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5 Issues to Consider when Choosing Between In-House and Outsourced Payment Provider

ecommerce platformsSelling software products and services over the internet will, at one point, involve setting an ecommerce platform for online order processing and electronic delivery.

But how do you know that time has come for implementing a dedicated online electronic payment platform? And how can you decide if it’s better to develop in house such a platform or outsource the service?

This article analyzes the advantages and disadvantages of using an in-house developed ecommerce platform versus an outsourced one.

The e-commerce platform. What is it and when do you need one?

An ecommerce platform can be roughly defined as an electronic system that allows you to process orders from customers, with the aim of selling online products and services. The platform involves financial electronic data interchange and, when outsourced, usually comes in hand with a lot of extra services, such as anti-fraud and internet marketing, together forming ecommerce solutions or ecommerce platforms.

You should consider implementing such a system in your online store when:

  • Number of orders becomes too high to be processed manually with full efficiency – more than 20 orders per week may be considered already too much, but it really depends on the amount of resources you are willing to invest into this aspect of your business;
  • Your products and services may be exclusively electronically distributedelectronic software distribution for example has its advantages that can not be ignored if you are in the software business;
  • Analyzing the costs such platforms involve, you come to conclusion that it’s cheaper and more efficient to electronically process your transactions through such a system.

Every business is different and you know best what is more profitable for your overall sales. This article sums up some aspects of online commerce platforms that you should take into consideration when your dilemma is choosing an in-house implemented system over an outsourced platform or vice-versa.

  1. Legal Issues

Outsourced platform

In house development

  • Signing a contract with the third party ecommerce provider
  • Being compliant with the third party requirements
  • Setting up a merchant account
  • Mandatory authorization with a payment gateway
  • International Economic Laws

If you choose to develop in-house your ecommerce platform, no matter if your business involves international or only national payments; you need to set up a merchant account. This basically means signing a contract with a bank and negotiating financial conditions of the partnership. You need a merchant account so that, in legal terms, you may use a bank account for electronic transfer of money to you from your clients, via credit cards processing.

Then, you need to set up a contract with a payment gateway such as if you are in USA or for Europe. Having a payment gateway is compulsory, its purpose being to legally authorize your business to process online payments made through credit cards.

Then, there are several international economic laws you need to consider, such as properly applying VAT to customers’ orders or managing other taxes that VISA or other institutions require. These laws and requirement need to be considered every time new features are added into your platform, either in house developed or outsourced.

If you choose to opt for an outsourced ecommerce platform, the company chosen by you has already solved these matters, because it has already negotiated and signed all the needed contracts, has deep knowledge of and already has implemented all the international economic requirements and will act as a third party intermediary.

Given the legal resources that you have, your negotiated partnerships and the time, last two ones being discussed further on in this article, you should be able to make the right decision for your business concerning legal matters.

  1. Credibility

Outsourced platform

In house development

  • 24/7 customer support
  • Online reputation management
  • Experienced ecommerce platforms
  • Transactions history
  • Privacy issues
  • Young ecommerce platforms

Users are cautious with giving away their credit card details, because they are aware of the existence of fraudsters and really don’t want to lose their money during an online transaction. Moreover, people tend to grow trust into ecommerce platforms they’ve used before and worked smoothly, with no incidents whatsoever. That is why in terms of credibility, arguments in favor of the two options are pretty tight.

Either way, it takes a great deal of time, a website of outstanding reputation and an excellently implemented shopping cart to achieve a satisfactory level of trust among your customers when it comes to their credit cards. A recent article in The Guardian analyzes for example 100 UK online stores in view of examining how trustful are their ecommerce solutions. Is your shopping cart compliant? See also this article.

Some say that it is more professional to have your own merchant account, which adds up to the credibility of your business and increases your conversion rates. Peter Barnsley, Head of IT at Attraction World Ltd answered on LinkedIn that "merchant accounts: 1) Allow you to keep the shopping basket part of your site; 2) Make your site feel more professional as the whole sales process is integrated and 3) Has a higher chance of converting due to the above."

