Welcome To The e-Jungle

Nothing scares resellers and their customers more than a sizzling e-commerce meltdown.But no matter how many headlines the eBays and eTrades snare with grandiose outages, e-commerce integrators shouldn't overreact and pour all of their resources into the technical intricacies of Internet business.
Written by Ben Elgin, Contributor

Nothing scares resellers and their customers more than a sizzling e-commerce meltdown.

But no matter how many headlines the eBays and eTrades snare with grandiose outages, e-commerce integrators shouldn't overreact and pour all of their resources into the technical intricacies of Internet business. In deed, the success of any e-commerce venture hinges as much on the business deals the merchant negotiates as it does on databases and middleware. Save yourself 1 percent per deal here and another 1 percent there, and suddenly you're boosting your customers' margins.

Such percentage points are scattered throughout the path of an Internet transaction (see "Tame The Re-Tail Jungle," p. TK), ranging from the contract inked with a merchant bank to deals cut with payment gateways, hosting companies and card-processing outfits.

Quite simply, it's a jungle out there. But while even payment-processing pros concede they're often confused by the fast-changing payment landscape, savvy integrators with a wealth of experience and good contacts can put their customers in a position to succeed. In addition, gritty integrators representing numerous clients can use economies of scale to pack more wallop at the e-commerce bargaining table than a single merchant.

Do It Yourself On the flip side, resellers that leave the business headaches up to the customer are gearing up for a short-term engagement.

Undoubtedly the biggest business deal facing your customers is the online merchant account. Not only does it dictate the bank and card-processing companies with which both you and the merchant will deal, it also represents your customer's biggest investment.

Nothing will cost more in per-transaction percentages and up-front fees (except, perhaps, the Web site itself).

More importantly, the scattershot range of merchant deals dotting the financial canvas today means your customer is in danger of being burned.

Just ask Thomas Forgione, president of e-commerce integrator Web Alliance International Inc. (www.waisite.com), who recently priced out a handful of merchant accounts for a prospective customer.

Negotiating with a number of independent sales organizations (ISOs)—the companies that frequently resell merchant accounts for banks—Forgione found two financial institutions that he concluded were proposing reasonable per-transaction costs. But while one ISO pushed for a $150 "set-up fee," the other demanded $500 up front.

Sound like small potatoes? Not for the small- to midsize-business market, where companies often slate e-commerce budgets at a few thousand dollars. We're certainly not talking about Amazon.com-type deployments here.

A veteran of the payment industry himself, Forgione wrangled with the more expensive ISO, trying to determine why it wanted the larger initial charge. After going around in circles for a couple of minutes, he deduced that the bulk of the cost was a simple commission for the ISO—something the merchant bank would never see. That means there might be some negotiating room on the fee. "One rule of thumb to go by: Ask the ISO if it works on straight commissions," says Forgione.

If it says yes, the door is open to negotiate—no matter how non-negotiable it claims the fee is. If it says yes but refuses to budge on price, you're much better off walking away from the bargaining table, taking your valuable business elsewhere and finding someone who requests a lower fee.

Pie For One But inking a low-cost set-up fee is only half the battle. Getting a reasonable discount rate—the piece of action that a bank and ISO takes with every transaction (see "Talk The Talk," above)—can have a much greater long-term impact for your customer.

Depending upon the industry your customer is getting into—along with the quality of its credit history—Internet discount rates often hover between 3 percent and 4 percent. That's nearly double what a merchant typically pays in the brick-and-mortar world.

Much of the inflated price is legitimate business. In all card-not-present transactions (including mail order, phone order and Internet), Visa and MasterCard typically jack up their non-negotiable transaction rates to cover for increased levels of credit-card fraud.

Analysts estimate that fraudulent e-commerce transactions now account for as much as half of all credit-card fraud (see www.zdnet.com/zdnn/stories/news/0,4586,2317933,00.html).

Risky Business Online merchants that set up shop in higher-risk industries like pornography or online gambling—where credit-card charges are disputed more frequently—can expect to see an even bigger cut taken out of their pie.

But, beyond the basic percentage levied by the credit-card companies, discount rates often have very little in common.

