As the owner of a new business, choosing the right payment processing solution is one of the most important decisions you’ll make. In addition to changing the transaction fee structure for every sale, your processes and responsibilities as a merchant will change as well. Your main choices to start accepting payments are a merchant account vs a payment aggregator…but each has its own pros and cons.
A merchant account is a joint contract between you, a bank (or “acquirer”), and a payment gateway. It provides a way for funds from credit card transactions to be confirmed and deposited into an account that you can easily access. A merchant account essentially acts as an intermediary between your business and the banks that your customers use.
Funds appear in your account before the acquiring bank itself actually receives any money, so it’s a credit-based system. The bank needs to know that you’ll be able to handle the cost of transaction fees, along with chargebacks resulting from customer returns and refunds. For this reason, banks will take a close look at your credit rating before allowing you to open an account with them.
Benefits of a Merchant Account
Merchant Accounts Give You More Control
When it comes to processing payments, some of the biggest challenges come with fraud prevention and chargebacks. If suspicious activity is detected, merchant accounts will notify you before taking further action (such as temporarily freezing your account). Payment processors, on the other hand, are known to freeze or terminate accounts without notice. Since they have a higher level of risk they take on with merchants, this is done to protect them from fraud – but gives you less control over your money.
Merchant Accounts Have More Flexible Rates
Merchant accounts with traditional banks aren’t necessarily more expensive, but their rates tend to be more flexible than payment gateways. Since they deal with businesses both small and large, rates tend to change based on your sales volume. You can even haggle for different prices for different credit card brands, giving you the ability to hugely reduce your fees with a little bit of savvy negotiating. Payment aggregators, on the other hand, usually use a fixed pricing structure that stays the same even as your company grows. The higher your sales volume, the more money you can potentially save with a merchant account.
Merchant Accounts Deposit Funds Faster
A huge benefit of a merchant account is that you get your money within a couple of business days. Payment companies sometimes deposit funds just as quickly – which sometimes put a hold of up to 30 days on deposits. This is due to the relative risk assumed by each. Since payment companies are in a higher-risk business, their processes are more conservative to help avoid fraud.
Customized Anti-Fraud Tools
Since the risk of different types of fraud differs depending on what kind of business you have, getting customized anti-fraud tools that are tailor-made according to your risk level and business type is a huge benefit. Payment processing companies are closer to a one-size-fits-all approach, so they may not provide the same fraud prevention tools for your particular situation.
Disadvantages of Merchant Accounts
Merchant Accounts Are More Complex
With the endless challenges and complexities of starting and running a company, it’s great to be able to keep certain things as simple as possible. And despite being more flexible, merchant accounts are much more complex than accounts with payment gateway companies. Rates are different for different payment types, and you might have different merchant account providers for each brand of credit card you accept. The simplicity of partnering with a payment processor makes it much easier to set up and manage in the long run.
Depending on your merchant account provider, you may be subjected to minimum monthly transaction requirements. Since merchant accounts opened at banks are equipped to service much larger companies with enormous sales volume, they sometimes require you to make a certain number of sales each month in order to retain your account. This can disqualify a lot of smaller-sized companies from using them.
Negotiating is Difficult for Smaller Companies
In any negotiation, you need leverage. Unfortunately, if you’re a new or smaller company, you’ll naturally have less leverage than if you’re already a big player in your industry. Since payment companies use straightforward, fixed pricing structures, you might end up paying more using a merchant account.
Merchant Accounts Are More Time-Consuming
Just like the saying goes – time is money. Between figuring out your typical sales volumes, researching the best account providers for different credit cards, getting your credit approved, and negotiating prices, it can easily take a month or more to get set up with all the different accounts you need. Payment aggregator companies allow you to get up and running almost immediately, and the time you save can be spent building or growing your business.
What is a Payment Aggregator?
A payment aggregator provides a way for businesses to process credit and debit card sales without having to create a separate merchant bank account.
