Any type of Website that incorporates e-commerce tools needs to have a reliable payment system that is not only easy for customers to use but also captures the necessary information as well as payment a business wants from a transaction. We decided to write about this topic as it interests most of our readers and clients.
Internal Payment System or Outsourcing
Today, business looking to migrate to e-commerce on the Internet has to make a preliminary choice of whether to operate its own internal payment processing system or outsource the process, paying a fee per transaction to a third party. The latter option is far easier when getting started as many third party systems can be quickly installed and handle all the transaction coding behind the scenes. Some of the best ones easily integrate with a website, carrying the customer to a payment window and then returning him to the client website when finished paying. PayPal and Amazon Payments are two of the most common platforms used by small businesses and sole proprietors getting started.
However, over time a business will realize it wants to capture more information per transaction and is limited to the system capabilities offered by a third party. This can become particularly frustrating when a business wants to leverage customer history records and determine buying patterns to leverage opportunities for up-selling, long-term revenue streams and connecting customers with bigger services or products.
Payment System Types
Most common e-commerce approach tends to be the shopping cart or basket design. This allows customers to continue to shop multiple web-pages within a site, save their cart list, and pay for everything in one transaction versus multiple purchases. This approach is very convenient for consumers, but it takes a lot of back-end coding and work to make the system operate correctly. It also assumes a business creates enough web-pages and display items to function like an online catalogue.
Advanced payment processing also allows customers to choose their preferred type of shipping, calculates sales tax implications where they apply, and provides caveats to different customer groups, addressing the issue of changing regional sales requirements, depending where a customer is located. Again, automating all of these tasks allows a business to do away with manual communication of the same transaction information.
Another format that is gaining ground utilizes consolidating third parties for electronic sales. This approach combines the specifics of a home business website with a third party mass seller. The item or service being sold as a commodity can be listed and displayed on both sites simultaneously. However, the business utilizes the third party’s payment system to manage all transactions where payment is processed. Amazon is a good example of this approach.
Finally, an internal payment system allows a business to have a unique, proprietary approach which can be customized to how a business wants to operate, removing any reliance on a third party. This approach requires dedicated business resources and staffing to implement, but it often provides the best reporting and operation a business wants from an e-commerce website.
Processing Equipment and Costs
Clearly, getting started with a third party system coded into a website is far easier and cheaper up front in terms of startup costs. However, over time each transaction fee can add up, charging anywhere from 3 percent to 10 percent of a gross sale. That over time can be an expensive cost to pay.
For those starting up their own systems, dedicated equipment is required. The business needs to have a dedicated server to process all the transactions and customer records. It also needs to have a robust security system to avoid hacking and customer information loss. Finally, the system needs to be integrated with a business’ accounting system or provide relevant financial reporting. This combination of needs typically requires an up-front IT expenditure, not including the cost of the staff to maintain the system and provide repair when needed.
Tax Planning Implications
It is important for any business considering an e-commerce platform in a website to ensure each transaction and cost can be tracked to the source processing. This is critical for tax reporting both on sales tax as well as business income tax. Failure to do so can end up triggering tax audits and penalties. As a result, a business needs to make sure it’s e-commerce approach is designed with a robust tax support approach, anticipating all necessary reporting that will eventually be required.