Using Online Payment Services

Online payment services provide a compelling alternative to traditional payment methods. Unlike credit cards companies, services such as PayPal and CheckFree don't require businesses to have merchant accounts. These services make paying online quicker and more secure than sending paper checks or cash,

Online payment services have become especially popular among users of online auctions such as eBay, and many other online businesses now use these services as well. Before you sign up with a payment service, however, it's important to know how it works and how to avoid potential problems.

Payment services use a relatively simple process to transfer money. Buyers and sellers set up their accounts by providing enough information — their real name, e-mail address, and credit card or checking account information — to verify their identities. To pay another member, a buyer enters the recipient's e-mail address and the amount of the transaction; that amount is then debited to the recipient's account. If the recipient isn't a member of the payment service, they'll get an e-mail directing them to the service, where they must complete a registration form to claim their funds. Members can access money in their accounts by transferring it into their bank accounts, or by requesting a check from the payment service.

Payment services charge a small fee to transfer funds. PayPal, for example, charges the recipient up to 2.5 percent of each transaction, depending on the amount, but these fees are often less than the recipient would pay for a credit card merchant account. In addition, payment services can be especially helpful for making small, repetitive payments, such as affiliate rewards, commissions, and customer rebates.

There are some significant drawbacks to payment services, however. Most services impose daily or weekly limits on the amount of money customers can send or receive; people who want to exceed those limits might be charged an additional fee for a "business account" or "premiere account." Customers should also remember that these services aren't banks — they're not subject to strict banking regulations or protected by federal deposit insurance.

Most payment services provide less protection against fraud and abuse than credit card companies. PayPal, for example, won't usually cover more than $200 in losses if a buyer doesn't receive their goods from a seller, or suffers some other form of consumer fraud. Conversely, payment services are sometimes quick to freeze a customer's account if they suspect fraud or other criminal activities — so quick, in fact, that customers have sometimes complained about having their accounts frozen for no apparent reason.

Before you sign up with an online payment service, read the terms-of-service agreement carefully. Make sure you understand and accept a service's dispute policy, limits on liability, fee structure, and other regulations. Also, try not to keep more money in your account than you need to conduct a few days of business; your unused funds are much better off in an insured bank account.