Summary
Payment processors simplify and secure online transactions, but their priorities can vary between customer and merchant needs. As a trusted intermediary, they handle fund exchange for seamless, secure transactions and deposit payment directly into your account after shipment, providing a reliable payment method online.
Players
Definition
A payment processor is an online business must-have, acting as a trusted intermediary to secure transactions and financial data. While some prioritize the customer, and others the seller, their core function is to collect and deposit funds. Payment processors allow businesses to accept different payment methods, although some merchants may not need a processor if they have their own merchant account.
Costs
The cost of using a payment processor can vary widely, depending on the service. Some charge only per transaction, while others impose flat monthly fees. The price depends on the number of orders that the merchant accepts. Stripe, (the popular payment processor for new startups), and Square charge 2.9% + a 30 cents per transaction.
While PayPal takes 4.2% plus 30 cent internationally and 2.7% plus 30 cent for in-store transactions in the US, Fiserv charges 2.6% + a 10 cent in-person transaction fee. On average, payment processors charge anywhere from 3 to 5% (which includes the company's fee, processing fees, and the average credit card processing fee per transaction) to accept credit cards.
Best practices
When choosing your payment processor, there are a few things to consider:
Integrations into billing tools (invoices)
You need a payment processor that handles your e-commerce transactions and integrate with your billing system. This is a common requirement for many startups that generates automatic invoices for customers. Stripe is one first-class integration with all of the top billing systems.
Further integrations
While your payment processor collects or attempts to collect payments, your billing system will be the source of truth for all payment records. Your payment processor will likely need to send information to other services/modules within your core tech that offers cancellation services such as Oden Terminator, your CRM, and your policy admin system.
Modern & public APIs
Your payment processor should have a modern open API that is useful to the developer community. This is crucial for developers to implement their tools on top of the platform.
Reporting
Your payment processor should offer robust reporting and analytics with a clear and detailed breakdown of your sales.
Useful error codes
Generic error codes are vague and provide no insight into why a particular error has occurred. Error codes that include specific information about the nature of the problem allow you to resolve errors faster. For example, if a customer's CVC number fails, or their ZIP code is wrong, your billing system should alert you to the error and not fill the customer's order.
Additional features
Many standard applications exist with payment processors for common things like bill-pay, recurring payments, refunds, and customer support. Before committing to a platform, it is integral to check if your payment processor offers these services. This saves you time and money in the long run.
User-friendly dashboard
Your payment processor should include a user-friendly and uncluttered dashboard with an overview of sales and other timely information about chargeback rates, disputes, and FAQs.
SSL encryption
The payment processor should use a secure method of communication that protects your customers' information. Not all payment processors do this, so it is worth checking to make sure.
Pain points
Integration issues
A common problem with payment processors is their lack of integration with the billing system. This causes problems when there is a discrepancy between their systems and your own. Some payment processors do not integrate with every service, so you may need to choose one that does.
Poor customer service
Common issues with payment processors stem from their customer service. If you do not receive responses to your inquiries, or unclear answers, it's a sign that you should move on.
Security threats
If your payment processor is not keeping up with the latest security threats, you're putting your customers' information (and your business) at risk.
Credit card data theft
While most fraud is isolated to one payment processor, it's still a major pain point for companies. If your processor is more widely known, it’s not uncommon to be targeted by criminals. This is especially true if your processor runs on a closed or semi-closed system.
Excessive fees
Some payment processors will charge transaction fees, monthly fees, and other fees that can add up to be exorbitant for your company.
Not insurance specific enough
You will need to handle payment situations such as out-of-sequence endorsements, the addition of coverage, cancellation for non-payment, and you may elect to deal with lapsed coverage, or installment payments either on your own or via premium financing.
Alternative payment types
Many insurers in the D2C space collect only credit cards. If you are interested in collecting other forms of payment it is best to leverage a payment service that specializes in the following:
Cash
Oftentimes, this is the most convenient method for cash-based businesses. Cash is collected via in-store terminals and the process is quick and easy from both a business owner and customer standpoint. One drawback is that this is not widely accepted as a payment by insurtechs.
ACH
This requires a business to have an existing business checking account. The funds are then transferred via ACH from the customer's bank account to the invoice recipient. This is accepted by a few insurtechs offering commercial insurance.
Check
Checks are becoming less common as smartphones take over. Invoices can be printed on check stock and mailed to the customer who will then send them in with their payments. This can be very efficient if the size of a check is small and the specific type is not important.
Cryptocurrency
Cryptocurrencies such as Bitcoin and Ethereum are growing increasingly popular as payment alternatives to credit cards. This payment method relies on existing blockchain technology and thus has multiple advantages in speed and cost over traditional payment types. While Crypto is gaining in adoption and use, it is not yet a widely accepted form of payment in insurtech.
Agency billing
In insurance, agency billing involves an intermediary (such as an agent or broker) selling insurance products to customers on behalf of the carrier. When a claim is approved, the agency sends the customer a bill for the premium, which the customer pays directly to the agency. The agency then submits an invoice to the carrier for payment.
The commission structure for agency billing depends on the agreement between the carrier and the agency. Commissions can be based on a per-client or monthly basis, or a combination of both. Another payment method in the insurance industry is direct payment processing, where customers pay the carrier directly. In this case, the carrier reimburses the agent immediately upon approval of the claim. This method eliminates the need for invoicing, making it a convenient way for agents to receive commissions.
