We all know it costs money to make money. Yet after you tally up the cost of an application fee for a merchant account at your bank (which allows you to process credit card charges), monthly fees for the online gateway to the transaction clearinghouse that authorizes each charge, the monthly statement fee, and the bank's percentage commission and transaction charge on each sale, can a small business still earn a decent profit online?

If you are confident your monthly online sales will be $20,000 or more, then go right ahead and apply for a merchant account and online gateway service. But many small businesses that plan to dip a toe into the e-commerce pool have no good way to estimate their future online sales.

If you start off small, with just a couple thousand dollars or less in monthly online revenues, then paying hundreds of dollars in setup and ongoing charges for an online merchant account and all it entails could consume most or all of your profits.

Payment Workarounds

A small business can lower the cost of its entry into e-commerce by using a third-party payment service. In effect, a payment service gives your business access to its own merchant account. The advantages to this approach start with low or no setup fees. The service's merchant application form is typically simpler and more quickly approved than a bank's. You also often get tools that make it easier to accept payments using your Web site (assuming you aren't a Web wizard).

PayPal is probably best known as a payment system for eBay auctions. However, it has payment tools that businesses can use even if they don't sell on eBay.

PayPal's Website Payments Standard charges no setup, gateway, or monthly fees. You pay 30 cents per transaction and a commission of 2.9 percent or less, depending on your monthly sales volume. The system accepts payments using major credit cards (Visa, MasterCard, American Express, Discover), bank transfers, and, of course, PayPal.

It's fairly simple to set up Website Payments Standard. You add one or more payment buttons to your site using a bit of HTML provided by PayPal. At the time of purchase, customers click on a button that directs them to PayPal's secure site, which then processes the payment.

On the right is an example from a simple purchase page using Paypal's service. I set it up for a client, a voice-over artist who records telephone greetings and on-hold messages. It's not fancy, but it works.

Add a Cart

If you want to sell more than one product or service at a time, you can add a shopping cart that will accumulate multiple items until the customer is ready for checkout. Website Payments Standard includes its own shopping cart, and there are other shopping carts that are compatible with PayPal's payment service. For example, you can install an application on your own Web server, like K-Factor Technologies' AgoraCart (PayPal support with $55 Lifetime Premier membership); or you can use a third-party shopping cart service such as Netsuite's hosted business management service.

In addition to one-time purchases, PayPal's service also lets you offer your customers the ability to set up subscriptions and recurring payments.

When should you get your own merchant account? As your online sales volumes increase, you will likely qualify for lower commission rates using a merchant account than those charged by third-party payment services like PayPal. As I mentioned earlier, if your online sales top $20,000 per month, you'd probably save money using a merchant account, even with the initial startup and added monthly fixed costs. Having your own merchant account also gives your business more control in resolving payment disputes, such as customer chargebacks; PayPal generally tends to decide these quarrels in favor of the purchaser.

Richard Morochove is an IT consultant and writer. He can be reached via e-mail.