Writing recently about how to choose a shopping cart, I realized that you can’t really talk about carts without talking about payment collection. How do you actually collect your customers’ money? To get your online store to work the way you want, you’ve got to to hack through the whole confusing mish-mash of shopping carts, payment gateways, merchant accounts, and third-party processors. It tends to make people’s heads spin. So, in the interests of sanity, here’s the quick-and-dirty on what’s what with payment processing.

When you buy something in the grocery store, you choose your items, put them in a cart, then check out by getting your stuff run through the scanner and paying the total. The transaction path, the mechanics of transferring the money from your pocket to the store owner’s, is something like this:

In an online store the process is similar. You put your items in a shopping cart, which is actually a bit of software that remembers your items and computes their cost when you’re done. When you check out, instead of a cash register where you fork over your money, there is a “payment gateway.” The gateway sends your money along to the bank, where it goes into an “Internet enabled merchant account,” a business account which is specially configured to receive money from the gateway. With an online store, the transaction path looks like this:

Here, the payment gateway is the conduit between the online shopping cart, and the bank.

Each of these three components is essential in order to process transactions. They’re independent of each other, yet must all work together… or, in Internet parlance, they must be compatible. Sometimes a particular bank sets up their accounts to work with one gateway; sometimes your bank gives you a choice of gateways. So, for example, you could mix and match by selecting one item from each of the three columns below:

This kind of setup works great. You have control over the entire purchase process. There are good fraud protections in place. No one else’s brand goes anywhere on your site, unless you want it to be. So what’s the catch? For many start-up web retailers, the hangup is price.

Sample fees for each component:

If your credit history is poor, or you’re running a business considered “fringe” by banks (astrology readings, energy healing, etc.), or you don’t have much in the way of tangible assets, you’ll rates at the high end of the range. Banks scrutinize this kind of account much as they would a loan. In fact, because of the delay between the computerized transaction and the money actually moving from one place to another, they consider it to be a loan. For a sole proprietor or microbusiness who wants a web store to pay for itself, it’s hard to pony up this kind of bucks before the site has made even a cent.

Third Party Payment Processors

But all is not lost. This is where “third-party payment processors” come into the picture. There are two basic types of payment processors. First, there are the kind who take a percentage of your sales, hold the money and distribute it on a weekly or monthly schedule, sans their percentage. 2checkout.com and ccnow.com are two well-known ones.

The second type of third-party payment processor is what I call the “pseudo-banks,” services like Paypal and Google checkout, which process your transactions, take a smaller percentage of your sales, and hold the money in your account until you withdraw or transfer it. Percentages taken are generally less with this type of account. They can supply a free shopping cart, too.

In either case, the transaction process looks like this:

Both types of processor can supply shopping carts too, so that your entire transaction process is handled, start to finish. Most can handle multiple languages and currencies, and can accept all major credit cards. Additionally, most third-party processors can be used like gateways, that is, you can select your own shopping cart, and you use your own bank account. They simply process the money for you.

Here are comparable costs:

So what’s the catch here? Control. You pay little or nothing in setup costs, and the percentage fees are reasonable. But, your 3^rd-party processor hosts the checkout page, and controls its entire appearance except, perhaps, for the placement of one logo image by you. It may not allow you to process certain types of transactions, like subscriptions, or memberships.

Additionally, there is a 3^rd party interposed between you and your customers. If there’s a transaction issue, people can be aggravated and confused by having more than one party to deal with, whereas with a merchant account, your business is responsible for the entire transaction, so a customer only has to deal with one business entity.

Finally, In the “pseudo-bank” kind of account, However, they tend to require users to already have an account with them, or to sign up for one during the transaction process. This can make for a confusing checkout process, and one that many people will simply skip. And, they are “pseudo-banks,” so generally your money is not insured.

What Should You Do?

If you want to give your customers a seamless purchasing experience from start to finish, a merchant account plus gateway plus cart is the way to go. If you’re on a tight budget, take a look at the reputable third-party processors who have a good track record, a long history of successful payouts, and few online complaints. Make that whatever combination you choose can handle the kind of transaction, and the types of payments, that you need for your business model. And happy selling!

If you’re setting up an online store, read my post on how to choose the best shopping cart for your site.

The question I am asked more than any other is how to choose a shopping cart. It can be an intimidating decision, because there are such differences in price, capabilities, and setup. And, the wrong cart can seriously cut into your sales. So, after working on hundreds of sites, here are my simple guidelines to help you find a cart that will do everything you need, as easily, flexibly and affordably as possible.

There are five types of carts I’ll mention: template-based carts, all-in-one services, free carts used with Paypal or Google Checkout, WordPress carts, and last but not least, my favorite and most recommended carts.

1. Template-based carts

Yahoo Stores, Miva Merchant, Shopify and Zen Cart are some of the most popular, although there are dozens, if not hundreds out there. To actually collect money, these carts usually require you to have an Internet-enabled merchant account, and a payment gateway such as Authorize.Net, Payflow or CyberSource. For the merchant account and gateway, you’ll pay a small percentage of sales (1.5% or so to upwards of 5% depending on your credit rating), plus a fixed per-item sales charge (usually $0.25 to $0.35), plus a gateway fee—in addition to the purchase price of the cart.

Many people are very happy using these template systems. However, I tend to feel they’re not worth the time and trouble. First, being template-based, designing the appearance of a store using these carts can be a real pain. If you’re particular about the look, feel, and layout of your store, you’ll tear your hair out in frustration again and again… and still not have it looking ‘right.’ Second, because your store is tied to a template, you’re pretty much wedded to this cart for the foreseeable future. Locking yourself in can feel like a costly mistake once a cheaper, better technology comes along. And finally the killer: I find the entire system to be too costly for low-volume or novice sellers.

