The Beginner’s Guide to Online Payments

Even if you don’t run an online shop, there are many scenarios in which you may need to accept payments via your website for one reason or another. But what’s the best way to do it?

For many small businesses, the obvious default is Paypal. It’s well known, most people already have a Paypal account, and it’s reasonably quick and easy to set up. However, it’s by no means the only option, and may not be the most suitable for your business. Here’s a summary of some of the options out there.

Merchant Account

If you already have a merchant account, you might think you can just go ahead and use it to take payments online. Unfortunately, this isn’t the case – you need a separate Internet merchant account, and you’ll also need to set up a payment gateway to process payments. These will incur set-up costs as well as ongoing transaction fees. Some will also charge a flat fee as well as individual transaction fees. While this might sound very expensive, a merchant account is generally the cheapest way to process debit cards for individual transactions, as they are charged at a flat rate instead of a percentage of the total. Credit card transaction fees are charged as a percentage of the total, but you may be able to negotiate a good rate.

What is a merchant account?

Basically, it’s the middleman between your own bank account and the customer – it temporarily stores your money before transferring it to your own account. Your merchant bank doesn’t need to be the same as your existing business bank, so it’s worth shopping around.

Providers: most banks offer merchant accounts.

What is a payment gateway?

This is the method by which transactions are processed – the virtual equivalent of a chip and pin machine. It connects your website to a payment processor, collects the card details, sends the payment for settlement and tells you that it’s been authorised. Some payment gateway companies also offer a merchant account service, making them more of a ‘one stop shop’.

Providers: Braintree, Authorize.net, PaymentExpress, TrustCommerce, Worldpay, eWay

What is a payment processor?

Payment processors (or acquirers) are the financial institutions that work in the background to actually process the transaction.

If you don’t want to do it all yourself you can choose to use a payment service provider or a payment processor to help you accept online payments.

What is a payment service provider?

A payment service provider usually acts as both merchant account and payment gateway, meaning you can accept payments without having to have your own merchant account. This usually means that PCI compliance is also taken care of. This is convenient, but often a little more expensive.

Some providers offer numerous additional services, such as subscription billing, fraud management and virtual terminals (allowing you to also take payments over the phone using your PSP account). However, these may come with an additional charge.

Providers: Stripe, Braintree, PayPal, Adyen

Recurring payments

There are two main ways to take recurring payments – by credit/debit card or by direct debit. There’s also standing order, of course, but that has to be set up by the person sending the money, so you can’t use it for recurring online payments.

What is a subscription management service?

A subscription management service (or subscription wrapper) lets you easily handle recurring payments. Services typically allow customers to sign up and store their credit card details for future use, and allow merchants to automate billing, customise billing related emails; and make sure the right people get charged the right amount every month. You’ll typically still need to use either a merchant account and payment gateway or a payment processor, although both Paypal and Stripe allow you to take recurring payments independently.

Providers: Zuora, Recurly, Chargify, Paypal

Direct Debits

It used to be that only very large companies could afford to become Direct Debit Originators due to the hassle and cost involved. You need to have a Service User Number (SUN) and special software. You will typically need to have a turnover of at least £1 million, and you need to apply through your bank or through a Direct Debit bureau (a bureau may have lower requirements in terms of turnover, but setup costs will still be several hundred pounds vs thousands via your bank). This is no trivial undertaking and probably deserves its own guide. https://gocardless.com/guides/intro-to-direct-debit/originator/

Some providers offer a managed service which allows you to collect Direct Debit payments through their SUN, bringing the cost right down.

Providers: most banks, Allpay, Smartdebit, GoCardless

Here’s a bit more information about three of the major providers in the small business space.

Paypal

Who are they? Probably the most well-known provider worldwide. They were founded in 1998, became a wholly owned subsidiary of eBay from 2002-2014, at which point they were spun off into a separate publicly traded company.
What services do they provide? Paypal is a full payment service provider and also offers subscriptions and a range of merchant services, such as setting up payment buttons for one off purchases on a website. They do have some additional services which attract an additional cost, including a virtual terminal (allowing you to take payments over the phone as well as online).
How easy is it to set up? Very easy. You’ll need to verify certain details, but you can use your account (with some limits) while you’re waiting for verification.
What’s their payment schedule? You can withdraw money manually from your Paypal account whenever it suits you.
What do they charge? 3.4% + 20p, but there are volume discounts, so you could pay as little as 1.9% + 20p.
Who are they best for? Small businesses who are just starting out, who don’t mind paying a little more for convenience and the ability to make instant withdrawals. Non technical people.

Stripe

Who are they? Stripe is much newer, founded in 2011. They market themselves as ‘web and mobile payments, built for developers’ and the ease of integration they offer means that they’re easy to set up and many shopping carts come ready integrated.
What services do they provide? Similar to Paypal – full payment service provision, virtual terminal, subscriptions
How easy is it to set up? Very easy. You’ll need to verify certain details, but you can use your account (with some limits) while you’re waiting for verification.
What’s their payment schedule? Weekly in arrears on an automatic schedule.
What do they charge? 1.4% + 20p on payments from EU cards, and 2.9% + 20p for payments from outside the EU.
Who are they best for? Web developers, e-commerce shops, people who need a virtual terminal as well as online payments.

GoCardless

Who are they? Also founded in 2011, GoCardless allows small businesses to accept Direct Debits without the expense or
What services do they provide? Direct debit processing, either for regular subscriptions or one-offs.
How easy is it to set up? Very easy. You’ll need to verify certain details, but you can use your account (with some limits) while you’re waiting for verification.
What’s their payment schedule? Weekly in arrears on an automatic schedule.
What do they charge? 1% per transaction with a cap of £2 on the basic plan.
Who are they best for? Businesses who need to take regular subscription payments or who have clients who pay monthly.