There comes a point for all ecommerce businesses that have experienced a certain volume of global growth where using an out-of-the-box solution no longer becomes the most cost-efficient option. But to make a successful transition from outsourced ecommerce to building your own custom payments platform in-house, there are lots of things that need to be done well before the development begins. In this article, we will explore in detail some of those required preliminary steps, like the merchant account creation process, and some of the major elements that you need to be prepared to implement properly.
Your digital business has reached a pinnacle in your campaign to capitalize on global revenue, and the fees associated with using an outsourced payment processing platform are beginning to eat up a massive share of your bottom-line revenue. It’s now time to start making the switch from an outsourced payments platform to a custom-designed platform you’ve created in-house. Before we dive any deeper, if you haven’t read the first part of this series, we highly recommend you do so, as it is designed to give you a high-level overview of the most critical components to think about when it comes to ecommerce payment processing and global growth, like the importance of localization, scalability, uptime, and hidden costs you need to be mindful of. It also starts to identify both the benefits and disadvantages of outsourcing. With that knowledge now in your toolkit, it’s time to examine in finer detail the first step (and a large one at that) required into becoming your own payment processing powerhouse: setting up and maintaining merchant accounts.
You must first understand what a merchant account is and why it’s such a necessary factor when building your own payment processing system. Merchant accounts are a special type of bank account that enable businesses to take payments from credit cards. It’s an agreement that needs to be made between a business and a merchant bank so that transactions can be settled accordingly.
With a merchant account, the bank you are doing business with will likely be assuming any risks involved with payment processing capabilities. Because of this, there is a lengthy approval process that you will need to go through. This typically involves providing years of financial statements, risk evaluations, processing history, and personal credit history.
There are also very high standards that you must adhere to, otherwise you run the risk of having your application immediately rejected. This includes selling a product or service that has a high chargeback rate, or offering your goods in a region that’s politically unstable.
Chargebacks in particular – as mentioned above – can be a very quick way to damage all the hard work you’ve put into the merchant approval process. We briefly touched on chargebacks in the first part of the series , but we’ll now explore more of the specifics in terms of how it can harm you and ways to prevent it from doing so.
By taking on the role of a merchant account, you’re also assuming all responsibility when it comes to chargebacks. You must maintain a low chargeback rate, or you will be hit with higher fees, fines, or you could even have your account shut down entirely, so you need to be constantly quelling threats of chargebacks on an ongoing basis.
While they will inevitably happen from time to time, it's important to realize just how costly chargebacks can be. We previously mentioned that businesses spend around 140% of the actual cost of the chargeback itself. Here are those fees broken down:
It’s absolutely paramount that you have a chargeback mitigation process in place when you start to build your in-house payment processing solution, especially when your expanding your business to new markets and opening yourself up to more fraudulent threats.
There are a variety of things you should consider adding to your mitigation plan, like providing a recognizable soft descriptor on credit card statements, offering a reasonable refund policy, enabling a opt-in process if you’re a subscription business, and implementing CVC verification.
It’s not simply chargebacks you need to be managing effectively on an ongoing basis to keep your ecommerce business out of harm’s way. As you scale, you’ll need to invest more resources into complying with all of the geographic areas that you’re selling your goods and services in, which becomes very complicated as you expand due to the staggering differences that range from one jurisdiction to another.
In short, some of the more significant regulations that you will be required to address include collecting, paying and maintaining accurate tax records, anti-money-laundering (AML), identity theft protection, financial fraud prevention, bribery and extortion prevention, terrorist funding prevention, and customer protection.
If you fall short on meeting any of the above regulations – much like a high chargeback rate – you could see yourself facing stiff fines or a suspended merchant account.
So, you know how important pricing strategy is, and have considered the psychology behind the ‘9’ factor. Along pricing, managing chargeback rates and government regulations are a huge part of successfully gaining and maintaining merchant account status; but unfortunately, these are not the only things to watch out. You will also need to be able to understand and properly manage your contract terms and fees, which can be quite complicated to comprehend.
Typically, merchant services agreements include a pre-defined contract term that falls somewhere in between three to five years. To meet the approval requirements, businesses need to spend a lot of time and effort doing their due diligence, implementing the proper technology to build a payment processing engine, and paying fees to upstream providers.
If things were to go awry, and a merchant services contract needed to be terminated before the term is up, there is an early cancellation fee that often involves conceding the minimum monthly fee multiplied by the remaining number of months left on the contract.
Additionally, some contracts may also require making good on volume commitments, meaning there must be a certain threshold of dollars processed per month. If a business fails to process the minimum, they are then slapped with extra penalty costs.
Depending on the type of transaction that’s taking place, you may be faced with paying a higher rate than others. A good example of this is exchange rates, where merchants are required to pay a non-prime exchange rate if accepting payments in foreign currencies. Another example includes premium and corporate cards, which typically incur an additional fee that ranges somewhere between 0.2-0.4%, which can really add up when you’ve reached a large enough stage in your expansion.
