Payment Options for Export Import Trade Part IX - Credit Card Payment Gateway - Cost Implications for your Website

The ease, convenience and universal acceptance of on-line payment gateway has made it extremely popular option for e-commerce websites. However, prospective e-commerce merchants should examine cost of accepting on-line payment through credit card in detail and adjust their product price accordingly.

There are mainly three cost factors that all on-line merchants must keep in mind while calculating selling price. These are:

  • Payment Gateway Charges

  • Transaction Discount Rate (TDR)

  • Invisible costs like augmenting of website, shopping cart, factoring of risks like frauds, chargeback etc.

Payment Gateway Charges

Normally, service providers charge a one-time fixed installation charge towards integration of your website with payment gateway system. The time may range from half an hour to few days, depending on complexity.

Some service providers charge an annual maintenance fee, normally 10% - 15% of installation charge.

Transaction Discount Rate (TDR)

A transaction is the process that takes place when a cardholder makes purchase with credit card. A fee is then charged on these authorized transactions to cover necessary costs associated with processing the transaction. Merchants always pay this transaction fee and is typically a percentage of transaction amount. This percentage of transaction amount is called Transaction Discount Rate (TDR).

In off-line transactions - the TDR is 2.5% to 3% However, in on-line environment, the TDR could be anything between 3% to 7%.

For example - if merchant sells a product at Rs. 100 thorough on-line credit card payment gateway where TDR is 7% - bank will pay the Merchant Rs. 93 for the transaction.

Invisible Costs

In any business venture - one needs to examine various visible and invisible expenses and factor them in product pricing. While visible cost factors are easy to identify and calculate - invisible ones pose a challenge. Failure to take into account invisible costs may seriously dent profitability of a new venture.

In credit card payment gateway - there are two invisible cost factors that all on-line merchants must consider.

Your web-site needs augmentation before accepting on-line credit card payment. Please check earlier issue of FAIDA for details.

In addition - there is an invisible cost element of chargeback dispute.

What is Chargeback Dispute ?

A chargeback dispute is a forced refund from a customer's credit card company. It occurs when a cardholder decides to formally dispute a charge on his/her credit card bill, often because someone else fraudulently used that card number before the abuse had been discovered or reported.

In the event of chargeback - only person who gets affected is the Merchant. Bank/payment gateway not only recovers full transaction amount from the Merchant - but also keeps TDR of the transaction.

According to credit card association rules, Internet merchants must accept credit card fraud as part of the normal risk of doing business on the Internet.

As you can see, chargebacks can seriously affect any on-line business. Imagine the plight of merchant whose losses are mounting on account of:

  • Cost of product

  • Packaging and shipping cost

  • Transaction Discount Rate (TDR)

There are many preventive ways where the merchant may manage the risk - however it can not be eliminated altogether.

The amount of credit card fraud one experiences depends a great deal on type of products/service one sells. Products that appeal to children, teenagers, and unmarried men usually experience higher degree of credit card fraud. Products that are purchased primarily by professionals, women, and families normally face lower amount of fraud.

Happy and Safe Surfing

Dr. Amit K Chatterjee

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Source: FAIDA - Newsletter on Business Opportunties from India and Abroad Vol: 5, Issue 1 ; April 14' 2004

Author : Dr. Amit K. Chatterjee
(Amit worked in blue-chip Indian and MNCs for 15 years in various capacities like Research and Information Analysis, Market Development, MIS, R&D Information Systems etc. before starting his e-commerce venture in 1997. The views expressed in this columns are of his own. He may be reached at )

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