Across the globe, there are many online payment methods and solutions which allow for direct integration, such as PayPal, iDEAL, SOFORT and Klarna.
Merchants are able to make a connection to the processing platforms of these payment methods directly from their website. There is no need to use a third party payment processor or Payment Service Provider. If you would like to accept credit cards online, you do however need a 3rd party processor or Payment Service Provider.
Below you can read about the pros and cons of direct integrations into payment method schemes and what to take into consideration.
Direct payment method integration | Technical considerations.
Direct integration requires from the merchant or its website developer the know-how to integrate each payment solution separately. Especially in situations where multiple payment methods are offered, the complexity of integration increases. Important for businesses to recognise is that development can be costly and time-consuming.
Merchants and developers should also take into consideration that these payment schemes regularly update their systems and technical specs. Every update or coding change means development to ensure payment processing is not affected. It will introduce a merchant cost, especially when using external website developers.
One of the benefits of direct integration is the fact that there is no loss in the data exchange between the payment method processing system and the merchant's website (response codes etc.). The merchant is then able to receive all possible decline reason codes instead of only a limited subset through the likes of a Payment Service Provider.
Direct payment method integration | Settlement considerations.
Equally important to recognize is the fact that multiple, self-managed payment method integrations will lead to multiple settlement flows. Every payment method will settle funds directly to the merchant's bank account using its own frequency. Some payment methods are settled gross, some in nett. Some are settled next day, others settle with a payment delay of - for example - 14 days.
The diversity in settlement flows will make the merchant's reconciliation process more difficult. It will probably take more time and money for the merchant to match orders with payments and have a clear view on transactions costs.
One of the important benefits of using a collecting Payment Service Provider is the fact that they streamline the settlement of funds, provide the appropriate reporting and insights in transaction costs.
Direct payment method integration | Contract & Pricing considerations.
Last but not least, merchants and businesses should realize that besides the technical connection they also need to establish a commercial relationship. In other words, you need to sign-up and contract directly with the payment method scheme. There are two important considerations in that regard.
One is the paperwork. Especially when using more than just one payment method, you should be aware that you need to sign up with every payment method scheme individually. As these payment companies are heavily regulated (which is a good thing), it however entails strict sign-up procedures including Know-Your-Customer (KYC) and Anti-Money Laundering (AML) checks. It can take a while for you to complete the forms, gather the required documents and pass the compliance checks. However, once it is done, it's done.
Other important aspect is pricing. Often these payment method schemes have standard and tiered pricing, which means that you will be charged a commission per transaction in line with expected volumes. Especially when starting up, you will be placed in the first tier, paying the highest commission rates.
Because it is just you signing up directly with the scheme, you are not able to benefit from economies of scale. That is different when using a (collecting) Payment Service Provider. Then you should be able to benefit from lower commission rates as the Payment Service Provider negotiates commission rates based upon the total volume of its connected merchants. See below for a schematic presentation.
(please bare in mind that by using a Payment Service Provider you probably will have to pay a processing fee besides the commission rate. In order to make the right pricing comparison you should calculate the total cost through the Payment Service Provider).
When using the services of a Payment Service Provider, they take care of development and bear responsibility for managing and maintaining the connections on behalf of many merchants. Instead of paying a one-off development fee to its website developer, merchants will then pay a transaction processing fee or gateway cost to the Payment Service Provider.
An example to make it more clear:
- A merchant would like to accept payment method XYZ, and uses its own developer to make a direct connection. The developer is charging a one-off integration cost of 350 euro.
- A merchant would like to accept payment method XYZ, and uses a Payment Service Provider charging a fixed processing fee of 0,20 euro for every processed XYZ transaction.
This merchant could process 1.500 transactions of payment method XYZ through a Payment Service Provider for the same amount charged by its developer for a direct integration.
From a pricing perspective, every merchant has a different tipping point as developer costs, volumes and commission rates differ per merchant.
When expecting large transaction volumes and offering a limited number of payment methods, it probably does make sense to go for direct integrations. However, when expecting less than 100 - 200 transactions per month and only offering a limited set of payment methods, it could make sense to build your own connection.
Merchants should also take the commission rate and the Payment Service Provider integration costs into account.