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Payment Method Types

Credit Cards

Credit cards are by far the most common form of online payments. There are about two credit cards per man, woman and child in the US, and among those who have credit cards, the average is about 3.5 cards per credit card holder. Credit card issuers are typically banks and credit unions, and they have done a great job popularizing this method of payment by marketing various credit cards to different segments of the consumer population.

When submitting credit card payments to your gateway, it should typically take seconds to submit a payment and receive an answer. It might take longer depending on traffic, but it usually takes no longer than 10 seconds for the transaction to complete.

Records of inactive credit cards are stored until you delete them in Zuora.

Credit Card Tiers

There are numerous tiers of credit cards, depending on the card brand/network. For example, Visa has Visa Traditional, Visa Traditional Rewards, and Visa Signature. Each of these card types has different levels of benefits, starting from basic features like zero-liability to advanced features like 24/7 concierge services. The cost of accepting these various card types is different for merchants, and in a typical tiered (qualified, non-qualified, mid-qualified) merchant discount rate structure, a merchant agrees to pay more to accept the rewards cards than they would to accept a basic card. Of course, a merchant has little control over the kind of card a consumer pulls out of their wallets to pay, so banks heavily market these rewards cards to consumers, partially funding the rewards with higher merchant interchange, and charging the customer a fixed annual fee for the privilege of earning reward points.

CVV Code

The Card Verification Value (CVV) or Credit Card Security Code (CSC) is the three or four digit number located either on the front or back of a credit or debit card. As a merchant, you can request the CVV/CSC code from cardholders as a way to reduce fraudulent transactions and verify the identity of your customer. The CVV/CSC code can be entered by the end customer and passed to the gateway to authorize the card the first time the payment method is created in Zuora or when a payment method is updated.

This code is not stored by Zuora (and passed for recurring payments). PCI regulations prohibit storing this information to avoid it being accessed by others. 

Debit Cards

Debit cards are issued by the bank where the cardholder has a checking account, and non-banks cannot issue debit cards. The card's funds are withdrawn directly from the bank account, either immediately (PIN debit) or after a couple of days delay (Signature Debit). Due to the funds being secured against actual bank account funds, the risk of non-payment by the cardholder is lower than that for credit cards, and therefore the cost of servicing debit cards is usually much lower for banks, though that doesn't necessarily translate to lower card acceptance costs for the merchant.

Records of inactive debit cards are stored until you delete them in Zuora.

Signature Debit

Signature debit cards are Visa or MasterCard branded cards that are linked to your bank account, and need the cardholder's signature at the time of making the payment, similar to a credit card. Though debit interchange is much lower than credit interchange, merchant account providers typically provide signature debit acceptance at the same cost to the merchant, and many merchants are quite unaware of the difference. Signature debit transactions actually travel over credit rails, as opposed to PIN-debit transactions that travel over debit rails. Signature debit is sometimes called offline debit, because transactions conducted with signature debit cards require 2–3 days to be reflected on users’ account balances.

Signature debit cards carry the logo of their signature network (Visa or MasterCard) on the front of the card, and there can only be one signature logo per debit card.

PIN Debit

PIN debit cards require electronic authorization of every transaction and the debits are reflected in the user’s account immediately. The transaction is additionally secured using a PIN that is previously set up by the user. PIN debit networks are Star, Nyce, Pulse, AccelExchange and others. There may be multiple PIN debit networks encoded onto a card, and the logos for each of these networks are located on the back of the debit card.

Bank Transfers / Electronic Funds Transfer (EFT)

Bank transfers are a payment method from a customer bank to a merchant bank. 

Zuora supports the following direct debit payment types:

  • Australian Direct Entry
  • Direct Debit: ACH
  • New Zealand Direct Entry
  • SEPA (Single Euro Payments Area)
  • UK Direct Debit

Direct debit has specific requirements about how payments are captured, processed for collection, and managed.

ACH/Direct Debit

ACH, Direct Debit, E-check and others are a form of EFT (electronic funds transfers) and a means of collecting payment from a customer by pulling the funds directly from their bank account and transferring it to the merchant's account. It is referred to by different names in different countries, for example, in the United States it may be referred to as ACH and in the United Kingdom it is called direct debit. 

Mechanics of Direct Debit

Direct Debit in all countries is architected using one or more clearing house associations in each country. Some include government bodies (for example, the Federal reserve is a member of the US-based NACHA that processes 60% of US ACH transactions) and others are bank-only associations (for example, US-based EPN that processes the remaining 40% of ACH). These clearing houses adjust credits and debits to all the bank accounts in their member banks based on net settlements. Due to this clearing-house model, direct debit takes 2-7 business days.architected using one or more clearing house associations in each country. Some include government bodies (for example, the Federal reserve is a member of the US-based NACHA that processes 60% of US ACH transactions) and others are bank-only associations (for example, US-based EPN that processes the remaining 40% of ACH). These clearing houses adjust credits and debits to all the bank accounts in their member banks based on net settlements. Due to this clearing-house model, direct debit takes 2-7 business days.

