December 27, 2013
I have been observing a trend in the journey of some leading Ecommerce companies w.r.t, accepting payment. It goes something like this – an Ecommerce company starts accepting card payments using a third party payment gateway provider. In the beginning, when the numbers are low, it seems to be the structure of choice with least amount of hassle. As the business grows, it reaches a phase where you try to build your own payment gateway (end to end). The way Amazon did in US and Flipkart, Snapdeal (recently) did in India.
Whats most interesting is that there is a next stage as well. It comes when you have spent enough time and developed expertise to perfect your payment solution. Where the Ecommerce firm becomes so good in handling payments that it starts offering it as a platform based service to other merchants. E.g., Amazon Payments allows its users (merchants) to receive money using its API (and to send money out via ACH). Popular crowdfunding site Kickstarter uses Amazon Payments. Amazon Payments fees start at 2.9% + $0.30 per transaction for payments over $10 (the percentage. Amazon monthly fee for Pro Merchant accounts ($39.99 as of the date of publication).
In Ecommerce business, transactions are everything and a lot of times there are transaction failures and security breaches. So the payment gateway should be secure, and robust. There is a constant effort by leading Ecommerce companies to improve things. But what is the business case for an Ecommerce firm to have their own payment gateway? is it only about down-times and transaction failures. Well, we should ask the Do-ers: firms like Amazon and Flipkart
Benefits of having own Payment Gateway for Ecommerce firms:
It helps the companies operating in E-commerce space in reducing the cost. Economies of scale kick in. But it makes sense at a certain size, at a certain sales volume. What is that threshold? (Please follow this series and you would get this answer in subsequent posts)
It shifts the control in the hands of the firm – Now you can build heavy duty fraud detection and prevention systems using Big data analytics, build your own negative list and deploy methodologies to reduce transaction failures (like dynamic switching)
If you have shopping behaviour analytics you won’t mind a bunch payment transaction analytic insights added to it. Infact you would go head over heels to club the two and develop solid mechanisms for targeted marketing, complete left out transactions and so on.
With the launch of your payment gateway it creates various business opportunities. This gateway can be used to offer payment aggregation services to other websites thereby justifying the investment in building it
Flipkart earlier relied on third party payment gateways and banks to complete their transactions. Now with their own system they expect to:
Simplify online transactions for users and offer it to other merchants selling online (PayZippy)
On the consumer front, the gateway will authorise payments and process them securely through a user's bank account, and will help Indian customers to pay online for purchases made online.
Another Indian E-commerce Company Snapdeal has made an announcement recently about its own payment gateway. About 60 per cent of online transactions in India is made through cash (COD). But the additional processes required for cash-on-delivery and higher instances of returns have added to the overheads of online retailers. Snapdeal and other retailers are trying to reduce that burden.
Amazon Payments moved to the next phase: On the consumer front, Pay with Amazon, will enable users to opt for their Amazon accounts to pay on third party e-tailing sites. This will happen on partner sites which will list ‘pay by Amazon’ as a payment option for the consumers. The ‘Login and Pay with Amazon’ service is compatible with tablet, mobile and desktop devices Companies like Amazon with its existing clients include Gogo.com, Autoplicity.com, and Build.com. Similarly other ecommerce companies like Flipkart in India (Payzippy) are moving in that direction and offering it to other merchants to use their services.
It doesnt mean that all Ecommerce firms would be doing this or will be capable of doing this. The Role of Third party payment gateways in Ecommerce industry can’t be overshadowed. They have worked hard to help millions of stores go online. Companies like PayPal, Authorise.net, and Braintree etc. have played a pivotal role.
Bank as a Payment Gateway:
There are various banks which offer payment gateway services for merchants. Examples are Citibank, Federal bank, Capital one. In this the Acquiring Bank holds the contract for providing payment processing services to the merchant. The merchant account is a contract under which the Acquiring Bank extends a line of credit to a merchant who wishes to accept credit card transactions. The Acquiring Bank holds all the risk on every transaction as well as the operation of every registered acquiring ISO/MSP and their sub-agents and are responsible for all Association fines.
Citibank - Citibank Payment Gateway manages bank account data for suppliers, houses rich remittance data, and supports payments made with automatic clearing house and buyer-initiated Purchasing Cards. Buyers can send the file directly, from their organization's ERP system, with no point-of-sale transaction required and no need to show the card to the supplier. Whether payments are made by ACH or with a buyer-initiated Purchasing Card, Citi manages the disbursement. Citibank charges 2.25 % on every transaction processed through Citibank payment gateway.
Federal Bank - Fed–e-Gate is a solution that enables you to accept Credit and Debit card payments from your Ecommerce website securely. It supports all variants of VISA/ Master/Maestro Cards. It is designed on a robust platform to meet high volume transactions with secure processing and provides merchants with real time access to transaction data to view their transaction status and provide refund to customers as per request. Federal bank charges 2.1% on every transaction processed by merchant.