Payment Methods in Online Shops — Part I: A Forest Full of Trees

by Volker Schwarz, 30.09.09

Cash is king — but only once upon a time. This outdated saying applies even less to purchases processed via the Internet. Sophisticated payment concepts must replicate the role traditionally played by banknotes and coins as well as facilitate trust between anonymous merchants and their customers. Electronic payment methods are the digital handshake which seal the deal in today’s business world.

Yet there is a practically limitless range of payment systems. Our four-part series of articles entitled “Payment Methods in Online Shops” will help you find the right provider for your ePages online shop and explain what you need to be aware of concerning activation. In “Part 1: A Forest Full of Trees” we will help you by shedding light on some key matters.

Payment in advance, COD, bill, credit card, direct debit, PayPal, Google Checkout, Moneybookers, T-Pay, Saferpay, and many more. A lot of online merchants are driven to despair by the sheer magnitude of payment possibilities. “Which ones should I offer to my customers and how many payment methods are sensible per shop?” “What advantages and disadvantages do Method A offer for merchants and customers? What about Method B?”

In order to see the forest above the trees, it makes sense to categorise the seemingly countless variety of payment methods wooing merchants and customers these days. Surprisingly enough, every payment method belongs to one of just three categories: “Payment without safeguards”, “Payment with safeguards”, “Payment with virtual wallet”


Category 1: Payment without safeguards

The “Payment without safeguards” category denotes all payment methods that do not involve an additional service provider which guarantees on behalf of the customer or merchant that payments will be properly processed. If a transaction is to transpire, then the customer or the merchant — or both — must take a leap of faith and blindly trust the other party.

Types of “Payment without safeguards” include: payment in advance, payment via bill, direct debit, manual credit-card payment (without external provider).

Payment in advance

Payment in advance is the most straightforward of all payment possibilities: items are shipped as soon as the customer transfers the necessary funds.

A sure thing for the merchant, though it entails more work: the merchant must regularly check their account to determine which orders have been paid for and can be approved for shipment.

Customers often dislike paying in advance. Small wonder: they must part with their money before the goods are even shipped. On the other hand, they can rest assured that the merchant cannot access confidential account information.

Payment via bill
This remains one of the most popular methods of payment among customers, especially in Germany. After all, they know that their bank information will be protected and that they can take a look at the goods before paying. A lot of customers thus prefer online shops which offer the option of payment via bill.

Merchants must consider the pros and cons. On the one hand, they bear all of the risk. They ship goods with the expectation that the customer will pay upon receiving them. And if payment problems arise, then debt collection is not necessarily worthwhile — especially in the case of relatively small sums of money. The resulting percentage of financial losses can however be offset, for example, by the higher volume of orders due to the option of payment via bill.

Merchants who are considering whether or not to offer payment via bill should also acknowledge the correspondingly considerable commitment with regard to tracking payments. The monitoring of such orders requires substantial amounts of time; unpaid bills must be identified and debt-collection procedures executed.

Direct debit

In the case of direct debit, a merchant has a fee-based contract with their bank which permits the merchant to debit payable sums from customers’ accounts. Customers consent to this method by providing their bank information in a shop’s payment form.

This can be risky for a merchant: in the case of non-payment, e.g. a customer’s bank account has insufficient funds or a customer ultimately demands re-payment, then the merchant loses money. Yet by the time the merchant becomes aware of non-payment, the goods have long since been shipped and payment is unlikely. Merchants who wish to minimize such risks require a supplementary fee-based insurance policy issued by their bank.

Not all customers are willing to divulge their account information, which entails an elevated risk of misuse. Yet willingness rises in accordance with a shop’s reputation and the respectability which a website broadcasts (e.g. by means of a seal of certification, such as those by Safe Buy or Confianza Online).

Credit card, manual

As with direct debit, a merchant must first sign a fee-based contract with their bank in order to obtain payment from customers’ credit cards in the case of manual credit-card payments. Customers are asked to provide their credit-card information to the merchant to conclude a transaction in an online shop. Merchants are unable to determine, however, whether or not customers use stolen credit cards. Merchants must then assume any losses, unless they have a supplementary fee-based insurance policy issued by their bank.

Customers are more willing to pay with credit cards than via direct debit – especially in the Anglo-American regions. Many potential customers nevertheless hesitate to pay with a credit card, for they must submit confidential data to an unknown party. A seal such as Trusted Shops helps to persuade customers.


Tomorrow, we will publish the second part of “Payment Methods in Online Shops — Part 1: A Forest Full of Trees”, in which we will focus on the two remaining categories: “Payment with safeguards” and “Payment with virtual wallet”.

About the author

studied German, History and Politics at the Ruhr-Universität Bochum. From 2004 to 2009 he worked as a freelancer for several marketing and communications companies in Hamburg, including e-commerce companies. Between August 2009 and December 2011, he worked as an online editor at ePages .

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  1. 06.10.2009

    I think you should expand the ‘Manual Credit Card’ option to inform web merchants about PCI DSS compliance and what data security measures they must take when using this payment method.

    • 07.10.2009

      Thanks for your input. Actually we have planned to do a whole article about this issue, which is going to be linked to this overview article. Otherwise the existing article is really going to be too long.

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