When you’re a freelancer who’s just learning how to make money online, payment systems can be confusing. Here’s a big picture explanation of how it all works, from the top down.
First, if you’re getting paid through a freelancing site like Upwork or PeoplePerHour, you only need a PayPal account. If PayPal isn’t accepted in your country, then the freelancing site you’re working through will offer an alternative.
But, if you’re not just doing work online for someone else, and you’re planning to sell anything on a website yourself, then you need to know a little bit more about payment systems.
Think of payment systems like a pyramid.
Dedicated Merchant Accounts
At the top are dedicated merchant accounts, which are bank-level accounts. Some payment processors at this level include Authorize.net and PayLeap.
To get a dedicated merchant account you and your online business will go through a rigorous credit check and underwriting process. This involves reviewing bank and financial records, credit records, income statements, background checks, and more. It’s similar to (but even more rigorous) applying for a loan to buy a house.
The reason for this rigor is that you’ll be handling customer credit card information directly, storing it yourself. And the only reason you want a dedicated merchant account is to negotiate custom fees, based on high volume sales. We’re talking about $40,000 per month or more.
Fortunately, the average internet business entrepreneur doesn’t need a dedicated merchant account, because of something called a Payment Gateway.
A payment gateway allows you to tap into a shared Merchant account owned by the gateway. These are also called aggregate merchant accounts.
Typical gateways you’ve heard of include PayPal, Stripe, BraintreePayments, and AmazonPayments. And there are a few dozen more.
They’ll process the credit cards for you, and pass the money along to your account, so you never touch the customer’s credit card numbers, which is why it’s easy to get a payment gateway account.
Almost anyone can get payment gateway, just by signing up.
Payment gateways make money by charging you a fee per transaction. They usually do not have a joining or monthly fee. In other words, they’re free to sign up, but you’ll pay per transaction. The usual transaction fee is 2.9% plus $0.30 (thirty-cents) of each transaction. That’s in the US coinage, so check their websites for your currency.
For your online business, do you want or need to sign up for a payment gateway? As mentioned before, if you do business through a freelance site, or similar, you’ll want at least a PayPal account where they’ll deposit your money. If you take payments directly from people, a PayPal account is handy and may be all you need. You can add a PayPal payment button to any location on any website to get paid into your PayPal account. A similar “one-button payment option” also exists with Stripe and Braintreepayments.
However, if your online business is complex, such as having multiple products or offering different payment plans, then you will need a billing platform.
Billing Platforms are pre-programmed interfaces between the customer and the Payment Gateway, giving you more flexibility than simply taking payment and delivering product. Here are a few of the things you can do with Billing Platforms (keeping in mind that not all Billing Platforms offer all these features, so you have to look at each one in light of what type of business you’re doing):
- offer upsells at checkout
- customize the dunning process (those are the automatic emails that go to subscribers letting them know things like their credit card is about to expire, or their account is up for renewal)
- search and organize customer data
- add custom data fields, such as asking where they heard about you, or what size t-shirt they want
- upgrade or downgrade customer accounts, great for subscription programs
- accept recurring billing, again great for subscription programs, but not necessary for a storefront like Etsy
There are literally hundreds of billing platforms to choose from, depending on the kind of online business you’ll be doing.
- There are recurring billing platforms if you plan to sell subscriptions, like SendOwl and Recurly.
- There are storefront platforms like Shopify, Etsy, and Amazon.
- There are affiliate platforms like Clickbank.
- There are CRM billing platforms, like Infusionsoft.
- There are membership platforms like Cart66 or PaidMembershipsPro.
- There are stand-alone billing platforms that can be programmed with many different types of customer interfaces, if you do multiple types of online business, like Chargebee.
Many of these platforms do the same things. Some have many more features than you’ll ever need, so why pay for them? Others are limited in what they do, and you’ll want to think ahead to the kind of businesses you’ll be running. (But you can always have more than one billing system if your business grows in different directions.)
Consider the Costs
A billing platform should cost no more than $30/month when you’re starting out, and many have free trial periods or “free under $X” plans. Some have one-time fees but very low or zero monthly fees.
And no matter what, each billing platform will still pass along a Payment Gateway fees of 2.9% + .30, in addition to their own fees. Some billing platforms will wrap the payment gateway fee, charging your their own version of a transaction fee and then forwarding on the portion of the gateway fee to the merchant account. That makes it easy for you, but can cost more per transaction.
So compare and calculate costs carefully.
I like to imagine a scenario in which I’m making $X per month, then compare across platforms to see how much $X would cost me on each platform. For instance, I sell a real estate direct response marketing package for $79. With PayPal alone, that would cost me $2.59. But with Chargebee, I pay the $2.59 plus a portion of my monthly cost to Chargebee ($99/mo. at my current pricing level). Since I make in excess of $10,000/mo., the $99 monthly fee is easy to absorb in exchange for the benefits I get with Chargebee. But if I’m making just $79/month, I wouldn’t want to pay $99/mo. in billing platform fees. That’s an exaggeration, of course, but meant to illustrate how you must think about the costs associated with your payment system.
You do not need a dedicated merchant account until you’re making so stinking much money in your online business that you can hire someone to manage your money for you. You do need a payment gateway, but most of these are linked already to a billing platform, such as Etsy or Sendowl. So start by thinking about what type of internet business you’ll be doing, then Google search for billing platforms for your type of business. Avoid SAP or Enterprise level billing platforms, which are way more robust than you need. Each billing platform will hook you up to the right payment gateways (you can have more than one).
If you need any suggestions about your online payment choices, you can contact me. ~Linda