Episode 11: Beyond Stripe, Square, and PayPal: Finding the Right Payment Processor for Your Business

Did you know that some businesses are considered "high risk" by payment processors, making them more likely to face sudden account shutdowns and frozen funds? In this episode of The Payment Guy, Frank shares why certain industries are labeled high-risk, the pitfalls of popular payment processors like Stripe and PayPal, and the steps you can take to secure a reliable payment solution for your business. If you've ever worried about losing access to your funds overnight, this episode is a must-listen!

In this episode, these questions and topics will be covered:

• 00:50 – What makes a business "high-risk" and why banks and payment processors flag certain industries. 
• 06:49 – How to find a payment processor that understands and supports your business and why working with a payment consultant can help save you time and money. 
• 08:11 – Common mistakes merchants make that lead to payment processing issues and what you need to know about working with high-risk processors.
• 16:38 – Proactive steps to ensure uninterrupted payment processing and financial stability.

Running a high-risk business doesn't mean you have to struggle with payment processing issues. With the right knowledge and partners, you can build a strong foundation for your business and keep your revenue flowing smoothly. If this episode gave you valuable insights, please leave a rating and review and consider sharing it with a fellow business owner who could benefit.  

Connect with PayDiverse:
Instagram: https://www.instagram.com/paydiverse
Website: http://www.paydiverse.com
LinkedIn: https://www.linkedin.com/in/franksena

Transcript

UNKNOWN: 0:00

Thank you.

