On July 18, 2001, I answered a question in my weekly Doctor Ebiz column that precipitated a strong but reasoned response from a reader who helps set up merchants with merchant credit card accounts. I've edited his letter a bit, but you'll get the idea:

"In your last newsletter I noticed that someone had a question on downloading softgoods, and you mentioned that ClickBank and PayPal had no set up fee, no monthly fee, etc. Basically that means that you do not recommend a Merchant Account to anyone....

Not only you, but ALL the successful Internet marketers have a Merchant Account because it is much better than paying 7.5% per sale. It would cost you a lot more. A Merchant Account also has the advantage that you are in total control of your business.

I see a lot of marketers like you who recommend services where the merchant pays 7.5% per sale, but you forget to tell them that beyond $500 in sales, they'd better get a Merchant Account. If not they are going to lose big bucks.

Anybody who does not have $50 per month in monthly fees (to cover a $25 monthly minimum, $10 statement fee, and $15 monthly gateway fee) should not be in business. If you do not have $60 for your e-commerce web hosting package and choose free web hosting, you should not be in business.

You know as much as I do that $100 monthly overhead is NOTHING.

If you do not have $300 per month to invest in your business what are your chances to succeed? NONE, ABSOLUTELY NONE. Going into business with no money means that you have a 99% chance of going out of business." -- Andre Plessis, www.PayQuickly.com

I disagree with my reader that you can't start an e-business on a shoestring. I did it, and so have many others. But he raises a vital question: How important is a merchant account? When is PayPal or CCNow enough, and when does investing in a merchant account and payment gateway make business sense?

First, let's look at typical charges for doing business with a merchant account and payment gateway. Fees vary a lot, but I think these are typical. Then we'll compare the costs of some of the popular e-cash and service bureau alternatives in the US.

I put all this on a spreadsheet and calculated the purchasing costs above as a percentage of the sale for three average purchase amounts: $25, $50, and $100. I prorated the set-up costs, if any, over 12 months and averaged CCNow to 8.5% (since for many consumer products, the bulk of sales are made in November and December). (Note: If your merchant account/gateway costs are higher or lower, results will be different.) Take a look at the graph.

Several things become rather clear:

• PayPal costs look very, very good on paper. In direct costs, the merchant account/gateway route is only cheaper at monthly sales of $50,000 or more.
• It is unwise to set up a merchant account/gateway if you anticipate gross revenues under $650 per month. Beyond $650 in revenues per month, a merchant account/gateway option begins to become cost effective compared to the alternatives.
• At $1,500 gross revenues per month and greater, the monthly difference between a merchant account/gateway and PayPal becomes incrementally less. The curve is fairly flat beyond $1,500. By the time you get to $4,000 monthly gross revenue the difference between the two is about $45 to $50 per month.
• CCNow, ClickBank and DigiBuy are suitable only for products that have a fairly high mark-up that can absorb the substantial purchase costs of 8% to 14%.

But this analysis only examines direct purchase costs. The hidden costs are in time and ease-of-use. Observe that:

• Several of the service bureaus don't remit receipts immediately to the merchant. There is a delay of several weeks.
• None of the service bureau solutions nor PayPal allow the merchant access to the customer's credit card number.
• PayPal's shopping cart is pretty rudimentary, figuring shipping only crudely and taxes not at all.
• DigiBuy provides a sophisticated digital download and registration system, but takes about 14% -- a significant chunk of the total sales price.
• CCNow's shopping cart is better than PayPal's, but their shipping calculation is crude. Since they are a Delaware corporation, state sales tax need not be calculated.
• ClickBank has no shopping cart at all.
• An affiliate program is included in ClickBank, possible with DigiBuy and CCNow, and totally frustrated by PayPal.

A merchant account/gateway (the merchant-hosted API variety, not necessarily the gateway-hosted order form) allows you to integrate credit card purchases into sophisticated off-the-shelf shopping carts or custom applications that:

• Provide an easy-to-use, easy-to-understand interface for your customers.
• Allow you to tailor the selling approach and ordering process for maximum sales.
• Facilitate calculation of shipping costs and taxes.
• Enable you to put all customer data into a single unified database for better customer service.
• Disclose the customer's credit card number for easier tracing of chargebacks and returns.
• Free you to select the affiliate program most suitable for your business.
• Permit you to automate your online business.

In short, a merchant account/gateway allows the flexibility needed to make it easier for both the customer and storeowner. For the customer, ease-of-use translates into more sales. For the storeowner, ease-of-use and automation translate into time (and therefore money) saved.

Here are my recommendations:

1. If you are just starting out and can't afford a merchant account/gateway approach, by all means use PayPal, CCNow, or ClickBank, depending upon what you are selling and how much profit margin you can afford to spend on purchasing costs.
2. Between $650 and $1500 in monthly sales (for DigiBuy, ClickBank, and CCNow) -- and certainly if you are reaching $4000 or more in monthly sales (or anticipate these in your business plan projections) -- move to a merchant account/merchant-hosted API payment gateway system in order to save purchasing costs and reduce processing time and costs.
3. Don't "lease" e-commerce services. Borrow the set-up fees from your great aunt if you have to, but don't get caught in an unbreakable lease that will pounce upon you if your business happens to fail. Online businesses are too risky in the early stages to sign such foolish "lease" agreements. If you can't afford to pay e-commerce set-up fees up front, don't order them.