Merchant Accounts and Payment Processing

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 set up payments online using services like PayPal and Stripe. Sometimes these may not be suitable though, especially in the case of Stripe who simply doesn’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 takes 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:

For more in-depth information there is a great article on the eCommerce Platform website here.

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 use a third-party processing service company.

Monthly Volumes

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!

Rolling Reserves

Merchant processors will retain a percentage of the sale for a certain period of time to safeguard against potentially 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.

Remittance Payments

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.

Chargebacks

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 scrutinized 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:

It can be easy for customers to initiate a chargeback and some banks make very few 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 straightforward 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 customer's 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.

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 set up 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 making 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 set up with a merchant account and payment processor hasn’t been straightforward for the reasons highlighted above. The payment gateway was the most straightforward 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.