In the second part of my article, I will be helping you to weigh up the advantages and disadvantages of some of the major payment methods available to online businesses.
Invoice / Money Order
Payment by invoice carries high risks for the retailer. First, there is the possibility of non-payment. Resulting costs for the merchant of chasing non-payers can add up quickly. On the other hand, when paying in advance the risk of default is waived for the retailer, but the customer bears the risk of receiving a defective product. In addition, due to banking procedures delays in the purchase and delivery of items are possible. For this reason, the option of pre-payment is not that popular with customers.
Payment by invoice only really makes sense where physical goods are delivered via the online shop and, where appropriate, may need to be sent back. For startups that sell purely virtual goods or services, the cost of invoicing, account reconciliation and the collection of unpaid bills is simply too high and too bureaucratic. Other payment methods offer more flexibility, security and comfort.
Direct Debit (also called ELV or electronic debit) is very popular with German customers and shop operators because of the ease of use and the convenient and fast execution of payments it allows. Direct debit is therefore a must for every startup and accounts for about 40 to 50 percent of the total transaction volume online. Many customers, however, increasingly shy away from full disclosure of bank information and the rate of reversals is very high (depending on the product and partner, in some cases up to 40 percent). However, with the right partner, in addition to the simple integration of a direct debit option, you have the option of a professional risk management approach that limits your risk. Some suppliers provide Internet companies with comprehensive insurance against charge backs at only slightly higher fees. With such offerings available, direct debit has established itself quickly as one of the most promising payment options on the Internet.
Credit cards are the second most important payment method in Germany, appropriate for both national and international payments. The credit card is therefore a must for all startups. In addition to their international reach, credit cards offer a high degree of safety and automation. Visa, Master Card and American Express should always be offered in any web shop. Most payment providers have separate credit card acceptance contracts, however, some offer all payment methods from a single source. However, it should be noted that providers usually retain between 10 and 20 percent of sales revenue for three to six months in order to guard against possible default. Also, there are strict rules for reversals. Criminal charges and termination of the contract are possible if limits are exceeded.
Although the credit card is growing popularity, its takeup in Germany compared with other countries is still very low. Especially with younger audiences such as teenagers and student, the credit card is only used very occasionally. Payment by credit card is also not appropriate for small amounts due to the often higher transaction costs. With credit cards, it is also of immense importance to choose a partner from the beginning with professional risk and fraud management processes, because credit card fraud is an ever-present danger. Provider of complete payment systems are usually at an advantage here.
Giropay / ‘Sofortüberweisung’
Giropay and Sofortüberweisung are becoming increasingly popular in Germany and have already achieved a market share of almost 10 percent. Therefore, they should not be missing from the payment portfolio of startups
Giropay developed a process that can be used today by customers of Postbank, Raiffeisenbank and the savings banks. Payment is made directly by Giropay and has proven to be safe: When customers buy a product by Giropay on the Internet, they have to confirm the transaction by a personal PIN and secret TAN number, which changes for every transaction.
The principle of „Sofortüberweisung“ is similar to Giropay and allows direct payment via online accounts from other banks, including Deutsche Bank and Dresdner Bank.
In Giropay the merchant requires a first-acceptance agreement with so-called ‘acquirers’ (the commercial link between Giropay and the online retailer) and must then integrate over the Giropay system in his shop. The shop operator then pays his individual transaction fees with the provider of the POS system.
Micro Payment / ePayment
In order to tap new target groups and to enable the payment of small amounts – so-called micro-payments – many suppliers have cropped up with Internet ready solutions. For example, prepaid cards are already available for young people 14 or over, such as the Paysafecard. There are also mobile payment procedures. However, because of poor conversion rates, the limitation to small amounts, the difficulty of the assignment of transactions and the accompanying high costs, this is still not a mass scale option and therefore is not recommended for startups.
Besides the „traditional“ payment methods, more innovative e-payment methods have evolved that have been specially adapted to electronic commerce. Among them, so-called „eWallets“ have perhaps the most important and visible role. In the US, this already already accounts for about 20 percent of all Internet transactions. In Germany, the popularity of eWallet solutions is growing because they allay the fears of many online consumers about disclosing credit card and bank information online. EWallets also permit the bundling of a variety of local payment and transfer options in a single easily usable system. Customers need to register only once, and thereafter can authorise payments with their email address and a password.
Some payment service providers offer both direct and traditional payment options, plus newer e-payment processes, from a single source. Large platforms, such as Bibit (in Germany RBS World Play), Moneybookers or Pago bundle the various payment methods and thus reduce the complexity of mean cost and complexity that would be entailed by integrating various billing options into the system.
About author Martin Ott:
Martin Ott is the joint CEO of Moneybookers, where he heads up sales, P2P, marketing, products and services. He was formerly the COO at Jamba, a global leader in mobile entertainment services, and before that founded and was CEO of the Tokyo-based Eken K.K., an online platform for community and consumer reviews. Ott studied international business administration at the WHU Beisheim School of Management in Vallendar, the Finance Academy in Moscow and the Keio Business School in Tokyo.