Merchant services is a growing industry, with more players entering the game every day. There is a payment processor for every business type: those that provide low-risk merchant accounts, those that provide high-risk merchant accounts and specializations that run the gamut in between.
With all the options available, it can be dizzying for merchants to choose the right provider for them and their business model. It requires significant legwork and research to choose the optimal payment processing partner and not all merchants have the internal resources to get it right.
There are several key considerations to be aware of when you’re hunting for a new (or first) payment processor.
Know the Terms and Conditions
When vetting payment processors, be sure to look carefully at the T&C agreement. This can be a headache, as these documents are long, arduous and full of complicated jargon and legalese. Do it anyways. This document governs your relationship with the processor and lays out the terms of service by which you need to abide. Have a lawyer review the document but also review yourself. You don’t need to understand legal speak to catch some of the more glaring red flags. You know your business model better than anyone, so suspicious language regarding the usage of service may be easier to spot for you than anyone else. Anything that causes concern should be addressed with the payment processor to avoid misunderstandings and disruption to your payments operation down the road.
Understand the Contract Term
Every contract has a term for which it is valid. With payment processors in the U.S., that term is generally 3 to 5 years. This is important because the payment processor is agreeing to provide payment processing abilities for that time frame and you are agreeing to pay them for that long. Payment processors will sometimes operate at a loss to start, because the costs of onboarding a new merchant add up. Boarding a new merchant requires checks to be completed to ensure that the merchant will be stable and not fraught with fraud, which can cost even more in losses. These checks include reviewing financial history, credit reporting, fees owed to the card associations and costs associated with upstream providers. On top of that, it typically requires some time before the processor sees a profit. The contract term is a give and take – the merchant gains the ability to begin processing payment cards right away and the processor owns that merchant account for a time period that should allow for a profit to be made.
Where things can begin to get sticky is with early cancellation policies. Most contracts have an early cancellation fee that is based upon the monthly fee paid by the merchant. In the case of early cancellation, the merchant would be responsible for paying that monthly fee X the number of months that remained on the contract. See the example below:
Monthly fee = $100
Contract term was 36 months but merchant cancelled after 10 (26 months remain)
Early cancellation fee = $100 X 26 months = $2600
Some payment processors can be flexible on this if you are upfront about your needs as a business. This is especially true for startups, who often have limited capital and aggressive growth goals that may not always pan out. In the case of a failed startup, the merchant is still left on the hook for the remaining months of their contract. Talk to potential payment processors about early cancellation fees and find one that offers the flexibility to meet the needs of your business model.
This comes into play for high volume merchants, and particularly those who sell to customers on a global scale. Some processors do not support high volume payment card processing because they only work with acquiring banks that have volume caps and lower limitations. Others cater to high volume merchants by helping them obtain more flexible merchant accounts, often working with offshore acquiring banks that have no or very high volume caps.
This is an important consideration for a number of merchants, whether they are established businesses or startups. Startups should pay special attention to volume caps, as they are often growth-minded and looking to scale quickly. While investors in startups love to hear that a high rate of growth is feasible for your company, volume spikes and unanticipated growth can make banks nervous. Ensure your processing partner can help you through these variables and is set up to help you scale and succeed, rather than to hinder growth.
There are plenty of options to consider when looking to enter into a relationship with a payment processor (or when considering renewal with a current provider). Merchants should do their research on the considerations above and also take into account the unique needs of their specific business model. No two businesses are the same. It’s not uncommon for banks to want varying business models to fit into one payment processing mold; it means more predictability and less risk. This just isn’t reality for most businesses, and a good payment processing partner will understand that and help merchants find and build banking relationships that are a good fit for their needs.