As fantastic as this is, it is also a complete headache.

PlayNice.ly went through this process last year and it is only just getting entirely sorted out. There are bank accounts, merchant accounts, payment gateways and recurring billing systems… and they all have to talk to each other!

Actually, this Futurama quote popped into my head on more than one occasion:

You can’t just waltz into the Central Bureaucracy. It’s a tangled web of red tape and regulations. I’ve never been, but a friend of mine went completely mad trying to find the washroom there. – Professor Farnsworth, Futurama

TL;DR

This is going to take you a few months to get set up, but the only task which will really consume your time is integrating the billing system into your app.

But why not use PayPal?

PayPal has the potential to simplify this whole process considerably. Our ‘old school’ route took us a few months, but I imagine a PayPal setup may take just a couple of weeks at most.

We didn’t go with PayPal for a few reasons, but really came down to the fact that we just didn’t trust them with our startup’s revenue stream.

Of course, if you just want to take the occasional payments from a few users then PayPal would be a pretty good option.

A view from 10,000ft

The components of a typical web app’s payment processing system are, in our experience, as follows:

1. Your app
2. A system for handling recurring billing
3. A payment gateway
4. A merchant account
5. A bank account (i.e. your startup’s bank account)

You may find that a couple of these points merge together. For example, your bank may be able to provide both your merchant account and current account. You can also choose to implement a recurring billing system yourself, in which case 1 and 2 would merge.

So let’s walk through an example. This is what happens when you take out a PlayNice.ly subscription:

1. PlayNice.ly asks you to choose a plan and then sends you off to our recurring billing system (we use Recurly).
2. The recurring billing system collects and stores your card details, and asks the payment gateway to charge your card for the first month of your plan.
3. The payment gateway performs a few security checks and then asks PlayNice.ly’s merchant account to take the money from your card.
4. The merchant account takes the money from your card, holds onto it for a number of days (more on this later) and then pays it into PlayNice.ly’s current account.

Every month thereafter, the recurring billing system will tell the payment gateway to bill you again, triggering step 3, then step 4.

Oh yeah, just like that

Needless to say, this is not trivial or fast to setup. It took us about 3 months and a few hundred pounds (GBP) in setup/subscription fees to get everything working (more detail below).

The silver lining is that it doesn’t consume much of your time. In total we spent a couple of hours on the phone (or emailing) each week during this period. Updating the PlayNice.ly app with concepts of trials & subscriptions was by far our biggest time-sink, but that is a whole other blog post.

Choosing your tools

Before you start signing up for anything it is a very good idea to first figure out the combination of tools that will work together. Your chosen recurring billing system needs to be able to talk to your chosen payment gateway, and your payment gateway needs to be able to talk to your chosen merchant account provider, and so on.

In addition to finding tools that will play nicely with each other, you should consider:

• Do you need to charge any taxes? For example, PlayNice.ly is based in the EU, so we need to charge VAT to our EU customers. We therefore chose Recurly to handle our recurring billing as they handled this for us. If you don’t need VAT support, Chargify is a very attractive option.
• The documentation quality for the APIs you will be integrating with.
• The quality of the API client you will be using.
• Do you need to bill in multiple currencies?
• The associated setup and ongoing costs.

Gotchas: Merchant account & Payment Gateway

Here are a few notes and gotchas that we learnt along the way:

• A customer can reverse a credit card charge, known as a ‘chargeback’. If they do, you have to pay that money back to the bank that provides your merchant account. (This doesn’t apply to debit cards, but our merchant account provider didn’t seem to want to think about debit cards too much.)
• Because of the above point, initially the bank will want to hold on to incoming payments for as long as possible, just in case it needs to issue refunds to your customers (as the bank doesn’t trust you to cough up any refunds yourself). For us, this wait time is about a month (!), but this can come down to 3-4 days over time.
• Your website will need to conform to certain regulations which your merchant account provider will specify. For example, we needed to have privacy/refund policies on our site, and clear contact information displayed. (But interestingly enough, our merchant account was provisioned before we made these changes live. Go figure.)
• Your payment gateway and merchant account will probably need to be setup to allow something called ‘continuous authority’. This allows your recurring billing system to have the authority to take subsequent payments from the customers card without having their card’s CV2 number present (no one is allowed to store the CV2 number, as it acts as proof that the customer is actually present). There may be an extra per-transaction charge for this.
• Accepting American Express payments is more complex as they effectively have their own merchant account which needs to be setup separately with your payment gateway. Ask your payment gateway and merchant account provider about this.

