Kitchen Koncepts sells gourmet cookware, kitchen tableware and other cooking appliances to the home cook. Kitchen Koncepts serves numerous clients from various geographical regions all over the world. Kitchen Koncepts not only deals with kitchen appliances, but also customizes the kitchen setting, designing and transforming kitchens, in the process making them more stylish and attractive. The recently developed website allows customers to review the company’s products, thereby enabling potential customers to make more informed purchasing decisions.
A company such as Kitchen Koncepts could benefit greatly from utilizing e-commerce as it would increase sales and profits for the company. Sales would greatly increase since the company will eliminate the existing time and distance barriers. Customers can access the company’s website at any given time of the day, including weekends, and purchase products without having to consult with an employee as all transactions are automated. As a result of automation, transactions are carried out with ease since customers can purchase their desired products with a few clicks in a matter of minutes.
E-commerce helps companies decrease the various marketing, communication and processing costs associated with their businesses. Since there is no human interaction, customers can purchase products while using the internet hence Kitchen Koncepts could save on personnel costs. This reduces the direct cost of sales for the company, which improves the gross and net profit margins. If well integrated, the website will reduce processing costs as e-commerce greatly reduces the probability of processing errors. The speed of the transaction moves in accordance with the speed of the user, which will be highly beneficial and convenient for both first time and experienced e-commerce service users.
Electronic commerce enables businesses to provide more details about their products, for instance price quotes and discount rates for customers. Since e-commerce reduces operational costs, businesses can transfer the cost savings to the customers by making products cheaper, which will improve on the company’s competitiveness. A major advantage for e-commerce is that it may also allow the company to expand its market beyond regional, national and international boundaries. Kitchen Koncepts may therefore not have to invest in foreign direct investments in its expansion strategies since transactions can be carried out in regional or headquarter offices. Furthermore, transactions are carried out online; hence Kitchen Koncepts could partner with a shipping company and eliminate the need to open further regional offices.
E-commerce has its share of challenges, especially security issues and technical, and non-technical, limitations that make a number of people avoid the evolutionary system. The internet is also not widely accepted as a favorable and trusted financial transaction point. Safety and privacy concerns drive out many would be potential customers, meaning that businesses are restricted from achieving the full potential of e-commerce. E-commerce provides a form of impersonal transaction whereby the seller and buyer rarely communicate with each other, which may lead potential customers to question the authenticity and legitimacy of financial transactions.
Another reason as to why electronic commerce may not achieve its full potential is due to the issue of privacy. Potential customers and e-commerce users may have reservations about providing their personal and private information, especially to the relatively new players in the industry. Identity fraud risk also leads many people to be more hesitant in providing their credit card and bank information to online businesses in fear of falling victim to the growing crime.
E-commerce is also not suitable with certain types of businesses, such as those that offer perishable products such as food items. Most consumers would rather adopt the traditional shopping method when it comes to such products, which serves as another limitation for electronic commerce. On evaluation, the benefits of e-commerce heavily outweigh its limitations, so companies cannot afford to ignore the positive impact that electronic commerce may have on their businesses.
“Companies have to use a merchant account, which is a specialized bank account that enables businesses to receive payments through debit or credit cards, as well as electronic payments” (Sweeney 2006, 12). Businesses therefore have the option of maintaining their own independent online merchant accounts, or entering into contract with a payment service provider (PSP) such as PayPal, Google Checkout and World Pay. A PSP offers merchants with internet banking services for receiving electronic and online payments. In e-commerce, PSPs process credit, debit cards and online checks to facilitate web based transactions Laine & Hellsten 2006, 39).
PayPal
PayPal is an e-commerce provider, also a third-party vendor, which offers businesses with online payment processing services, thereby enabling merchants to be less dependent on traditional financial institutions for their transactions. As most payment service providers, PayPal charges fees in two different ways; that is monthly charges and a fee, usually a percentage, charged per transaction (Millard & Haldane 2007, 218).
