Startups are in a precarious position when it comes to processing credit card payments online. Stuck between a rock and a hard place, these businesses have two options: risk it with a traditional merchant account provider or open shop with a disruptive payments technology like Stripe or PayPal.
It may not seem like a tough decision on the surface; all a startup really needs is the ability to process payments, right?
Wrong.
There are so many considerations that startups need to be cognizant of and not all of them are covered or accounted for by the options mentioned above. Why? Because most merchant services providers are in the business of making money, not babysitting their clients and catering to their every unique need.
Let’s breakdown the two options.
The Real Deal With Traditional Merchant Accounts
The process for a startup to get a traditional merchant account is arduous, laden with paperwork and sometimes, impossible. Here’s why:
- Banks view online businesses and startups as high risk. This is especially true for particular startups who deal in gambling, porn, or gaming, due to the “illegitimate” nature of the business and the high probability of chargebacks. Even startups that fall into less controversial industries (SaaS, membership, free trial) are labeled high risk because of a high rate of churn and chargebacks.
- As a high-risk merchant, processors view startups as a hassle and compensate for the extra work with higher processing fees and lackluster customer service.
- Traditional merchant services providers tend to place more processing restrictions on startups, requiring rolling reserves or implementing volume caps that inhibit growth.
The bottom line is that opening a traditional merchant account may not even be a possibility for startups and when it is, this type of merchant account may actually hurt the business more than it helps. High processing fees and growth-inhibiting limitations on processing make it difficult for startups to scale.
Third Party Options No Reason to Celebrate
On the other hand, third party solutions offer quick credit card payment options for startups who want to start processing credit card payments right away. The downside? Well, there are several:
- The rates can be higher than traditional credit card processors/banks
- They don’t necessarily offer all the settlement currencies a startup needs and some charge for foreign exchange.
- Some of your potential customers may have gripes with providers like PayPal or Stripe, causing them to avoid purchasing from you if that is your primary payment acceptance method.
- Slow funding – some of these services hold funds for longer periods of time, especially if there are instances of chargebacks. This could negatively impact all of operations, including the ability to make payroll.
- Reporting options – many of these third party services do not offer customized reporting, which means startups need to scroll through pages upon pages of transaction history if they want to issue a refund, investigate a payment or cross-reference anything.
- Flexibility, portability and scalability – these alternative payment options can be appealing because of the ease and efficiency with which a startup can begin processing payments. What many startups don’t take into account is what happens when they grow beyond the volume that these options can handle. It’s a double-edged sword: growing quickly is great news for any startup but having to switch providers in the middle of business can be a headache.
Fortunately for startups, there are alternatives to both of these solutions available. Some merchant solution providers offer customized options for processing credit card payments for “outside-of-the-box” merchants. They meet merchants in the middle with reasonable processing fees, no volume caps, no rolling reserve requirements and gateways tailored to each startups specifications. This includes chargeback management and comprehensive fraud tools for each and every business model.
For startups looking to start processing credit card payments immediately, the message is clear: do your homework and make sure you choose the option that is a best fit for your business model. The appeal of quick credit card acceptance can be strong, but it may not be worth it if it slows your growth down the road or leads to the most unfortunate scenario of all: merchant account termination.
