Payment processing companies play an essential role in connecting merchants to their customers, allowing them to accept credit card payments quickly and easily. When someone uses a credit card to make a purchase, that transaction needs to be processed by an acquiring bank that is a registered member of a credit card network. Since these banks assume full risk and responsibility for transactions, they’re understandably wary when it comes to providing accounts to businesses that need processing services.
How Do Payment Processing Companies Work?
For companies operating in high-risk industries (such as pawn shops, travel agencies, or home decor), it can be difficult or prohibitively expensive to obtain a merchant account from one of these banks. Payment processing companies offer an ideal alternative, connecting high-risk merchants to acquiring banks and credit associations through sophisticated payment portals and assuming much of the regulatory risk associated with handling customer financial information (such as PCI DSS standards). When merchants accept payment for goods or services, the payment processing company evaluates the translation to screen for fraud and then transmits the transaction record to the relevant credit card association, which will then approve or decline it and issue a credit to be deposited in the merchant’s account.
5 Signs of a Bad or Mediocre Payment Processor
Unfortunately, not all payment processing companies are equal. Many payment processors draw merchants in by highlighting all the ways they can help them to generate revenue while failing to mention how their restrictive policies could hold back growth and limit flexibility. Here are a few signs that your high-risk business could be working with a bad or mediocre payment processing company.
- High Reserve Requirements
Many payment processors attach some form of reserve requirement to their merchant accounts, especially when it comes to high-risk merchant accounts. Reserves are a type of fee that processors use to protect themselves from the risk of chargebacks, which occur whenever a customer disputes a credit card transaction (this is distinct from requesting a refund, which is handled entirely through the merchant rather than the credit card company). There are several types of reserves, but most involve withholding a percentage of each transaction to build up a reserve fund that processors use to cover their chargeback costs. Since high-risk merchants often don’t have many options when it comes to obtaining an account, they can easily talk themselves into justifying a payment processor’s high reserve requirements. Unfortunately, many companies take much more money than is necessary to cover their chargeback costs. Even worse, some of them use high reserves to compensate for bad business practices. Rather than working to strengthen their fraud protection, for instance, they may simply be passing the cost of lax security on to their customers.
- Fees, Fees, Fees
While no one begrudges payment processing companies for charging some fees related to their actual services, some processors use undisclosed fees as a way to exploit their customers. Many of these fees are buried deep in merchant account contracts and often escape the merchant’s notice until they receive their first statement and learn that they’ve been billed an account application fee, an account setup fee, or a PCI non-compliance fee. The distinction between a reasonable fee and a “junk” fee is usually whether or not that fee is accompanied by a service that benefits the merchant in some way. Charging clients a fee for PCI non-compliance, for instance, without doing anything to help them become compliant, is a good example of a “junk” fee designed to simply extract more money from the merchant.
- Long-Term Contracts
One of the most crucial details any merchant should consider when evaluating payment processing companies is the duration of the contract. As a general rule, merchants want shorter-term contracts that afford them maximum leverage and flexibility, while processors prefer longer contracts to ensure a predictable revenue stream. Finding the ideal balance between those extremes is often difficult, but some payment processing companies don’t even bother and instead choose to lock customers into lengthy contracts with huge early termination fees. Long contracts and expensive termination fees are difficult to avoid once a merchant has already signed up with a processor, so it’s important to review contracts carefully before entering into that relationship. With so much competition in the payment processing industry, there’s no reason merchants should be forced into accepting terms that are extremely unfavorable to them.
- Tiered Pricing Plans
Payment processing companies base many of their transaction costs on the interchange fees charged by the banks and credit card associations they work with. This fee forms the basis of their processing rate plan, which outlines how much the merchant needs to pay the processor for each transaction. While there are a few different ways of implementing these plans, tiered pricing plans are by far the least favorable to merchants. Originally developed to simplify billing statements, a tiered plan groups several types of credit card transactions into one category and charges the merchant one price for a transaction that falls under that group. Understandably, the most expensive processing rate among the transactions in that group is used to determine the price, which means that merchants will be paying that amount even for less expensive transactions. While most providers have moved away from tiered pricing plans, some still try to promote it by assuring customers it will simplify their billing statements even though it will mean higher average payments for every transaction.
- Poor Support Compatibility Problems
One of the advantages of using a payment processing company is having the ability to implement streamlined software to facilitate credit card transactions. Ideally, these software platforms should be flexible enough to meet a variety of business needs and reliable enough to maintain high levels of uptime and data availability. When things go wrong, a good payment processor has well-trained, experienced staff that can resolve issues quickly and with minimal disruption to the merchant’s business. In today’s competitive payment processing industry, there’s simply no reason to settle for a processor with unreliable technology and poor customer support. Unfortunately, unlike many of the other warning signs, this isn’t always a problem that is easy to spot before the contract is signed. A company could promise a certain level of support during the sales process and then simply fail to deliver. Similarly, a technological solution may turn out to have a variety of problems when it comes to implementation and functionality. Doing research ahead of time and hearing what existing customers have to say is the best way to avoid this problem.
Don’t Settle for Mediocre Payment Processing Services
At AppTech, we believe high-risk merchants deserve more from their payment processing companies. Your business needs a partner who will help you to grow and make the most of new opportunities. That’s why we offer merchant account processing services without unnecessary fees that cut into your revenue. Our innovative portal can be incorporated seamlessly onto your existing website within minutes, or you can use our robust API to connect your existing payment portal to our processing network. Schedule a 1:1 discovery session with our team to learn more about how AppTech can help your business.