Players
Stripe
Stripe is a top payment processor with a user-friendly API and a free tier. It accepts various payment options, making it accessible to many customers. Stripe makes it easy for businesses to process payments through their online store and integrates with other applications, expanding payment options for customers. They have over 2,800 employees and serve customers from 47 countries, with a strong presence in North America, Europe, and Asia. Stripe is a reliable solution for businesses looking to accept payments online.
Fiserv
Fiserv's strong financial performance, coupled with its global workforce of over 44,000 employees and significant presence in more than 100 countries, positions the company well to meet the needs of its clients around the world.
Bank of America Merchant Services (Fiserv)
Bank of America and Fiserv are joint owners of Bank of America Merchant Services, a payment processing company that was one of the largest in the United States. The company was formed in 2009 through a partnership between Bank of America and First Data. Bank of America Merchant Services provides businesses with market-leading payment, eCommerce, and security solutions to optimize digital commerce.
Bank of America Merchant Services processes a large volume of transactions annually, serving over 705,000 merchant locations in the US, Canada, and Europe. In just 13 years, the company has become a major player in the payments industry, serving businesses of all sizes. It is committed to developing solutions that meet the changing needs of businesses in the digital era.
Citi Merchant Services (Fiserv)
Citi Merchant Services is a versatile payment processing company, catering to diverse businesses. It boasts a comprehensive range of payment options, from credit and debit card processing to online payments through Payezy Gateway and Clover Online. The company's proficiency extends to accepting mobile and point-of-sale payments, leveraging Clover products such as Clover Flex, Clover GO, Clover Mini, and Clover Station.
Citi Merchant Services leverages the First Data (Fiserv) payment gateway Payeezy for processing credit and debit card transactions. With competitive transaction rates, the basic plan charges 2.90% + 30 cents per transaction while the pro plan charges 1.89% + 23 cents per transaction. By utilizing Payeezy, Citi Merchant Services provides clients with a cost-effective and user-friendly payment processing solution.
PNC Merchant Services (Fiserv)
PNC Merchant Services offers merchant services, enabling businesses to accept various payment options, including credit cards. PNC acts as the receiving bank, while First Data manages credit card transactions. PNC's per-transaction fees vary based on a quote system. In-person transactions using swipe/chip methods incur a flat fee of 2.60%, whereas online/phone/manual transactions attract a fee of 3.45% + 15 cents. However, the pricing structure is subject to change and may lack transparency or standardization.
Others Include:
WorldPay (acquired by FIS), Vantiv (acquired by FIS), Global Payments, Agave Pay, Functional Finance, Paymentus
Gateway processor
Think of a gateway processor as a bridge that connects two worlds. On one side, you have the merchants, who are eager to receive payments from their customers. On the other side, you have the acquirers, who hold the power to distribute the payments to the merchants. And that's where the gateway processor comes in.
Like a skilled traffic controller, the gateway processor seamlessly directs the flow of information and money between the two sides, making sure that everything runs smoothly and securely. With a flick of a switch, the processor forwards the transaction to the acquirer, who then dispatches the funds to the merchants. It's a delicate dance of data and dollars, but the gateway processor makes it look effortless.
Invoicing
Businesses use invoicing to track transactions and ensure timely payments. They send an invoice to the customer with details of the items or services and the amount due. Invoicing can be done in-house with software or through external services, including those provided by the gateway processor. Small businesses rely on timely invoicing to maintain cash flow, so invoices are often sent promptly. After receiving an invoice from the gateway processor, merchants decide how and when to pay the bill. This decision is made separately by both parties if the processor is external, but merchants with their processors need to decide on their own.
Workflow
Whether made online, offline or as a mobile transaction, the typical payment workflow is as follows:
Step 1
After the consumer enters their information, the gateway processor initiates an authorization request to the issuing bank to verify if sufficient funds are available to cover the purchase amount. Upon approval, the consumer's funds are reserved, and the merchant can process the transaction.
However, the consumer's purchasing decision is not just influenced by the product's price. The perceived security and trustworthiness of the merchant and their payment processing system are also critical. Merchants must prioritize data protection and use a secure payment gateway processor, adhering to industry standards to assure consumers of the safety of their personal and financial information.
Step 2
The merchant receives transaction information from their processor, which they scan to create a transaction slip. This slip contains a list of expected transactions from their customers. Additionally, the merchant may need to send an email or SMS message to the processor to confirm payment within a specific time frame.
Step 3
Once the processor receives payment, the merchant receives a transaction receipt. The processor then generates an invoice to reflect the total revenue from completed transactions, known as a "settlement." This process can take time, making it challenging for merchants to manage gateway payments while waiting for settlement information. Nonetheless, it is a crucial step that requires careful attention.
Step 4
Merchants must ensure they have enough funds in their account to cover a transaction. They track their transaction activity and balance with programs like QuickBooks and use invoices to cover the transaction amount. Larger retailers require immediate access to transaction information, while small merchants may not send out detailed invoices before payment. The payment workflow is important for all businesses, with efficient workflows catering to different needs. Whether manual or automated, the end goal is to receive payment and track financial transactions.