In April I talked about online payment services at General Assembly and now I have turned the materials into 2 blog posts: this post, Part I (Overview) and Part II (How to Choose).
You would think that Hong Kong, as Asia’s “financial hub” and famed for its “business friendliness”, would offer the ease and options similar to the online payment services in the U.S., but the reality is the exact opposite. My experience of finding, setting up and dealing with online payment services here is mostly a frustrating one.
There is a ton of information you can find online but even basic questions cannot be easily answered, such as: What are the differences between service providers? Which ones are more suitable for your type of business? What do you need to have to apply? How long would it typically take? How do they charge and how fast can you get paid?
You will come across more than a dozen terms like merchant account, payment gateway, acquirer, processor, merchant service provider, merchant aggregator … once you start googling about online payment. Let’s start with the 4 types of players in the industry:
Acquirer: also known as acquiring bank. They provide line of credit, exchange funds and pay merchants.
Example: any bank or financial institution who’s a member of a card association (Visa, Master, Discover, AmEx, Diners, JBC, UnionPay).
Processor: also known as payment processor, card processor, processing network. They check the transaction details received by forwarding them to respective cards’ issuing banks for verification, and carry out many anti-fraud measures before approving or declining a transaction.
Example: any bank and non-banks like Global Payments, First Data, TSYS, WorldPay.
Reseller: also known as Independent Sales Organizations (ISO), Merchant Service Providers (MSP). They resell products of one or multiple processors and sell their own value-added products and services, this is likely the type that you would deal with.
Example: any bank and non-banks like CyberSource (Authorize.net), PayDollar, PaymentExpress. Most banks white-label their services so it is hard to distinguish whether they are a processor or reseller.
Aggregator: also known as Merchant Aggregator, Payment Aggregator, Processing Aggregator or Payment Service Provider (PSP). They let merchants (you) use an aggregated merchant account* and provide value-added products and services.
Example: PayPal/Braintree, Stripe, Amazon Payments, Google Checkout (retired).
It often gets confusing because a service provider you come across can be many things of the above, but you really should not worry about the distinction between the first three types because they end up giving you the same thing — a Merchant Account — to accept credit card payments.
Merchant Account: a type of bank account to allow a business to accept and process credit card transactions, online or offline. Say you run a restaurant and want to take credit cards, you need to open a merchant account.
What if you are a pure online business? Then you can just get a merchant account for online use, it is also called online merchant account, internet merchant account or direct merchant account.
You need to supply quite a lot of information and go through a lengthy approval process to get one (see below What Do You Need to Have to Apply?). The provider who sells you the online payment service will handle this. There is no ATM card or passbook, just a merchant agreement (a contract) and access to a secure website where you can manage transactions and generate reports, etc.
Merchant Account ≠ Aggregated Merchant Account
Out of the 4 types of players above, only Aggregator does not give you a merchant account, or to be precise, your own, dedicated (direct) merchant account. Their business model is to aggregate all transactions on behalf of merchants so you do not have to get your own, PayPal is the most well-known aggregator.
Without the need for such approval process, that means you can get up and running very quickly with an aggregator, which is a great option if you are in a hurry or somehow could not get a merchant account approved.
Just remember that when they say they give you an aggregated merchant account, it is really not the same as having your own, dedicated merchant account. This is a very important difference because it can have serious implications for your business. I will explain this more in Part II.
Payment Gateway: an e-commerce service that authorizes payments for online businesses. Some providers have their own payment gateways but many use third party ones. The gateway usually comes in two components:
- A virtual terminal for merchant to key in credit card numbers.
- An API for a website’s shopping cart to connect to the gateway for real-time processing.
You do not have to worry about signing up separately for a payment gateway service because it always comes with whatever online payment service provider you go with. But that also means you cannot switch to another gateway without switching your provider, so you definitely should evaluate the features of their gateway thoroughly, in addition to their pricing and support (see the Don’t Just Compare Fees in Part II), as they will unlikely add/tweak features on your request. It will be like asking HSBC to add a feature on their online banking website for you.
What Should You Care About?
Should I care about their size and what they call themselves?
Online payment service providers come in all sizes and some call themselves payment gateway providers, merchant account providers and a dozen other variations. They are the same in the sense that they all help get merchants paid online.
So my answer is no, you do not need to care much about how they call themselves. As for size, I do not think it matters much either, it is more about finding the right provider based on what they offer vs. what you need, rather than going with the biggest name.
Are they all legit?
In any case, every provider has to partner with an acquirer/processor behind the scene (they call it an underwriter) to allow them to run such business legally, it is something that they have to disclose during the sign-up process or already mentioned on their website or application form.
Imagine you, as a customer, bought something online using your credit card but the merchant never delivered it, you will be able to dispute the charge and be protected by the credit card issuer. Ultimately the merchant account provider will bear the chargebacks, penalties and losses if the merchant fails to fix the situation.
So the provider’s worries about your business’ legitimacy are probably more than your worries for theirs, as they are bearing risks as in providing a line of credit to you. That also explains why the merchant account approval process is lengthy and the fee structure is not standard.
What Do They Consider?
Since getting a merchant account is like getting a line of credit with the underwriter (that’s how they look at it), there are more than 30 variables to determine the rates, terms and conditions of your merchant account. Here are some of the ones I learned:
Card-present (swiped) vs. card-not-present (non-swiped): if you have a physical store and the card is “present” during the transaction, your business is considered less risky. For online business, since the card is “not present” the risk is considered higher. So if you already have a merchant account for offline use, you should tell your online payment service provider and it may help with the approval.