PayPal charges a monthly fee of US$30, while fees per transaction vary depending on the amount transacted per month (Strauss 2008, 217). Monthly sales ranging from $0 to $3,000 are charged at 2.9% plus a fixed charge of $0.30, monthly sales of +$3,000 to $10,000 are charged a fee of 2.5% of the sales and a surcharge of $0.30; while monthly sales in excess of $10,000 incur a fee of 2.2% and an additional $0.30. For instance, if Kitchen Koncepts makes a monthly sale of $5,000, having already been a PayPal member for more than 30 days, the company will incur a transaction fee of $110.30 (=$5,000 * 2.2% + $0.30).
PayPal has several financial advantages, such as the lack of set up, early termination of contract and downgrade fees, and has no cancellation charges. This makes the payment service provider adequate for start up companies. PayPal makes it relatively easy for businesses to integrate e-commerce into their websites; allowing businesses to add features such as buy now buttons, a shopping cart, or even set up subscriptions in the company’s website FrontPage (Reynolds 2004, 31). The shopping cart feature makes it easier for customers to purchase multiple items from a company’s catalogue within a single transaction.
PayPal is relatively easy and quick to implement and use for companies with no prior experience in e-commerce, and does not require common gateway interface (CGI) scripting on the part of the merchant, hence a merchant need not apply for an online merchant license. PayPal offers valid security, making certain that merchants are protected from certain types of buyers, such as those who haven’t provided their addresses, or those who have exceeded their credit limits (Crowder 2010, 28).
Despite PayPal’s advantages and extensive market share, the payment service provider has its share of disadvantages. PayPal offers limited customization features for payment and shopping cart tools on the front page. As such, there is limited flexibility for product variables which makes it tedious for customers to search for specific products. PayPal also tends to concentrate more on its trademark brand, rather than on the vendors’ trademark, whereby the PayPal trade name is manifested in the sign out process while the seller’s brand, on the other hand, is restricted to a logo.
The transactional rates applied by PayPal also make the PSP a relatively expensive option in terms of transaction fees. PayPal may also make it significantly expensive for customers with no PayPal accounts to purchase a company’s products, which may in turn affect the company’s businesses.
Google checkout
Google checkout is a relatively new PSP in the industry, which specializes in making online payments easy for both merchants and customers. The PSP has a similar transaction fee schedule as PayPal, but has an added level for companies whose monthly turnover exceeds $100,000, whereby the fee charged is 1.9% per transaction plus $0.30. Like PayPal, no set up fees are included in the package, but Google checkout could be considered as a cheaper alternative to PayPal since the former does not include fixed monthly charges, as opposed to PayPal which charges a monthly fee of $30. Therefore, a Google checkout merchant only has to pay monthly transactional fees, thereby making it ideal for low volume companies.
Through Google checkout, a company such as Kitchen Koncepts could discover several advantages, especially the ease of setup for companies new to e-commerce. Google also makes it easy to integrate their Google checkout service with their websites since the merchant does not have to manage the internet payment gateways. With Google checkout, merchants need not set up trade online accounts or internet gateways as Google checkout provides these services.
Google checkout provides adequate customer security, hence the merchant does not have to worry about customer security details. Buyers on sites that accept Google checkout do not have to input their credit card numbers, thereby making the customers feel more secure. Customers can leave their personal payment information with Google checkout, rather than entering their persona information on all merchant accounts that they visit. All customers need to do in this case to carry out transactions is to input their names and Google checkout password on websites that accept Google Checkout.
Google checkout is cheaper than PayPal for companies with monthly turnovers in excess of $100,000. For instance, a company with a monthly turnover of $100,000 will be charged $2,200.30 (=100,000 * 2.2% + 0.30) in terms of PayPal transaction fees, while the same company could incur $1,900.30 (=100,000 * 1.9% + 0.30) if it had opted for Google checkout, thereby saving $300 in terms of transaction fees, and $30 in form of monthly charges.
Goggle checkout is highly beneficial due to its integration with AdSense since it is easy to connect and carry out transactions between the Google checkout account and the AdSense account. As such, a client could use revenue from the AdSense account to pay for charges emanating from the Google checkout account, or money from the Google checkout account could also be used to fund advertisements on Google. In both cases, the Google checkout account helps minimize payment processing costs, whereby when AdSense revenue matches Google checkout transactional fees, merchants will not be required to part with their revenue, and may end up receiving “free” payment processing (Rich 2008, 99).
