Online stores often offer customers a better deal than brick-and-mortar retailers for obvious reasons, but behind the scenes, merchant fees and processes also cuts into the bottom line.
Standing between the online merchant and the customer is a payment gate which authenticates and processes the payment made from account to account.
Attached to this process, is a fee payable by the online retailer, called a merchant fee.
Merchent fees vary from retailer to retailer, and each merchant needs to negotiate a rate with the applicable banks, which is usually determined based on turnover figures.
The fee is typically calculated as a percentage of the value of the transaction that has gone through the site – a percentage which usually decreases the more you sell; this means that the bigger an online merchant is (in terms of turnover), the less it pays in merchant fees.
Merchant fee structures
Banks and third party companies create a platform called “payment gates” which act as a transactional gateway between a customer’s account (authenticated via entering their details online) and the merchant’s account where the money is paid to.
FNB’s mobile payment gate, Cell Paypoint, adopts a model whereby merchants pay a fee that’s a percentage of the value of the transaction being processed.
A different model, such as the Standard Bank-intergrated payment gate, MyGate, offers various flat-rated transaction fees, ranging from R1.00 to R1.80 per transaction.
However, there are two kinds of payment gateway services:
The first requires companies to register as online merchants with banks – such as FNB’s Cell Paypoint, MyGate, PayGate et al – while the secondy type does not require bank registration.
The eBay-owned PayPal service is one such payment gate.
PayPal enables any company to act as an online merchant so long as they have a PayPal account to process transactions.
The service has no monthly set-up or cancellation fees, and merchants pay only when they receive payments.
The merchant fees are tied directly to an online retailer’s monthly income, and are calculated at a base of US$0.30 (R2.46) plus 2.4% – 3.4% of the transactional value.
Affecting online retail
Wantitall.co.za’s Justin Drennan says that the company has been working at reducing its merchant fees since launching in 2007.
“Since then (2007) we’ve seen a steady decline in rates, as our turnover grew,” Drennan said.
While the fees have an obvious impact on online retail business, Drennan feels it’s all part of the space in which Wantitall operates.
“Credit card processing fees form such a small portion of total costs within our business that we don’t see it as a massive hindrance to our business,” Drennan said.
“We don’t find the fees to be excessive. At the end of the day its not about bank fees, its about relationships, service and innovation,” he continued.
“At the end of the day you are willing to pay for a great service, and we partner with banks which provide us with that level of service.”
Online retailer, Kalahari.com wouldn’t go into detail about the ins and outs of its merchant relationships with banks or third parties.
However, the retailer did offer that payment gateways like Naspers-owned PayU’s EasyMerchant (which Kalahari.com uses) would make it easier for smaller businesses to accept online payments where no online merchant account at the bank is required.