SPEAKER_00: 0:05

Hey, welcome to The Payments Guy, your ultimate guide to demystifying the confusing world of merchant payments. I'm Frank Senna, your host, a merchant payment specialist with nearly a decade of experience. In each episode, we'll break down the toughest challenges in the payment space so you can be better informed when navigating payments for your own business. From minimizing the impact of chargebacks, avoiding funding issues, and ensuring you're never stuck without the ability to process payments, we'll help you make smarter decisions and grow your business. Let's get started. Many businesses rely on Stripe, Square, or PayPal until suddenly they don't. What happens when your payment processor shuts you down, holds your funds, or refuses to work with your industry? Today, we're breaking down the alternatives. The convenience of payment facilitators like Stripe, Square, and PayPal makes them popular payment solutions. But many businesses don't realize that these platforms have strict risk policies that may not support their industry until it's way too late. Certain industries and business models don't fit a Payfax risk tolerance, which can lead to their account being terminated and their funds being held, which is a nightmare for any business owner. Today, we'll explore which businesses are considered high risk, why Payfax don't work for certain businesses, and how to secure a reliable payment processor for your business. Let's talk about what it means to be a high risk business. A lot of merchants don't realize that a merchant bank might consider their business to be high risk. What it all comes down to is the risk of chargebacks or cardholder disputes. You guys know what a chargeback is. That's when a customer, a cardholder is looking at their credit card bill and they see a transaction that they might not recognize. They call up their credit card company and say, Hey, I don't know what this is for. Or the credit card company says, no problem. We're going to refund you and we'll take it up with the merchant bank. So what happens in this case is that the merchant bank collected payment for that transaction from the cardholder. They took out their fees and they paid the merchant for the remainder. But now Visa or MasterCard or Amex or Discover comes back and says, hey, you have to refund this cardholder over here. The merchant bank, even though they already paid the merchant for that transaction, now has to pay the cardholder back for the transaction and the merchant bank got screwed. So when merchants are prone to getting more chargebacks, the bank considers them to be high risk because there is a risk to the merchant bank of financial loss. Certain industries are flagged as high risk based on what they're selling. CBD, nutraceutical supplements, online coaching, travel merchants, merchants who utilize a subscription billing model, which could be adult content merchants. There are credit repair merchants. There's multi-level marketing merchants. There are actually hundreds of different kinds of verticals that are considered to be high risk. And they're completely unrelated to each other. The common denominator here is that they are more likely to incur chargebacks. And that's why your business could be considered a high risk business. It's usually chargeback rates. They could also be regulatory issues like the CBD space, for example. It could be that there's a higher potential for fraud or refunds. A lot of businesses don't even realize their risk level until their account with Stripe or Square or PayPal frozen or terminated. Platforms like Stripe Square and PayPal, they are payment facilitators and they don't like to work with high-risk merchants. So if you're prone to getting chargebacks, these are not good platforms for you to work with because ultimately they're going to shut down your account. Why might Stripe Square and PayPal not be a good solution for high-risk businesses? The first thing is that these platforms utilize automated approvals, but they don't actually do real underwriting when they're considering letting you use their account. So what this means is they will look at your credit score, they'll look at the financials that you provided, like your bank account statements, and then they'll allow you to process payments, but they're not really doing a deep dive into your business, your business model. And once you start processing transactions, They take a look then, and at that point, they might say, oh, these are prohibited products, or no, we don't like this business model, so we're going to shut it down. So if a business model does not align with these Payfax risk parameters, then they're going to shut it down. These payment platforms like SquareStripe and PayPal, they are monitoring accounts constantly and reevaluating them. A sudden sale spike or an increase in chargebacks will trigger a risk review, even if you've been with the platform for a couple of years. So there's a lot of things that can cause a risk review, but these guys are very quick to hold your funds and to close your account and limiting your ability to process payments. How do high risk merchants get matched with the right processor who understands their business? Each merchant's risk level is unique because it depends on a bunch of factors, including the industry of the business, what kind of billing model that the business is using. For example, are you offering a free trial or a subscription, which is like a passive billing model where the cardholder can sense one time at the beginning that the merchant can process payments and bill them. And then every month after the merchant is just passively billing that cardholder. And then your risk level is also determined based on your processing history. So if you have three months of processing history that does not have chargebacks that are high, you're more likely to get approved with a merchant bank. Not every bank works with every business type. So, for example, if you do your personal banking with Citibank, for example, you could go to Citibank and say, hey, I'm starting an e-commerce business. I'm selling watches online. The Citibank is going to take a look at that and they're probably going to say, that's a little too high risk for us. We're not interested in working with you or collecting payments for you. But where does a merchant go? A lot of times these merchants don't know which banks are willing to work with a high risk merchant. So high risk merchants have limited options based on which a banks are willing to take their business. But an experienced payments consultant like me can help you save time, reduce getting your application declined, and help make sure that you're matched with a bank that understands your business model and your business and works with other businesses like yours. And this way, you're not going to have to deal with the headaches of PayPal or Square or Stripe just pulling the plug on your account. Some common pitfalls that you want to avoid when choosing a high-risk processor, including not really understanding the terms of the merchant account. So for example, a lot of these high-risk processors will have a reserve requirement on the account. So what this means is in addition to the fees that the bank is collecting after they collect payment and before they pay out your funds to you as the merchant they might hold on to an additional 5 or 10 or sometimes 15 percent in what is called a reserve account and this reserve is actually it's your funds but the bank has custody of them and they hold on to that 10 percent as a way of managing risk themselves so a lot of merchants don't understand what a reserve is or why it might be required sometimes we can negotiate better reserve terms, like we can reduce the reserve requirement from 10% to 5%. But this really depends on a bunch of factors, which I'll go into on another episode. But it's really important that you kind of understand