Pros and Cons of Direct Debit

One of the most powerful benefits of direct debit payments is that it there is a fixed transaction fee, which can be substantially less than the fees for credit card processing.  Comparatively, credit card fees are typically based on a percentage of the sale amount.  So, if you have a $1000 payment, a merchant could pay $30 in credit card fees (using 3% as an example) or .50 in direct debit fees (using .50 as an example). The cost of a merchant-initiated payment (called a Direct Debit or Preauthorized Payment) is higher than that for a customer-initiated one (also called a remote payment), due to the inherent risks in the latter, but in either case, they are much lower than credit card fees. Zuora supports merchant-initiated Direct Debit.

An important drawback of direct debit is the credibility of the approval process. A credit card transaction is immediately approved for payment, which means that the account is good and there is an available balance. With direct debit transactions there is no immediate approval for a payment.  Instead, the direct debit network will respond with an initial approval or decline after checking the format of the bank account number and transit routing number as well as other specific direct debit information. Similar to checks, you can accept and process the payment, but it takes 5-7 days to know if the payment was rejected (and not settled) or was accepted (and settled) by the bank upon settlement. Rejections may be due to a variety of reasons such as insufficient funds or closed account. The biggest difference between ACH processing and credit card transactions is that, with a credit card transaction, the merchant effectively captures funds from the consumer, with a guarantee of payment, but ACH provides no guarantees. 

For the vast majority of merchants, the lower transaction processing costs more than offset the losses from rejected direct debit payments, so it is overall a more cost-effective option.

Direct Debit Around the World

Direct debit is available in a number of countries under different names. 

Country Direct Debit Name
Australia Australian Direct Debit
Canada PAD (Pre-Authorized Debit)
Denmark  
Finland  
France  
Germany Lastschrift, Bankeinzug
Hong Kong  
Iceland  
Netherlands automatische incasso
New Zealand New Zealand Direct Debit
Norway  
Singapore Singapore Direct Debit
Sweden Autogiro
Switzerland  
United Kingdom  
United States of America ACH

SEPA (Single Euro Payment Area)

The SEPA Direct Debit (SDD) Schemes allow a merchant (biller) to collect funds from a customer (payer's) account, provided that a signed mandate has been completed by the customer. A mandate authorizes the merchant to collect a payment and to instruct the customer’s bank to pay this collection. Mandate forms are provided by the merchant or service providers.

Wire Transfers

Wire transfers permit highly secure real-time or near-real-time transfer of funds between bank accounts using a network like Fedwire (US) or Swift (international). The difference between wire transfers and Direct debit or other clearing-house models is that the funds travel directly from one specific account to another, as opposed to being part of a bulk settlement between banks. The other advantage is that wire transfers allow international (cross-border) payments, which clearing-houses operate only within the borders of the country in which they are domiciled with the exception of Europe, where SEPA (Single Euro Payments Area) allows for cross-border transfers.

Banks charge both, the sender and the recipient. The sending bank typically collects a fee separate from the funds being transferred, while the receiving bank and intermediate banks deduct fees from the money being transferred so that the recipient receives less than what the sender sent.

Payment Method Acceptance 

Merchants often face the question about what methods of payment to accept. Consider the following factors when deciding on which payment methods to accept. 

Sales Boost

Would I get a sales boost by accepting an additional form of payment? American Express typically tends to have a higher acceptance cost than MasterCard and Visa. However, for many merchants (for example, airport vendors), it makes economic sense to accept Amex rather than lose potential sales to high-spending affluent individuals who prefer to rack up rewards points or miles on Amex, or road warriors armed with expense-accounts whose companies institute policies mandating the use of Amex for reimbursable expenses. They would rather pay slightly more in card fees than lose a big sale. Of course the math works differently for merchants who sell low-ticket items, or operate stores in locations that are not frequented by this kind of customer. And if some of your customers do not have credit cards, or prefer not to use them, alternatives like ACH are likely good investments.

Cost of Acceptance

Some forms of payment are costlier to accept than others. E.g Amex Credit often costs more than Visa Credit, which in turn (depending on  your specific contract), could cost more than Visa or MC Signature Debit cards. Balance this against the opportunity cost of not accepting the card (see above).

Fraud and Chargeback Rates

Cost of fraud, while not significant except in certain industries (for example, travel), is an additional consideration when doing a cost-benefit analysis. Some methods of payment tend to have lower chargeback rates that can be attributed to cardholder demographics, usage scenarios (online vs offline), and merchant industry.

Days to Funding

Some methods of payment include a holdback amount, or have a longer interval between when the transaction is settled by their processor and the funding/crediting of their merchant bank account. 



 

Last modified
11:52, 26 May 2016

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