2. All-in-one carts-plus-payment-collection

For example, 2checkout.com and ccnow.com. These carts advertise themselves as “merchant account alternatives” because they handle the entire transaction from start to finish, collect and hold all sales proceeds, deduct their own fees, and send you the remainder by check or direct deposit on a monthly or weekly schedule. You don’t need a separate merchant account, gateway, or payment collection service of any kind.

They generally offer a web-based interface through which you can create purchase links for products on your site. They handle multiple currencies, offer a clean, easy interface for your clients, don’t require much up-front investment, allow you to accept a variety of credit and debit cards, and are easy to administer.

Pitfalls? First, expense. With 2checkout, for example, you’ll pay a $49 setup fee in addition to a per-sale fee of $0.50 or so, plus roughly 5% of each sale.

Second, what if the company you’ve selected goes under? A client of mine lost a month’s sales, over $4,000, when her all-in-one company (located in another state) went belly up without warning, and without paying out the money it had already collected for products already sold. State agencies were useless in attempting to recover the funds. She lost all her Christmas sales that year.

Third, the payment page tends to prominently display their brand, and offer limited customization.

And finally, these carts don’t usually support affiliate programs.

This kind of cart can be a good choice when you’re not too concerned with pinching pennies, want to easily and quickly “test the waters” with marketing a product or two, don’t have a track record selling online, or want to provide a multi-currency option for your customers. But, caveat emptor.

3. Simple, free carts that require both the merchant and the buyer to have an account with an online “pseudo bank”

E.g., Google Checkout and Paypal Web Payments Standard. This is also a cart-plus-payment solution. For payment processing, Google and Paypal charge a per-fee transaction of $ 0.20 to $0.30, plus a tiny percentage of each sale. Both services “hold” your funds, acting as a clearinghouse until you choose to transfer them to the bank account of your choice.

The carts tend to be simple, bare-bones carts with elementary shipping calculations. Using them is quick, cheap, and easy. They have the benefit of brand recognition and financial credibility.

The drawbacks? First, some buyers simply won’t buy if they have to sign up for a Google or Paypal account. And Paypal buries the “no Paypal required” option, so many potential buyers won’t spot it. Second, the payment pages are not beautiful, and are customizable only to a limited extent. Third, and often most imporotant, these services do not provide hosting for secure digital downloads.

These services are a good choice if you’re on a budget and can work around the digital issue.

Very importantly, the payment processing portion of both Paypal and Google Checkout can be used with many other free-standing carts.

Also note that Paypal offers another payment processing option for an additional $30 per month, called Web Payments Pro. It must be used with a third-party cart, but it makes credit card payment sans Paypal account a much more visible and easy option.

4. Carts that work exclusively with the WordPress blogging platform

There are ecommerce WordPress themes which have the cart integrated into them, like the specially designed Market Theme and the Ecommerce Theme. There are also free plugins which can be incorporated into any existing WordPress site or blog, such as the Ecommerce, the eShop, and Shopp plugins. The themes tend to cost from $50 to $100; the plugins are usually free.

These can be a great alternative to standalone carts, although in my experience, the plugins can be slow and slightly glitchy. Both themes and plugins require a payment processing service (either a merchant account, a “merchant account alternative,” or Paypal/Google).

I don’t recommend any of these carts (yet!) for high-volume sites.

5. In a class by themselves

There are two carts I most often recommend, based on their ease of use, features and flexibility: 1shoppingcart.com and e-junkie.com.

The luxury model. 1shoppingcart is used by so many high-volume Internet retailers and marketers for good reason. It’s a web-based cart (nothing to install) which generates product links to be added to your existing site. You can handle thousands of products, and generate discounts, cross-sells, upsells, and specially priced bundles. You can use automatic recurring billing to sell subscriptions or create installment payment plans. You can automatically put buyers on product-specific email lists, and send them as many automated emails as you wish. You can also manage your newsletter or mailing list in the same interface. Both hard products and digital downloads are well supported. The interface is generally straightforward, both for you and your customers. Technical help is available via phone and email, and the technical staff is responsive and helpful. The cart works with most payment services and gateways, including Authorize.net, Cybersource, Paypal, and 2checkout.com.

This cart is expensive. It will do everything but slice your bread. But if you’re serious about selling on your site, this is THE top-of-the-line cart and helps you do everything possible to maximize your revenues.

The economy car. E-junkie is the up-and-coming low-budget alternative to 1shoppingcart. It’ll get you where you need to go, with quick, inexpensive, and no-frills secure sales of digital or tangible products.

It’s got most, but not all, of the features of 1shoppingcart: secure download links, somewhat-customizable cart, some shipping options, product bundles and gift coupons. It works with about half a dozen of the most popular payment processors, including Paypal, Google Checkout, 2Checkout, and Authorize.Net. It also offers the ability to manage your own affiliate program.

Downsides: It does not offer programmable autoresponders or recurring billing. Its interface is sometimes convoluted and slightly confusing. Limited number of payment gatweays accepted. Simple but ugly checkout/download pages.

Bottom line

My final answer:

• If you want to sell very cheaply, don’t mind appearances, and don’t need secure download links, use Paypal Web Payments Standard or Pro and/or Google Checkout to process your payments. As your shopping cart, use a WordPress ecommerce theme/free plugin, or use the free Paypal/Google carts.
• If you need secure download links for digital products—ebooks, mp3s, video, etc.—then your quickest, cheapest, easiest option is to use Google or Paypal to process your payments, and pay a small monthly fee to use the E-junkie cart.
• If you want a top-of-the-line experience for you and your customers, with maximum flexibility and ease of use, use 1shoppingcart, along with a merchant account and gateway like Authorize.net or Cybersource.

And th-th-th-that’s all, folks! Happy selling to you.