how high risk banks work, and how they manage risk, because otherwise, you're going to get some nasty surprises that you might not expect. And those reserve funds can impact your cash flow, because that's the next 10% that they're withholding. So another thing you want to be conscious of when applying for high-risk merchant accounts with a high-risk merchant bank is you don't want to apply to too many banks all at the same time. Some banks are very sensitive to the number of recent credit pulls that a merchant has had on their credit. So what this means is part of the underwriting process when you apply for a merchant account is that the bank is going to pull your credit. They just want to make sure that you pay your bills and that you can cover any overages or expenses or chargebacks that might come in or any losses. So some of these merchant banks will look at the number of recent credit pulls and if they see, oh, this guy submitted applications to 10 merchant banks in the last week, that is a red flag for them. them and they will say, no, we're automatically declining this application. We don't want to work with this merchant. It's just it's too risky for us. So there are a handful of merchant banks that are sensitive to credit polls and you need to know which ones to apply to first so that there's only one or two polls on your credit versus five or six or seven if we're applying to multiple merchant banks. So that's where a working with a high risk merchant consultant like myself can be really helpful because we know where to submit to first and we always come up with a submission strategy for our merchants. Make sure that we're applying to the right banks that are going to fit your business and minimize getting your accounts declined or your applications declined or wasting any credit pulls, any unnecessary credit pulls. Another thing to be conscious of with high risk merchant banks is is that their fees are gonna be higher than a low risk merchant bank. And this can be a turnoff for a lot of merchants and say, oh, I'll just go with Square Stripe because it's a flat 2.5% or whatever it is. The problem is once you start using Square Stripe or PayPal, they can pull the plug on your ability to collect payments and they can hold on to your funds. So yeah, you might've saved some money, but now you can't process payments at all because Square or Stripe doesn't work with high risk merchants and they're going to hold on to all the money that they've collected for you already. So it ends up being more expensive in the long run if you look at it that way and the cost of doing business. So it's really important that you kind of understand from a merchant bank's perspective what the risk is associated with your account and how you can help to manage that to maintain a good relationship with your payment processor. Another thing to keep in mind, too, is that these high risk processors may have a funding delay of one or two days, meaning that if you collect payments on Monday, you might not receive the funds for those until Wednesday. The reason is that's another risk mechanism, another way of managing risk. So if the bank can hold on to those funds for just a little bit longer, that means if there are any major charge issues that come up that the bank has more of your funds to help cover those costs. So it's important to understand the funding times and that that can vary. And also keep in mind, once you've established history with a merchant bank, we can negotiate a lot of these things to be more favorable for you. But first, you have to build some history with the bank. They have to get to know you. If you think about it, if you were going into business with another business owner, you'd want to make sure that you're not going to be set up to lose money and that you're protecting yourself as well, right? So another thing to keep in mind is your billing model can affect the risk profile that the bank will assign with your business. So for example, we talked about subscription billing models already. A subscription billing model means that you collect the car information from your customer around the first transaction and then the customer gives consent that you can bill their credit card every month or every two weeks or whatever the frequency is. This passive billing model where you're just going to bill them every month without having the customer have to go and type in their credit card information each time, that is inherently riskier. It's more likely that the card holder will dispute the charge. So if you don't need to have a subscription for your business, then you might want to consider removing that subscription element or a free trial element. Those are things that make your business seem riskier to the banks. So that's something to be mindful of when applying for merchant accounts. I worked with a coaching business that was utilizing Stripe and out of nowhere, Stripe I pulled the plug on them. And the business owners struggled to find a new provider until they found a high risk friendly processor. My company, we are partnered with over 40 different high risk merchant banks. So we do have connections with all of the high risk banks out there and we know which ones will support which types of businesses. So it's always good to work with a consultant who can help you to get matched with the correct business. We also worked with a CBD merchant selling CBD online. And without realizing it, he violated PayPal's acceptable use policy. So PayPal pulled the plug and held his funds for six months. And he wasn't able to get that money until the risk of chargebacks was gone. So it caused a huge problem for this guy because he was not working with a processor that understands his business model. Another example I had was an online coaching business was using a recurring subscription model. It got flagged by Stripe as high risk and their account got shut down. But we were able to match them with a high risk bank that understands their business and since then they have been processing transactions without any issues. So a A couple of actionable insights to take away from this episode are you should really understand your risk classification as it's assigned by a merchant bank. If you're considered high risk, you need to understand what that means, how it impacts your business, and who you can work with, which banks are going to be willing to work with a high risk merchant. We always recommend that you work with an expert consultant to avoid any unnecessary declines on your applications and get connected with the right processor faster. My company, PayDiverse, this is what we do. This is our bread and butter. We connect merchants with high-risk banks that understand their businesses so that merchants can focus on selling and making money. And we handle the payment stuff for them. And our last piece of advice is to implement chargeback prevention tools. These are third-party tools that are available. can subscribe and they basically will help minimize chargebacks or they can even automatically refund a cardholder before a chargeback is even submitted, which really can reduce chargebacks. And again, you might say, well, I don't want to refund people just because they asked right away. Well, it's much more expensive to lose your merchant account and not be able to collect payments at all than to concede some of these refunds. So it's something to consider the cost of doing business. You want to ensure that your ability to collect payments is never disrupted because that can really cripple a business. If you need help finding a reliable high risk payment processor, we would love to help you out. Please check out our website at paydiverse.com or you can email us at support at paydiverse.com. We are experts in merchant accounts and payment processing solutions for high risk merchants. So if you need help, please don't hesitate to reach out. We would love to work with you.