For a business to accept credit and debit card payments, they will need to first secure a payment processor. While that seems simple at first glance, it can be much more complicated than most merchants realize.
What sets one processor apart from another? How do you decide which service best fits the needs of your business?
What Does a Payment Processor Do?
A payment processor essentially serves as an intermediary between the merchant and the acquiring bank that provides the merchants account. The processor handles most of the responsibilities associated with processing a transaction, but the acquirer maintains liability and interfaces directly with the card networks.
In some situations, contracting with a payment processor also means the merchant secures a payment gateway and a merchant account. This is especially true of processors like Stripe or PayPal who cater primarily to smaller merchants.
However, as a business grows, the merchant will likely want to contract each vendor independently. This can reduce costs and provide more transparency on what is being paid.
Consider Your Needs
What features are most important for your business?
Security and Fraud Prevention
Security is an important factor when choosing a payment processor. You will want to ensure that the processor you choose offers services like data encryption or tokenization. Processes also need to comply with the Payment Card Industry Data Security Standard (PCI DSS).
Youll also want to inquire about available fraud detection and prevention tools like Address Verification Service, card security codes, black lists, white lists, and velocity checks.
Most merchant processors support the four major card brandsVisa, MasterCard, Discover and American Express. However, you should doublecheck to verify this.
It may also be worthwhile, depending on your customers preferences, to accept PayPal, Apple Pay or other payment processing platforms. If you intend to do so, be sure any processor candidates will accept these payments.
If you plan to accept transactions from overseas markets, check to see if the processor you choose is willing to accept cross-border payments. Double check for any currency restrictions.
Also, see if international card brands can be processed via domestic partnerships. For example, UnionPay and JCB are two popular and widely-used card brands in China and Japan respectively. These cards operate via the Discover Network in the U.S., meaning that to accept UnionPay and JCB cards, a U.S. merchant need only to be able to accept Discover cards.
One of the greatest advantages online payments is the trove of detailed customer data available to merchants. This data can help merchants gain insight into their customer base, including demographic information, time and date of purchase, cart abandonment rate and more. Finding a processor that enables merchants to collect this information can be very valuable in the long run.
Also, check to see how the processor will integrate with your platformsshopping cart software, CRM, fraud filter, etc.
Its important to remember any processor you choose is providing a service to your business for a cost. It is reasonable to expect high-quality, attentive assistance.
Offering 24/7 support across multiple channels (phone, email and social media) is important, as is the ability to connect with a live, well-trained and knowledgeable representative quickly. If a processor provides inconsistent or lackluster service, its a good sign that they cannot be relied upon.
Consider the Costs
Processors usually offer services with one of three pricing models:
- Interchange Plus or Pass Through
- Flat Rate
- Tiered or Bundled
Tiered or bundled price plans are almost always the most expensive option. This is because very few transactions actually qualify for the low rate processors advertise. Flat rate pricing can be economical for businesses with low ticket prices or low monthly sales volume; for all other businesses, flat rate is usually unnecessarily expensive. Interchange plus is usually the most economical option.
Check this article for a detailed guide on how to identify the most cost-effective pricing model.
In addition to per-transaction fee, merchants might also be charged for things like:
- Address Verification Service
- Monthly minimums
- Network access
- Setup and cancellation
Rates are often customized for each business. Considerations that could impact the rate you pay include the ratio of profitability to risk, the type of business, how products are sold, and other established market metrics.
When it comes to price, transparency should be a key element. You need to be able to evaluate the rate you are asked to pay compared to other service providers. Youll also need to know the variables that can impact your rates and how those rates can change over time.
Find a High-Risk Processor
Depending on the industry in which you operate, your business may be designated as high-risk. This means other merchants who offer products or services like yours have a greater risk for chargebacks. The following are just some of the industries that processors consider to be high risk:
- Adult Entertainment
- Travel Services
- Online Gaming
- Subscription or Recurring Billing Services
These industries are especially susceptible to chargebacks. The revenue loss and fees associated with chargebacks can easily jeopardize the businesss longevity or even lead to bankruptcy. Because this isnt a risk most banks are willing to accept, a business that has been labeled as high-risk will need to work with a high-risk payment processor.
These service providers charge higher processing fees to offset the cost of the increased payments risk. They will also typically include other stipulations, like a merchant account reserve and monthly sales cap to insulate against potential financial losses.
Finding the Service That Works for You
There is no guarantee that youll find the ideal processor on your first try or that a single solution will be able to scale alongside your business. Theres also no denying that the process will be confusing, time-consuming and labor-intensive.
Look for processors that value transparency. In the end, finding the right solution for your business means a careful analysis of available services and applicable costs against your individual preferences. You cant make those important decisions if there isnt clarity on whats being offered.