Gotchas: Recurring billing

We found the recurring billing setup pretty straightforward. The task that really ate up our time was making PlayNice.ly billing-aware (as we were previously in a free public beta phase). Even though we outsourced the recurring billing to Recurly, there was still a lot of effort involved in handling trial accounts, expired accounts, billing callbacks, account upgrades, account downgrades, copy writing, billing notification emails, pricing plans etc.

Do not underestimate this.

How much does it cost?

Every step along the payment processing path will probably have some fees associated with it. This is roughly what we were initially paying:

• Recurring billing system: $29/month
• Payment gateway: £20/month (about $33/month)
• Merchant account:
  • Setup: £150 (about $244)
  • About 2-2.5% per transaction + 0.85% per transaction for continuous authority

Our timeline

So how long did it take to get all of this setup? Longer than setting up a PayPal account, that’s for sure…

• Late August – Met with bank for current account setup
• Mid September – Current account opened (so this took about 3 weeks, which is longer than usual)
• Late September – Merchant account setup
• Mid October – Recurly setup & setup of test account with our chosen payment gateway
• Mid October – Early December – Getting everything to work together. This involved phone calls and support emails to find the correct settings for various interfaces, and finding that we needed to sign yet more forms that people had forgotten to mention. Boo.
• Early 2011 – Writing integration scripts to hook up Recurly to our accounting system (Xero, which we highly recommend).

All-in-all, it was about three-and-a-bit months before we could accept card payments. None of it was too time consuming, it just took a long time. We could have probably shaved a few weeks off this process if we were really in a hurry, but I really wouldn’t want to do this in a rush

Big fat disclaimer

13 Responses to “Web apps, credit cards, merchant accounts and PayPal”

1. Rex says:

   March 23, 2011 at 3:21 pm

   I’m surprised it took this long and cost that much to get the merchant account and recurring billing setup.

   We have an Authorize.Net merchant account, use Recurly for subscription billing, and found our merchant bank using FeeFighters (ended up going with Merchant Focus).

   It took us less than 2 weeks from start to finish, paid $0 in setup fees, ended up with a transaction discount rate starting from 1.75% depending on card type (Merchant Focus uses interchange-plus pricing), and we accept all major card types. Not only that, there is no delay or holds placed on our account. We were able to accept paying customers within 2 weeks of setting up our accounts, and we only pay the Recurly monthly fee, a $15 Authorize.Net gateway fee, merchant account transaction fees, and a $7.95 a month Amex fee (their monthly minimum). All in all, I think we ended up doing well and wasting little time.

   I’m not sure why it would cost a few hundred dollars and take as many weeks/months as it did in your case. Perhaps because you are a non-US company?
2. Rahul says:

   March 23, 2011 at 3:56 pm

   Excellent writeup! We went through the exact same process late last year and were finally able to tie it all together this past January. We wrote about our woes and adventures during the course of the experience and it seems to have helped a couple of people figure things out for their startup/web app as well.

   We ended up going with Spreedly, Ogone and Atos Worldline because we’re based in the Netherlands, which makes things significantly more complicated than being in the US or UK.
   So if you’re in a similar situation I recommend reading our posts on the subject as we tried to share as much as possible of what we learned. Here’s a link to the blog post I wrote that summarised everything we dealt with: http://blog.quplo.com/2011/01/looking-back-on-the-quest-for-payments/

   Thanks for sharing, playnicely!
3. adam hosker says:

   March 23, 2011 at 4:18 pm

   Is highly recommend anyone looking at a solution today to consider alertpay, even for recurring payments. No fees, no haste, no merchant account and easy to use API and documented with examples.

   Interesting read, not sure benefits are worth the time investment nor costs for any startup.
4. Matthew Votsikas says:

   March 23, 2011 at 4:25 pm

   Interesting, I’ve been looking into using Amazon Flexible Payments Service (partly ’cause its faster and cheaper in the short term to use and partly ’cause I trust Amazon more than PayPal).

   Does anyone have any experience using this?
5. MarkR says:

   March 23, 2011 at 4:44 pm

   Doesn’t sound too bad, only a few hundred quid setup fee, probably dwarfed by the developer-time to integrate.

   I’ve done some of these integrations before and they’re generally moderately problematic, the main problems are that PSPs treat you like an idiot.

   You didn’t talk about commission at all, I guess the rates really vary depending on how well you know your bank manager
6. adam says:

   March 23, 2011 at 4:52 pm

   Hi Mark,

   You are very right about the cost of developer time. Of course, being a bootstrapped startup means that time is a more plentiful resource than money.

   The only commission we pay is on the merchant account:

   About 2-2.5% per transaction + 0.85% per transaction for continuous authority

   Thank you for reading!

   Adam
7. Jason says:

   March 23, 2011 at 11:08 pm

   This might sound like a dodgy question.