On the other hand, an outsourced solution has bigger chances of more rapidly building trust among its users, even if we only think in terms of number of transactions and their corresponding clients and success. Moreover, these sort of outsourced platforms usually guarantee a certain degree of fraud-free transactions, have 24/7 customer support, as well as provide management reputation and other related internet marketing services. Most ecommerce providers offer totally customizable shopping carts to their clients, achieving the same capabilities as in house hosted systems.

To conclude the credibility issue, some argue that a third party payment processor might be more likely to handle conflicts objectively, since they are on neither side when problems occur. Clients are thus confident that their order is treated correctly, given the middle-man as sometimes third party processors are named.

  1. The Time

Outsourced platform

In house development

  • The ecommerce system is already developed
  • You need time to customize it with your own products and prices and to integrate the buy links into your website
  • Developing your entire ecommerce application
  • Visa and MasterCard compliance
  • Remaining time for growing your business
  • Time for constantly improving your system, both for development and further compliance with institutions requirements

Creating you own shopping cart and implementing your entire in-house ecommerce solution may take a long time, as there are a lot of technical, security, economic and legal aspects to take into consideration. On the other hand, an ecommerce provider has a fully functional system ready to be implemented into your existing website, which most definitely takes a lot less to be done.

If you really want to use your own shopping cart, you may still save some time, by avoiding the negotiating with the banks and pass the compliance checking with the major credit cards companies like Visa or MasterCard. Most third party ecommerce platforms are ok if you choose to implement your own shopping cart into their systems.

If you choose a third party provider, you only need time to customize their system with your own products and prices and to integrate the “buy” links into your website. But probably the most important period of time that you win if you make this decision is the time otherwise needed to constantly improve your own system and getting the corresponding authorizations and signed contracts.

Especially if you are a startup business or a small scale one, time spent on handling each order, the payments, the chargeback management and the support to clients would definitely be better used to grow your business.

  1. The Money

Outsourced platform

In house development

  • Ecommerce provider fees
  • Affiliate network
  • Increasing sales through marketing services
  • Bank, VISA, MasterCard etc fees
  • Charge backs
  • Negotiating commissions with the banks
  • Currency conversion

Usually ecommerce providers charge their clients a fixed fee or a certain percent of the order’s value, but having your own merchant account requires as well paying a fee, to the bank you are working with, as well to other institutions like VISA or MasterCard. Regardless of which alternative you choose, fees involved in the two options may not be very different from each other.

As Kate Forbes, Internet and Database Marketing Director puts it, money and security really go hand in hand: "You need to be cognizant of the ability of your IT group to keep credit card information/transactions secure. The cost of an SSL certificate for transaction encryption is negligible, but what about the unseen costs of securing the data and supporting the infrastructure that stores this data?"

When thinking about the money, it is also important to calculate, besides the bank’s/ ecommerce provider’s fees, the following:

  • Charge backs

No matter your line of business, clients will want to return certain products to you, so someone must handle the charge backs – either you or your ecommerce provider. Also, please note that too many charge backs lead to VISA/MasterCard closing your merchant account, so you should be really prepared to handle such situations.

"VISA has hefty fines for those who do not adhere to their stringent requirements for securing this information. Can you sustain the costs of what they require or can you afford to be fined if you are not in compliance?", adds Kate Forbes on Linkedin, while analyzing the best option for an online store.

  • Currency conversion loses

If you work on the international level, loses due to currency conversion must be in your grid for properly calculating how much money you earn from your online transactions.

An outsourced ecommerce platform most surely will be able take care of these aspects for you, plus to offer you a seat in their affiliate network – that otherwise needs to be developed and financially managed by you. The outsourced platform will also most likely negotiate better commission with the bank and will offer you a wide range of related services, such as internet marketing, all of these so that you increase your sales revenues.

