Merchant Accounts and Payment Processing12 min read
For an online business to thrive you need to take payments easily and securely for both your consumers and you as a merchant.
This is the bane of most online businesses, especially if you’re just starting out. It’s a mind field and for the non-technical entrepreneurs it can be incredibly frustrating when integrating payment processing into your e-commerce website.
There are easier ways to setup payments online using services like PayPal and Stripe. Sometimes these may not be suitable though, especially in the case of Stripe who simply don’t like dealing with nutritional supplements.
The challenges of online payment processing are not just technical though. These days getting a robust payment solution can be difficult even applying for an account, especially for a supplement business that is often classified as “high risk”.
This post will go through some options and solutions I am exploring with Payment Processing for my Super Greens supplement brand.
Why you Need Online Payment Processing?
This may seem like there is an obvious answer to this, but I think it’s good to make it clear what this actually means.
For anyone new to setting up an e-commerce site it can be confusing as there are a number of parts to selling online. Having decided on which e-commerce platform to use the next part is setting up payment processing.
Integrating a way for customers to pay is usually the last part of the e-commerce puzzle and takes place outside of your website. This seems counterintuitive as from a customer’s perspective it all happens on your site (on most occasions depending on your payment method), but the actual processing of payments typically take place outside your site.
The reasons for this are mostly due to security. As a merchant you don’t have the headache of securely managing and storing credit card details.
The other important reasons are avoiding having to keep up with changes in payment processing rules – and there are a lot of them!
In order to process customer payments on your site there are three critical parts to processing payments online.
Merchant Accounts, Payment Gateways and Payment Processors Explained
It can be confusing the know the difference between merchant accounts, payment gateways and processors and so I thought a quick definition of these two would be helpful:
This is the step in-between your e-commerce store and the payment processor that receives the payment from the customer.
It’s the payment gateway that securely takes the customer’s credit cred details and sends them to the payment processor.
Using a payment gateway means you don’t have the additional concern with security as the payment gateway take care of this part. The gateway encrypts all the data from the customer to the payment processor without them being compromised on the way.
The payment processor is what connects both the merchant account and the payment gateway together – they are the financial institutions.
The processor in simple terms takes the information from the payment gateway and checks its correct by validating it first and then executing the transaction. If successful or not, the payment processor informs the payment gateway of the transaction status and all being well deposits funds into the merchant account.
Merchant accounts (or MIDs) are a type of bank that allows businesses to accept payments by debit or credit cards online. Having a merchant account is essential for receiving funds from a payment processor.
Once funds have cleared into your merchant account you can then move this into your business account.
Often applying for merchant accounts can be a headache and often can be troublesome in getting approved. The reason can be due to the type of product/service you’re selling, geographical location (you or your company) and your trading history.
There are alternatives to merchant accounts such as PayPal and Stripe, who basically act as both the payment processor and merchant. Such options may not be suitable for all types of businesses and often the fees are higher.
For more in-depth information there is a great article on the eCommerce Platform website here.
Merchant Processing in 2018/2019
It’s getting harder to get merchant accounts and payment processing these days. A big issue has been the prolific abuse of re-billing and so called “free trial” scams that have caused problems for consumers.
The abuse of this model has led to much stricter banking and processing requirements…
Having a great broker can really help with getting set up with merchant processing and would recommend this approach if looking for solutions beyond payment gateways, like PayPal/Stripe.
Step by Step Process for Online Payments
When I first began to understand online payment processing, I remember thinking how confusing it seemed. So, I thought it would be helpful to show the step-by-step process of taking payments online. This will highlight the different companies involved in each step of the process.
Applying for an Merchant Account
You can apply directly for a merchant account of course, but it can help if you go through a third party to assist with merchant and payment processing.
I have been introduced to a couple of contacts (https://www.cascadiapay.com/) who can assist with the application process and recommend solutions that best fit my processing needs. They also navigate the mind field of what merchant and processing companies are looking for in terms of me as a merchant and the current regulations.
If you’re planning or are selling in what’s considered a “high risk” category (see below) then using a third-party processing service company.
High Risk Categories:
Adult – If Legal, Gaming – If Regulated, Automotive Parts, CBD, Clothing, Continuity/Recurring Billing, Jewellery, MLM., Nutraceuticals (this is us!), Teeth Whitening, Website Hosting/Monitoring, Credit Repair/ Financial Counseling, Dating, Direct Marketing, E-Books, E-Cigarettes, Electronics, Pharmaceutical – If Licensed, Seminars, Tech Support, Ticket Sales and Travel.
When you first start making payments online the merchant processor will limit the monthly volume you can process, this is to reduce their liability and risk of fraud.
The merchant processor is liable for funds to customers should there be a bunch of chargebacks and so manage the scale of liability with a monthly limit to how much you can process.
When you get more transaction history and they can see your number of refunds and chargebacks are within acceptable ranges, your monthly limit can be increased.
A transparent conversation with your merchant processor can help to manage expectations both ways. So, if you know sales volume will be going up maybe due to marketing efforts or seasonal variations, then ensure monthly volumes are raised accordingly.
The last thing you want is to not be able to process those sales!
