turning into a bit of an epic, I will cover the PCI DSS in a separate post. The important thing to remember is that you still need to confirm your compliance with the PCI DSS even if you and your server never touch any card numbers. I’ll explain how that works in part two of this post.