   But to what extent can you hide your identity when receiving money in this way?

   I ask only for privacy reasons. I am happy for my online business to be judged and held accountable by banks and customers. However I am uncomfortable with customers being able to track me down due to personal information exposed through online selling.

   The customer is not always right, and sometimes they can even be scary!

   So, would be good to understand what level of privacy merchant banks and payment gateways provide. Would PayPal offer better protection?
8. Dan Engel says:

   March 24, 2011 at 3:34 am

   Great post. Thanks for sharing.

   You may want to take a look at SaaSy.com going forward. Basic integrations can be completed/subscription services launched in 3 or fewer days, and everything is outsourced to a single service, including all the features that the basic recurring billing services don’t provide but which is essential to minimizing churn, lowering expenses and, most importantly, increasing revenues. You can see a matrix comparing SaaSy with Recurly, Chargify, and others here: http://saasy.com/matrix.php

   or you can see what TechCrunch had to say about SaaSy as a game changer at:
   http://tinyurl.com/4vagyvf

   Hope this is helpful.
9. adam says:

   March 24, 2011 at 11:39 am

   Hi Jason,

   In our experience (in the UK), it was a condition of our merchant account that we provide several pieces of information on our site, including contact details (that is, our company contact details, not our personal details). So our merchant account provider actually requires your company to be contactable by customers. I can see why this is, the merchant bank does want to be handling large numbers of chargebacks. I imagine there are some regulatory reasons to.

   PayPal may be better here to – but anonymously accepting peoples money is probably going to be a bit of a grey area.

   Adam
10. Jessica says:

    March 31, 2011 at 5:59 pm

    Sorry to hear that the process took you so long! I think there are ways to make it shorter in the future, though.

    For example, CheddarGetter has recently announced that next month it will roll out a new Quick Start Wizard to make the whole set-up process easier. It’s also just developed a new hosted payment pages option, which will allow you to simply plug in your pricing plan information, merchant account solution, and a few other parameters and then your live billing site will be up and running. But even if you use this option, their fully-documented API will still be available, which can help make your billing system perfectly tailored to your app. And finally, CheddarGetter’s offering a new plan specifically for start-ups, which allows for unlimited customers and transactions, great support, and full access to the new set up wizard and hosted payment pages. This plan comes with a free trial for a month, and the price is only $19/mo after that. I highly recommend them!
11. Andrew says:

    April 8, 2011 at 9:11 am

    Guys,

    Been there, done that. I’ve tried it both ways (PayPal and Merchant Account).

    PAYPAL IS THE ANSWER

    You can set-up your PayPal account, create custom buttons and customize check-out page and even take care of shipping calculations (all optional) and start taking payments in one work day.

    If you don’t have a PayPal account currently. The only thing that takes time is waiting for PayPal to verify your bank account if you didn’t already have one set-up. That takes up to 2 days I believe.

    You deal with ONE company, PayPal; Not 5: The Merchant, Discover, American Express, Visa, Mastercard, The Payment Gateway not to mention monthly fees for each of these and the loads of junkmail and besides all that do you really want to be liable for every customers’ credit card information?

    HECK NO!

    Anything else is UTTER SUICIDE! I’m not going to go into details,there’s just way too many. Just trust me, I’ve been there.

    I LOVE PayPal. I see lots of clients who automatically and erroneously think that PayPal is for babies and small-timers and it just won’t cut it for them. They think they need a very complicated and bureaucratic EXPENSIVE MERCHANT ACCOUNT with Authorize.net or some other poorly run, CRAPPY payment system because they want to be perceived as a SERIOUS PLAYER. I say have fun with that and I’ll see you back here in a month or so..

    This is my 2¢.

    If you’re thinking about doing an merchant account with someone other than PayPal, email me and I can give you a whole dollar’s worth of reasons why NOT.

    andrew@pixelpads.com

    If you prefer to call: 801-589-1617

    ~Andrew
12. alice says:

    April 8, 2011 at 4:52 pm

    I have to agree with andrew. Paypal is the way to go and they are getting so much better in customer relations, making it easier every day. When I design websites I recommend paypal setup to my clients for online transactions. No headaches on transactions and no responsibility in having the client’s account number-means no liability on is if security is breached. I normally can get clients on line in a day to accept payments, at worst a week. I even tie it in with my own online billing. Everyone I recommended it to has been happy, many surprised as they were wary of them to.
13. CALIE says:

    April 20, 2011 at 4:17 am

    On a more recent note though I have been looking for a marketplace merchant solution, Braintree and Amazon flexible payment service are pretty much the only real solutions out there for my needs.

    Merchant services