  1. Security Issues

Outsourced platform

In house development

  • Security Certificates included
  • Dedicated anti-fraud department
  • PCI-DSS compliant
  • Training people to manage frauds
  • IT human resources
  • Customers’ credit card details

Given the worst fear of your clients, the security matter is for sure the most important one to analyze. Fraudsters are your main issue, that is why you must be sure that you don’t lose money, nor clients, nor your merchant account because of them.

As Kate Forbes pointed out on Linkedin, "Security is paramount and the costs of ensuring it are not always taken into account, especially since security is an ever-changing bar with which to keep up. Also take into account the worst case scenario (think TJ Maxx) of someone hacking into your systems and gaining access to your customers' information. What are the PR, legal and reputation costs in the worst case scenario?"

On the other hand, more confident people, like Peter Barnsley, also quoted before, says: "If you have the in house expertise, or the ability to pay a developer to build you a custom shopping kart it is always best to do it through a merchant account."

"Security for either option really isnt an issue. The shopping karts you can take from Protx, Google, Paypal etc are just as secure as using their API's to embed your own shopping kart into your site. All traffic has to go via HTTPS from the client to either your server or the outsourced service so there is no difference there (as long as you have your servers set up correctly!)," he adds.

You need to have a Security Certificate that certifies the https connections, as Peter is saying. You need to think about the ways in which you are allowed to manage credit card details, according to VISA and other institutions you are working with. Plus, it is advisable that you are PCI – DSS (payment card industry - data security standard) compliant, which among other things means that your system is security bug free.

Make sure you analyze the offers of outsourced services, including their anti fraud services and guarantees in this matter. They all have people anxious to answer your questions. For a comparison between PayPal and having your own merchant account, check out this article. Again, it’s the most important decision, which can help you sleep better at night.


No matter if you are a start up software business or software vendor considering a switch from your current platform, only after properly analyzing the legal issues, the time, the money, the security and the credibility matters, you will be ready to make the wisest decision for your business.
Happy transactions!

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Comments (2)

Peter Barnsley says:
June 15th, 2009 at 4:56 pm

Glad to see you are using my comment for your own twisted purposes :) - selling your product.

How many people out there have heard of avangate? Not that many I should think.. so why would an avangate payment solution increase confidence? Far from it - it would be more likely to put people off. The only company I can think of that could get away with it would be Paypal. All payment gateways (Protx, Commidea, Paypal etc) give everything you mention in your article as standard: 24/7 Support, Fraud tools, Customiseable baskets - infact the very point that I make is that integrating a solution directly to your site is the ultimate in customisation.

The biggest problem with doing it yourself though is compliance. PCI and other regulations are becoming a huge issue now, and using a solution such as yours - or the standard out of the box payment page you get with Paypal / Protx etc will sidestep the issue entirely.

So the question comes down to, do you want it to look good and in theory give higher conversions, but then cost you more in compliance issues. The answer to that question will be different for every organisation and something that you will have to evaluate carefuly.

roxana says:
June 24th, 2009 at 7:00 pm

Peter, thanks for your comment - great to continue our conversation started on Linkedin. I tried hard in this article to be as objective as possible and I was happy to read and quote your opinion in favor of in house development of ecommerce platforms, since most of other opinions gathered from people were in favor of outsourcing.

My argument regarding credibility and confidence is rooted in the belief that it is more likely for a specialized organization in online payments processing to excel in this activity, than for a company that has built such a platform in house, when it is not its core business line/ activity.

Let me expand on this idea. Credibility in my view is directly connected to how you handle all aspects of the online purchase, including customer support, and to compliance. An outsourcing payment processor handles transactions for many clients (say X) – translating into times X experience with order and payment processing. Lots of experience means that you have more chances of observing problem areas and you have more resources (this is your core business) to solve them and constantly improve the platform. Customer support components that increase credibility include 24/7 phone lines, local dial-up numbers, order status tracking in real time, multiple payment methods. The more you integrate into your solution, the more credible you are. Anyway, this is what I had in mind when I mentioned “an outsourced solution has bigger chances of more rapidly building trust among its users”.

To conclude, I totally agree with you – outsourcing vs. in-house is a decision that each company should make, after carefully evaluating all implications:).

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