The Benefits of Using a Payment Aggregator
Easy Approval With No Credit Check
Getting approved for a merchant account can take a lot of time. From credit approval from the merchant acquiring bank to signing the contract, it’s a much more intensive process to open this type of bank account than buying services from a payment company. An easier approval process means you can get up and running faster, and start collecting revenue.
Fast, Simple Setup
In addition to their fast approval process, payment companies make it easy to get set up once the contract is signed. Complicated issues like PCI compliance are automatically taken care of. In addition, you get easy-to-use applications and plugins for your websites to accept debit and credit cards for online transactions. If you’re a brick-and-mortar store, many payment companies provide you with POS equipment like payment terminals that you need to handle in-person transactions.
Payment gateway companies are much more turnkey, requiring almost no maintenance on your part. The more time you save on details like your credit and debit card payment solutions, the more time you can spend finding new customers.
Fixed Pricing & Simpler Process
While fixed pricing means you can’t negotiate lower rates, it also means a much simpler structure. Not only does accounting become much easier, but the overall management of handling credit and debit card payments is drastically simplified.
The Disadvantages of Using a Payment Aggregator
Sudden Freezing/Closing of Your Account
Payment aggregators are much quicker to freeze or close your account. This is due to the higher risk of their business – at the first hint of fraudulent activity or excessive chargebacks, you could find your payment gateway frozen without warning. This is to protect the company providing the payment processor, but it can translate to a lot of lost revenue if it happens to your company.
It May Not Scale as You Grow
Since payment aggregators are designed for small to mid-sized businesses, you run the risk of outgrowing them as you expand. Higher sales volumes may bring higher fees in the long term, whereas merchant accounts are able to offer lower fees to bigger companies.
Inconsistent Customer Support
Some payment aggregators have much better customer support than others. If you have a technical issue, every moment you can’t accept credit and debit card payments is lost revenue. If you have to wait all day to get a problem fixed, it can have a devastating effect on your business.
Caps on Transaction Volume
With merchant accounts, you often have to meet a minimum transaction volume. With a payment aggregator like Square, on the other hand, you have a maximum account volume that you aren’t allowed to exceed. Growing beyond the set limit can incur additional fees or force you to upgrade to a more expensive version of the service. This is one of the reasons larger companies go with merchant accounts.
Why The Payment Aggregator Model Exists
With all the complexities of opening an account to manage credit card payments, entrepreneurs have historically had to spend far too much time figuring out the details. By acknowledging this need, companies recognized the need for a service provider that could make the process easy. The payment aggregator model emerged to make it easy to start accepting payments quickly with a payment gateway that anyone could set up. While there are disadvantages, payment service providers have made it much easier to start a business and begin selling.
What’s the Difference Between PayPal, Stripe, Google Wallet, Square, Payoneer, Shopify, and a Traditional Merchant Account? Which is Best?
PayPal, Stripe, Google Wallet, Square, Payoneer, and Shopify are all payment aggregators. They allow you to collect credit and debit card payments without having to make a separate, traditional merchant account with a bank. They’re a great option for many new business owners, but each option has its own features, risk profiles, and pricing.
Risk & Underwriting
Since every payment service provider has a set level of risk they’re willing to take on, they have different fraud prevention features. Their fees reflect the fact that payment gateway providers need to account for potential losses due to fraud. However, every payment aggregator is different. Some provide stricter fraud prevention measures than others and will freeze your account if your chargeback rate hits a certain level. Make sure to get all policies in writing, and familiarize yourself with chargeback thresholds.
When you’re looking at different payment aggregators, don’t just look at the price – make sure to also look at value. Different risk and fraud policies might justify a higher fee structure. For example, If a company pays some chargebacks for you, that provides a huge amount of added value that shouldn’t be ignored.
Who Should Use Merchant Aggregator Processing Services?