Just how disparate can they be? Elliott Frutkin, CEO of e-commerce integrator Doceus (www.doceus.com), recently tackled that very question, polling the dozens of card-processing companies that work with the CyberCash payment gateway.

Not surprisingly, the starting prices ranged from a couple of percentage points up to 6 percent. "There's quite a variety out there .... Once you get up to 5 or 6 percent, that's just not very reasonable," says Frutkin.

Indeed, a steep discount rate could sink merchants of all sizes, especially on the Internet where smaller mark-ups tend to be a way of life. Suddenly, after the card company takes its cut, a 10 percent mark-up is cut in half. And that is before your customer has paid the payment gateway and the site-hosting provider, not to mention your bill.

"There's a lot of things for merchants to consider if they're going to be profitable on the Web," says Web Alliance's Forgione.

For merchants with tainted credit histories, the landscape gets even more daunting. First, just landing an e-merchant account is tougher than in the real world, because banks shy away from high-risk merchants in card-not-present environments. Second, credit-suspect merchants may have to fall back on less established card processors, which charge exorbitant rates.

Says Laura Zung, VP of product management at Internet solutions provider Verio: "There are a lot of fly-by-night processors out there that charge between 7 and 13 percent of the transaction." Occasionally, those processors absorb the heightened risk, pay the Visa rate of 3 percent and pocket the rest.

Glueing In The Gateway As if there weren't enough hands in your customer's pie, you still have to factor in deals with the payment gateways—companies that give the transactions legs, routing order data from the "buy" button to the card processors.

Although a full-service integrator can provide sound advice as to which gateway to choose, there is less room to negotiate prices. CyberCash, for instance, typically will hoist a start-up fee of at least $150, a lower monthly fee of around $10, and a flat per-transaction fee between 10 cents and 25 cents.

Other gateways charge a hefty setup fee and then provide a range of services on an á la carte basis. CyberSource, for example, takes at least a dime out of each transaction for basic processing and offers services like tax calculation and fulfillment messages for an additional 10 cents. More bandwidth-intensive jobs like fraud detection sell for between 30 cents and 40 cents per transaction.

Just understanding the pros and cons of the payment gateways is a service in and of itself to upstart e-commerce merchants.

Says Dave Lynn, director of business development at Stellcom (www.stellcom. com), a Microsoft Certified Solution Provider, "The matrix is changing every two months. If I tell you CyberSource is coming on strong today, CyberCash will vault ahead two months from now."

Indeed, just last month CyberCash announced plans to offer HNC Software's Internet Fraud Detection Service, known as eFalcon. Around the same time, CyberSource proclaimed that sneaker giant Nike had deployed the company's Internet Fraud Screen Service.

Of course, neither CyberCash nor CyberSource are one-size-fits-all solutions. For low-end e-commerce integrators that throw their arms in the air and drop the business ball altogether, there are a couple of passable options.

Hosting companies like Verio and Concentric are touting all-in-one packages, encompassing everything from domain-name registration to an online merchant account. A reasonable solution for small commerce shops, they package every charge into a single bill that usually totals a couple hundred bucks per month, not to mention a percentage of the transactions.

While those solutions mean no negotiations and business headaches for e-commerce integrators, they also tie the merchant into a hard-set architecture, where scale and change can prove to be difficult. That's not exactly the type of limitation that a growing business wants to weigh.

"I usually recommend merchants get away from any one vendor and treat payment as a plug-and-play module," says Internet analyst Vernon Keenan.

In addition, the bundles come with Web templates, putting the value of even channel bottom-feeders in question.

But to attract and sustain up-and-coming e-businesses, there's really no better way than to grab a machete and start clearing a path through the jungle of Net-transaction relationships.

Talk The Talk

Arm yourself with the correct vocabulary before negotiating deals.

ISO—Independent sales organization. These companies sell merchant accounts for the banks. Chances are, you'll often deal with these.

Interchange Rate—The percentage of a transaction that the merchant pays to Visa or MasterCard. This figure is non-negotiable, but varies according to industry and risk factors. Should hover near 2.5 percent.

Discount Rate—This is the interchange rate plus a piece of the action for the merchant bank. Negotiate with the ISOs here for the best deal around.

Factoring—A shady practice of less-reputed, card-processing companies. They put risky companies

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