Google checkout has several disadvantages, despite its gaining popularity. Google checkout is still relatively unknown, meaning that it is not as widely recognizable and acceptable as PayPal. Google checkout limits payments to only credit and debit cards, which implies that customers cannot use other means such as eCheck and PayPal to settle payments. Google checkout is not a true payment gateway; hence merchants may experience difficulties in transferring money from their Google checkout account to their bank account (Laudon & Guerico 2008, 104).
WorldPay
Fast PC networks 2010) notes “ WorldPay, a payment gateway, makes it possible for businesses to receive payments over the internet, and thereby facilitating online transactions. Unlike Google checkout and PayPal, WorldPay allows merchants to receive payments from a wide range of online methods.” Therefore people can use major credit cards, eChecks and PayPal. As the name suggests, WorldPay has been designed to facilitate international transactions, meaning that customers can take advantage of local payment methods such as Electron and Maestro. Since WorldPay is versatile in a wide range of countries, merchants and customers can use various languages and currencies when dealing with WorldPay. WorldPay is based in the UK, hence prices are listed in sterling pounds but users outside the UK can convert their currencies to translate the price.
WorldPay is more expensive than the other payment service providers. Fast PC networks (2010) notes “a merchant will have to pay £200 in payment gateway setup fees, and incur a regular monthly fee of £30 with the first month’s pay paid up front.” An additional setup fee of £100 is paid for merchants who want to accept mobile payment services. WorldPay charges transactional fees of £0.50 per transaction for UK issued debit cards, while other cards and payments methods are charged 4.5% of the transacted value. Businesses have the option of receiving fraud detection services at £0.06 for every transaction (Fast PC networks 2010).
Fraud protection services, which are more proactive than detection services, cost £20 per month, and an additional transaction fee ranging between 1% and 2% of the transaction value. WorldPay charges a chargeback fee of £10 every time a payment is returned. No charges are incurred when transactions are carried out in sterling pounds, but businesses that opt for other currencies are charged £50 for each different currency. All these costs make WorldPay significantly expensive for small and medium sized companies, thus its features are more suitable for international companies due to the PSP’s global support, security and reliability features (Crowder 2010, 294).
A merchant account is a specialized account issued by banks, Independent Sales Organizations (ISO) and merchant account providers to facilitate e-commerce transactions, thereby enabling businesses to receive and make payments over the internet. With a merchant account, a business can accept real time payments through credit and debit cards, and eChecks (Hicks 2009, 29). Setting up a merchant account involves several costs, including application fees ranging from $99 to $600, regular monthly gateway fee of $30, termination fees and annual fees, all of which are fixed fees.
Fast PC Networks (2010) notes “variable costs include discount rates, which serve as a form of commission for the provider ad usually ranging between 2% to 4%, fixed transaction fees, $0.2 to $0.3 charged per transaction, and batch transaction fees that are charged once a day.” Edwards, Edwards & Economy (2009, 130) add that “Other miscellaneous fees may be included in other expenses, such as account activation fees, statement fees and customer refund processing costs.”
A merchant account entails having an internet payment gateway. An internet payment gateway enables a business to integrate online credit card processing with its website, in the process making it easier for a business to receive payments over the internet. Since transactions are carried out in real time when an internet payment gateway is used, customers can know immediately whether or not their credit cards were approved for carrying out the purchase. A shopping cart will have to be used to allow customers to interact more freely with the website. A shopping cart is a tool that allows customers on the website to carry out certain functions, for example customers can place various products into the shopping cart, just like they would in a supermarket, and pay for the items in a single transaction.
The shopping cart also enables customers to specify on the product they want based on certain characteristics such as size and color. After a customer has finished selecting items for purchase, the shopping cart adds up all the relevant costs of the transaction, including the price of the items, tax and shipping costs, and bills the customer with the total cost, and consequently breaks down the relevant costs to the customer. Once satisfied with the information, the customer may choose to input his credit card information to settle the account. “The internet gateway collects information, encrypts its, to protect the information when it’s sent to a credit card processor through a secure connection. The credit card processor subsequently returns an approval or a decline notice in relation with the customer’s credit.” Edwards, Edwards & Economy (2009, 130).