Payment services companies aren’t for everyone. Some companies are better off opening an account directly. However, a merchant aggregator might be a good fit for you if:
- You own a small to midsize company with relatively low sales volume
- You’re a new entrepreneur and want to get your business up and running fast
- You don’t expect a dramatic increase in your volume over the medium to long-term
- You have a minimal credit history or a lower credit score
If you fit the above criteria, a company like GAM payments can get you started fast. While bigger names like Stripe and Google are popular, they can’t give the kind of personal attention that a smaller, boutique provider can. That means better support when you need it, and less lost revenue in the long run.
Who Should Use a Traditional Merchant Account?
For some companies, payment aggregators and payment gateway services aren’t a good fit. Traditional merchant accounts at a local bank might be the best option if you:
- Own a large company, with a consistently high sales volume
- Expect your volume to increase in the medium-term
- Are an experienced business owner with a high level of familiarity with the procedures involved with finding a payment partner
- Have a good credit score and solid credit history
PayPal, Stripe, & Square: Which is Best?
Which payment aggregator you choose completely depends on your business needs. For example, PayPal and Square have identical pricing, but PayPal provides more payment methods for in-person payments compared to Square. Meanwhile, Stripe lowers your fees when you hit a limit of $80,000 per month, but with PayPal, you get a fee decrease at just $3,000 per month. They also offer different payment options depending on the package you get.
At the end of the day, the best option depends on factors like your monthly volume, growth rate, whether you want to accept ACH payments, whether you’re solely e-commerce or also brick and mortar, what products or services you sell, and other factors.
How to Prevent Your PayPal, Stripe, or Square Account From Being Frozen or Shut Down
If you have a payment aggregator account with a company like PayPal, Stripe, or Square, being frozen out isn’t just frustrating – it’s costly. Losing your payment gateway means losing revenue, and the reasons for account freezes vary wildly. However, almost all of them have to do with the aggregator’s perception of your risk level. That means certain companies will be deemed higher-risk from the outset simply because of what they sell. For example, if you only sell digital products, you will be considered higher-risk than if you sell physical products because it’s harder to prove that the product was received by the customer.
Another example is businesses that sell age-restricted products. These carry a higher risk because of underage customers attempting to buy the products, and the possibility of police sting operations to catch vendors selling products illegally.
Aside from your default risk level, you can take a few steps to minimize the amount of risk you present and avoid account freezes:
The more chargebacks your company gets, the more likely your payment partner is to suddenly freeze or shut down your account. You can prevent excessive chargebacks by ensuring all customers see a clear, straightforward return and refund policy before they finalize their purchases.
Mind Your Marketing
Payment aggregators like Square have automated systems for determining your risk. They aren’t always entirely discriminating and can flag companies that use buzzwords associated with high-risk businesses and scams. For example, if you use terms like “get rich quick” or “miracle cure” somewhere in your branding, you run the risk of a sudden account freeze while the payment gateway further analyzes your business. Worse yet, they could shut you out from accepting payments entirely.
Maintain a Good Credit Score
While a good credit score isn’t as important as if you open a merchant account, it still lowers your risk profile (and your risk of being frozen out of your account).
Know Your Contract
Sometimes, accounts are frozen because PayPal, Stripe, or Square believes that you violated some aspect of your contract agreement. By being familiar with all of its provisions and knowing major details, you can make sure that you don’t give them an opportunity to accuse you of breaching it.
Look Out for Suspicious Orders
If you get an order you think is suspicious, taking proactive measures can prevent the situation from escalating to the point of your account being frozen. Look out for unusually large orders, orders with billing or delivery addresses in different countries, and many small purchases coming in separately from the same credit card.
The Final Word
Whether you need a merchant account or a payment processor depends on many different factors. While a payment gateway aggregator might be the perfect fit for your needs today, you may need to get your own account as your company grows. There are pros and cons to each, and every company is different!
If you still aren’t sure which is the best fit for you, GAM Payments can help you figure it out. They’re a boutique payment services provider specializing in high-risk merchants and can get you started with everything you need to start accepting payments as quickly as possible. GAM Payments will help you stop stressing about credit card processing, and focus instead on growing your company!