Finally, understanding that ecommerce purchases may simply fail for random reasons. Whether the payment is declined, a refund is requested, a chargeback occurs, or some other fraudulent activity has taken place, it’s important to realize that the merchant is still on the hook for paying the transaction fee, as we mentioned earlier.
As discussed in the first part of this series, there are lots of things that need to be top-of-mind when it comes to scaling your payment processing capabilities. One thing that didn’t get covered earlier is how you will also need to build relationships with multiple payment providers as your business expands to new markets.
There are certain jurisdictions that have strict laws on how they handle payments within their borders. Take Brazil for example, which requires ecommerce businesses that want to accept payments in the Real to have a processor and physical business entity within their country. Also, when you branch to other markets where credit cards might not be the most popular form of payment – like Alipay - you will need to ensure you’re establishing a relationship with providers that offer these alternative forms of payments respectively.
In short, this is a fairly complex process that requires a full-time, in-house team to manage effectively, but it needs to be clearly understood for businesses who are looking to build their own payment processing platform, especially those who are already offering their solutions in international markets or looking to break into them. A successful ecommerce business is one that can accept as many different forms of payment as possible, so you will eventually need to be prepared to address these challenges.
Now that you have a better understanding of the merchant account setup process, the ongoing effort that goes into maintaining this status, the fees and costs associated with it, and key regulatory standards that you must adhere to, it’s time to focus on laying the groundwork for your in-house payment processing platform. Before we dive any deeper, it’s important to realize that this is a large undertaking, and you will likely need to be ready to make a large investment in terms of time and internal resources.
Below, we will explore the most significant components that you must be ready to build and integrate properly for establishing a successful, scalable ecommerce foundation.
It goes without saying that you will need to have the technical and design resources available to build an attractive and fully functional shopping cart. As consumer expectations rise and people expect a more intuitive and seamless ecommerce experience, so do the demands that are put on your development team to ensure you have an aesthetically pleasing, high-converting cart. Your team needs to have a clear picture of the exact functionality that is required to build this successfully, and how it connects with the backend of your system. They will also need to be well-versed with web design best-practices (and future best-practices), as well as the digital payment landscape.
Part of the backend connectivity with your shopping cart also involves integration with the payment gateway, which can be difficult to comprehend depending on how complex your front-end cart is.
Subscription ecommerce business, as an example, will require automated tokenizing so that transactions can happen on a recurring basis. Additionally, there is also the matter of storing credit card information. You can either choose to create your own vault and store this yourself (which requires very strict security standards), or you can partner with a third-party that specializes in recurring billing.
While on the topic of integrations, you will also likely need to be considerate of other business systems you’re currently deploying in your organization that will need to connect with your custom payments platform. This can include a variety of applications depending on your type of business:
It’s worth noting that as you implement each of these integrations, there will also be time and effort that needs to go into maintaining each individual application, as each third-party solution will come with its own set of updates and new functionality that could cause things stop working if proper maintenance isn’t being applied.
Inevitably, you will be faced with technical issues or other problems that will lead to network downtime. This could be as a result of one of the above business applications not cooperating with your network, an update to your platform that didn’t execute properly, or even something more malicious like a DDoS attack. Regardless of what the source of the outage may be, it is paramount that you can combat it as quickly as possible to mitigate the impact of lost revenue. According to SiteUptime, you can accurately estimate your loss via an outage by taking your average revenue per day and dividing it by the minute. For example, if your site makes $10,000 a day, then it loses $6.9 a minute whenever it’s offline. As your business expands, these losses can lead to an exponential loss.
In terms of prevention, you will need to have a dedicated in-house IT team with the technical knowledge to identify and troubleshoot outage sources quickly. Depending on the resources and the size of the team, you may want to consider onboarding an uptime monitoring service, or simply having staff dedicated to that responsibility.
At the end of the day - it is impossible to guarantee uptime 100% of the time, which means you will need to manage and prepare for these occurrences – as rare as they may be – when building your own custom payments platform.
Now that you have broadened your knowledge about the merchant approval process and what is required to maintain merchant account status, as well as the key building blocks required to lay the foundation of your payment processing platform like design requirements, integrations with payment gateways and business software, and establishing procedures for mitigating and addressing outages and maintaining reliability, you’re well on your way to understanding the resources and needs that go into building your own in-house, high-converting ecommerce platform.
All that remains now is to analyze the rising role of compliance and the protection of data, as well as the steps you’ll need to follow to properly meet challenges associated with managing tax requirements – two things that only get more complicated as you scale your digital business.
In the final part of our “Build vs Buy” series, we will examine these elements and do a final review of all of the aspects we discussed that go into building your own platform, including their estimated costs.