The internet payment gateway provides three vital services whenever a customer attempts to make an online purchase, that is; authorization, settling and reporting. Crowder (2010, 294) notes “authorization is the process whereby a credit card issuer, such as a bank or other financial institution, permits its client’s credit or debit card to be used for an online purchase through an internet payment gateway.” In this case, the internet payment gateway ascertains as to the acceptability of a buyer’s credit card for making an online purchase in a fast and secure manner in a matter of seconds. The internet gateway, through authorization, links the seller, buyer and credit card processor, or issuer, to enable the transaction to proceed.
During the end of a given timeline, the internet payment gateway assembles all the online payments made by the customers and drives all the information to the company’s data bank in a distinct group, a process known as settling. This process allows the bank to act accordingly and transfer the funds to the business’s bank account. In this way, the business can be credited with the payments in as little as two working days when the funds settle.
“The internet payment gateways also provide reporting facilities since it records all the transactions, thereby allowing the business to view, print or even download all transactions relating to a given day for further processing” (Crowder 2010, 294). Some internet payment gateways are compatible with accounting packages, thereby making accounting of transactions easier for the company.
Internet receipt gateways allow an infinite number of users to carry out transactions simultaneously within the access without disrupting operations. Crowder (2010, 241 notes “Multiple customers and operators can access can access the internet payment gateway from various locations all at the same time, and carry out similar or different transactions.”Customers can purchase a company’s products at any time of the day, which would improve sales since purchases can be made after the normal working hours. The internet payment gateway therefore provides a company with an unlimited user license fee.
PayPal is advantageous since it provides a business with an internet payment gateway system; hence a business would not incur the expensive gateway fees. Applying for a PayPal account and setting it up takes less than a day, meaning that a business can quickly set off in electronic commerce. Traditional merchant accounts are relatively expensive to set up and maintain due to the inclusive setup fees, monthly fees, gateway fees and the discount rate.
The setup process is often strenuous, which requires the company to fill out an application form, and accept to certain privacy and shipping rules. The merchant will also be regulated on how they store customer credit card information, while PayPal does not provide customer credit cards information. PayPal is also advantageous in that it is a widely popular and trusted payment service provider, thus customers will be more inclined in using PayPal as the preferred payment than a traditional merchant account.
PayPal may seem adequate, but from a business perspective, a traditional merchant account has significant advantages over PayPal. A business that relies solely on PayPal may seem small and unprofessional hence it may lose business from large potential clients. Another PayPal disadvantage is that transaction fees are high for high volume transactions; hence a business could save money by opting for a merchant account.
Merchant accounts are more convenient than PayPal in terms of feedback. With a merchant account, a business could contact its merchant bank during business hours to get an issue clarified whereas one cannot even e-mail PayPal for feedback, but would be forced into PayPal’s ticket based system which could take days before an issue is resolved. Since PayPal does not provide access to customer credit numbers, a merchant would have to ask customers to pay bills manually in case of a monthly subscription.
With a merchant account, Kitchen Koncepts would incur lower rates and transaction fees than through PayPal, and would have added advantage in customizing their accounts as opposed to the limited flexibility offered by PayPal (Holden 2004, 284). PayPal’s rigidity makes shipping problematic, especially when it comes to estimating the costs. PayPal manages the security details of the account, which are usually adequate, while a business would have to manage their security details with a merchant account. The greatest drawbacks for merchant accounts are the high initial costs and the timely set up process (Edwards, Edwards, & Economy 2009, 59).
PayPal is therefore good for small businesses that have just started in e-commerce, though merchant accounts are more ideal for businesses that project future growth due to the flexibility benefit. Alternatively, Kitchen Koncepts may start with PayPal while initiating and integrating a merchant account, and blend the two in the future to reap the benefits of each.
References
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Fast PC networks, 2010. “Merchant account – A guide to understanding the basics.” Fast PC networks. Web.
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