Merchant processors will retain a percentage of the sale for a certain period of time to safe guard against potential fraudulent transactions or chargebacks. These are typically are between 5-10% of the sales for a rolling 6-month period. So, sales in say January 2019 will only be released in July 2019.
Payments from the merchant processor to your company bank account are not immediate but are made usually 3-5 days after the transaction takes place.
When selling anything online you have to be aware and vigilant when processing customer payments. Customers can dispute transactions, called Chargebacks, for a number of reasons and in some cases in error or worse for disingenuous reasons.
When a chargeback occurs, the merchant reverses the transaction and the customer receives his or her money back. On top of this the merchant processor charges a one-off fee typically around $35-40 USD.
Whilst it’s the nature of doing business, Chargebacks have to be monitored as get too many and you risk losing your merchant processing account.
Visa and Mastercard require chargebacks to be under 1% and so will be heavily scrutinised by your merchant processing company.
Reasons for Chargebacks
There are a number of reasons that chargebacks can occur but here are the most common reasons for disputed transactions:
- Items not shipped or received – Customer has not received their goods and sometimes can prematurely trigger a chargeback without reaching out to the merchant. This can sometimes be due to shipping delays or the order being left in a different place or on rare occasions stolen.
- Transaction not recognised – The customer may not recognise the merchants name on their statement or have completely forgotten about the transaction.
- Unauthorized transaction – A case of outright fraud where the customers card has been either cloned or stolen.
It can be easy for customers to initiate a chargeback and some banks make very little checks into the authenticity of the dispute. This can mean that you ALWAYS have to be defending chargebacks and for some disputes can be difficult to win.
How to Reduce Chargebacks
There are a couple of straight forward strategies you can implement do to reduce customer chargebacks.
Firstly, ensure that it’s easy for customers to know what they’re being charged for. So, what I mean by this is making sure the name that appears on a customer’s bill matches the product or service they bought.
Make sure that you use a “Doing business As” (DBA) name that matches accurately. A little tip here is to use the URL of your store as the merchant name and even include your phone number!
Secondly, be transparent with your billing and avoid undisclosed fees. This will not only annoy your customers but increase the likelihood of them triggering a chargeback.
You should always keep on top of any Chargebacks and understand how to respond to them. Whilst this is out of the scope of this article, I will follow up with a dedicated post on this.
Cross-Border Payment Processing
The number one advice is to have payment processing in the country you’re looking to have customers. This may not always be possible but if the majority of your customers are in the USA, then it makes sense to have US merchant processing.
What’s the reason for this?
It comes down to the customers issuing bank and the restrictions placed on making payments online. Previous experience has shown this to be caused by concern over cross-border payments to overseas countries.
Basically, it’s the concern by the customers bank over potential fraudulent transactions that they could be liable for in the future. So, they simply prevent the transaction from occurring in the first place.
It may be a nice “protective” feature for customers in worse case scenarios but for you the merchant a real pain in the behind.
PayPal and Stripe
Everyone has heard of PayPal and for consumers the experience tends to be positive as they are very customer friendly.
For merchants the story is mixed with some companies reporting a great experience, on the flip side there are the horror stories of locked accounts with funds frozen for upwards of 6 months.
PayPal and Stripe may not be a suitable fit for some online businesses too as some categories are not supported. Many of the sectors considered “high risk” will struggle using these payment options.
Merchant Account and Payment Processing Redundancy
You will always want to have more than one merchant account and payment processing setup. This can serve two purposes, most importantly is to have redundancy and always having a backup payment processing account if the primary one goes down.
The second issue is to split the load between merchant accounts especially if you’re running close to your monthly limit.
Recommended Payment Processors
- AsiaBill – An option if you’re based in Asia but currently aren’t accepting nutraceutical processing.
- Payvision – An option and one I am exploring. Although I have been pre-approved for this account, they are taking a long time to set up the account (so far 6 weeks!).
- PayPal/Stripe – Great choice for digital products and whilst PayPal can be used for supplements it’s not a good idea to rely just on this method of payment. PayPal are known for restricting accounts and holding funds for months at a time due to what they consider a minor issue that can be easily resolved.
TO BE UPDATED: When I get more information I will add to this list.
The Bottom Line
Applying for a merchant account and payment processing online can be difficult when first starting your e-commerce journey. I used a previous contact to help me get setup but still took some time due to the nature of the products I am selling – supplements.
Integrating a solid method of payment processing is without doubt essential for running an effective e-commerce story and ultimately make money online.
There are a number of moving parts in payment processing that aren’t clear at first, hopefully this article outlines the process more clearly.
The process for getting my e-commerce store setup with a merchant account and payment processor hasn’t been straight forward for reasons highlighted above. The payment gateway was the most straight forward thanks to a previous business contact.
What is clear is the need for applying as soon as possible to get your merchant account and to ideally have more than one payment method. A good secondary payment method could be PayPal, or Stripe if your business sector is permitted, but ideally another merchant account as a backup.
I can recommend having a conversation with Andrew at Cascadia Pay. These guys have been supporting clients online with a range of services from web development, email management, online marketing and payment solutions.
Give them a shout at https://www.cascadiapay.com/ – please mention LifeHackerGuy to get VIP service!