Merchant category: businesses are considered differently by pre-determined risk profiles, e.g. toys, books and most retailers are “low risks”, subscription, ticketing and group-buying are “high risks” hence more difficult to get approved. Some categories are denied outright, e.g. gambling, pornography, escort services, weapons, drugs or even health supplements and beauty coupons.
Types of goods/services you sell: higher sale amount is considered riskier because if anything goes wrong it is more likely for the customer to initiate a chargeback and for a merchant to go insolvent, e.g. vacation package or high-end furniture. Creative or consulting services can also be tricky, because whether the delivery is completed or satisfactory can be easily disputed.
Delivery times: the shorter the delivery times the less risky they think you are. If your delivery time is a few days to a week and you offer return/exchange/money back guarantee, you will get an easier approval. Say if you offer a custom-made product and it takes over a month to deliver, or you collect advance payments like annual subscription fees, it may be harder to get approved without a strong financial standing.
Information supplied with a transaction: the information you collect with a transaction will help lower the risk because you could help prove that the transaction is genuine.
In general, the less “risky” your business is, the faster the approval process will be and the better the terms/rates will be offered. Unfortunately there is little transparency and you have to get a “price quote” from the provider to find out the exact offer.
Some underwriters are more cautious about risks than others and will look into the owner’s credit worthiness in addition to the company’s credentials. For instance, one of the providers I spoke to request a personal guarantee (or collaterals) from the owner because it is a new business and the delivery time is longer than usual.
What Do You Need to Have to Apply?
To apply for a merchant account, you should expect to provide the following information:
- Company information, e.g. company name, registered address, business registration (BR) and certificate of incorporation (CI) copy, address proof, owners’ name and identity card/passport copy, ownership percentage and contact details. Some may also require the disclosure of paid up capital, number of employees and latest bank statements.
- Business information, e.g. business nature, products/services, target customer, past annual sales volume and website address. Some even require a business plan.
- Others, e.g. shopping cart info, delivery provider, customer service hotline, return/refund policy, delivery time and forecast sales amount (both number of transactions and sales volume).
If you run an online business, be prepared to create a website that looks like “ready to sell” as some providers would require this as part of the application, while others require this as soon as you like to “activate” your account. It should have:
- A working URL (can be password protected) with SSL certificate installed.
- Product/service description with prices in the currency you plan to accept.
- A working shopping cart already integrated with the API/test account provided by the provider. A reviewer will go through the whole checkout process to test the integration and any error will cause delay.
- Company information like an “About Us” page.
- Contact details, e.g. company address, service hotline, email.
- Payment provider’s logo and card logos, e.g. Visa/MasterCard.
How Long Does It Take?
A merchant account application would take anything between one to three months, depending on those “risk variables” mentioned above and the completeness of the information you provide. Getting it approved does not mean you could start selling right away since there is usually an “activation” step where they would review and test your website.
Some sales representatives will tell you that it will be done in a week or two from start to activation but the only time I came across such fast timeline was with a client applying for an additional merchant account from the same provider for an identical business.
From my experience the major delay is usually with getting that “ready to sell” website up and running for review, especially when the integration process is not as straight-forward as you imagine. If you do not have the technical knowledge (i.e. you are not a programmer), it is better to hire one and get a realistic estimate on how long this process would take.
How Do They Charge?
Unlike aggregators, the fees associated with merchant accounts are more complex and non-standard (again, less risky business get a better deal) but that also means they can be negotiable.
Typical fees include:
- Setup fee, usually a one-off charge.
- Monthly or annual fee, which you have to pay as long as you keep the account active.
- Per-transaction fee, which usually comprises of two parts: a fixed amount + a percentage amount, e.g. HK$1 + 3.5%, a fee that you only pay when you have a sale.
Say if you sell a product for HK$100, the per-transaction fee you need to pay the provider will be HK$4.5 total. This is usually the part you like to compare and get a better deal for.
Sometimes a provider will break this “per-transaction fee” into two parts like this:
- Transaction fee, e.g. HK$1
- Merchant Discount Rate (MDR), e.g. 3.5%
This is essentially the same but the term “Merchant Discount Rate” (MDR) is worth noting. It is actually a fee that comprises of two things:
- Interchange rate/fee set by Visa, MasterCard … it is fixed and non-negotiable.
- Mark-ups by processor/reseller/payment gateway: this can be negotiable because it is where your provider makes money from.
The current interchange rate for local Hong Kong transactions from Visa and MasterCard is 1.78% across all card types so it would be very unlikely for your payment service provider to offer you 1.78% or lower unless they want to lose money on every sale you make. From the pricing I gathered anything between 2.5% and 4% are quite common for MDR.
In general, the bigger your sales volume the lower your MDR can be. Some providers could offer a better MDR if you are willing to pay a higher monthly fee. Also, the MDR part of the per-transaction fee is typically not refundable even if you do a refund for a sale. So if you are selling expensive products and offer a “money back guarantee”, you better factor in the cost of MDR.
On the other hand, if your sales are mostly low value, e.g. HK$1.99 for a song, that fixed part of the per-transaction fee (HK$1) could easily eat up all your profits, so you may want to shop around to see which provider is willing to lower that or turn that into a percentage charge.
There are also other fees in the cases of refund, chargeback or authorization for certain providers but they are only applicable in special circumstances (NB. you have a bigger problem if your business has many refunds/chargebacks) so I do not think those matter for comparison.
Online Payment Service Providers for Hong Kong Businesses
If your business is incorporated in Hong Kong, these are the active, available online payment service providers as far as I know:
You have probably heard of Stripe, Square, WePay … they are all Aggregators and unfortunately not available for Hong Kong businesses at this moment.
In Part II (How to Choose), I will talk about Merchant Accounts vs. Aggregators in general, as well as the pros and cons of some of the above providers.