Has Your Business or Charity Outgrown Square or Paypal?

Or Amazon Payments, Stripe, Google Checkout, and others? There are some things you need to be aware of.

These days a lot of small businesses, entrepreneurs, and small charities rush to sign up with Square or Paypal or Stripe or some other service that allows them to accept credit cards with just a simple sign-up and a standard fee for each transaction. However, there are some very real, yet not-all-that-obvious dangers in using one of these services that those people probably are not aware of. Hidden fees, transaction limits, account deactivations, poor customer service, and more are all potential issues awaiting the unsuspecting business owner. Then there is the very big question of when using one of these services instead of a merchant account services provider actually costs more money.

These services, like Square, Stripe, or Paypal, are known as “aggregators” because they basically take all the transactions from all their customers and group (aggregate) them together to run through their own umbrella merchant account. Their marketing makes it sound like this is the best thing possible for any size organization since sliced bread. Don’t believe it.

To be perfectly honest, there are some situations where an aggregator may be ideal for your organization.

If you are a hobbyist who only sells maybe $1,000 a month on Etsy or Amazon or Ebay, an aggregator can be a good choice. If you are a brand new business or a local non-profit who doesn’t have a clientele yet, an aggregator may be an OK way to start accepting credit cards. If you have a small seasonal business, like say a three-man lawn mowing business, an aggregator could work for you. However, there are still some hidden dangers buried in the user agreements – and in those email updates to the user agreement that you never read.

Not all aggregators are alike, just like not all merchant services providers are alike, so any examples of problems I give are meant to be examples of what kind of policies to look for rather than a condemnation of a specific company.

The first thing you may not realize about an aggregator is that when your customer sends payment funds to your aggregator for you, that money does not belong to you. The money the aggregator receives from bank transfers or payment card transactions is the property of the aggregator. If the aggregator suspects fraud, or if you violate the user agreement with the aggregator, the aggregator can hold your money for as long as they want, up to and including indefinitely.

Similarly, since aggregators don’t run credit histories on their applicants, they face significantly more risk of fraudulent transactions. Aggregators tend to be far more cautious, almost to the point of paranoia, about fraud. Many of the aggregators limit transaction amounts to somewhere around $400. If a merchant’s transaction exceeds that amount, the aggregator’s automated systems could (and in some cases, will likely) put a hold on the funds for up to 30 days. One of the aggregators, let’s call them “Rectangle,” is apparently using algorithms to flag “suspicious” transactions. When a transaction is flagged, “Rectangle” either will try to contact the merchant for more information, or they may just deactivate the merchant’s account without notice. The latter tactic allows Rectangle to advertise that they don’t hold account holders’ funds – because the merchant whose funds they are holding is no longer an active account holder; they have been deactivated.

Additionally, the credit card brands (Visa, MasterCard, Discover, and Amex) have set a limit of $8,000 per business per month for transactions from an aggregator. Can you imagine having your account closed and having no ability to accept payment cards, without warning, because some mathematical equation you didn’t even know about flagged one of your transactions? Heaven help you if it’s during a busy season. Imagine the emotional roller coaster of getting that dream sale or contribution, only to have the funds put on hold or your account deactivated.

Many of the aggregators advertise a flat rate for each transaction. While this is a great marketing ploy, appealing to those who don’t like accounting, it leaves out one important fact. Pricing a credit card transaction is ridiculously complicated. If you combine all the different credit card brand transaction fees, there are probably over 300 of them ranging in charges from .05% to over 3%. That doesn’t include a fee to the card brands and other assessments. In order to be profitable, the aggregator’s flat rate fee has to be high enough to cover the average of all those fees for all the transactions they process for everybody, plus the aggregator’s markup. That could easily be increasing your transaction cost by 20% to 30% or more if you mainly process transactions with smaller fees.

Because aggregators have to worry about having the cash to cover the potential maximum fees, they tend to be a bit slow to actually send the funds to the merchant, even if there are no problems. Our customers have told me of at least a half dozen aggregators who routinely took 7 to 10 days to send them their money. That can be really hard on a small or start-up business. Merchant services providers are generally far more prompt than that. As an example, our merchants normally receive their funds within 48 hours.

From what I’ve told you so far, you might think the ideal is to use an aggregator if you are selling items with relatively small price tags. That is not necessarily true, either. At least two of the most popular aggregators use a fee structure of 2.9% plus $0.30 per any transaction. If you are selling a refrigerator magnet for $3, this fee structure would cost you about $0.387 for the transaction. And your standard 100% markup just fell to 74.2%. Of course you could impose a $5 fee for credit card transactions below a certain amount, but that just turned your $3 refrigerator magnet into a probable $8 No Sale.

You may also find that the advertised flat rate has an asterisk stating that the rate does not include transactions that are keyed in or transactions over a certain dollar amount. There may very well be higher fees for either of those circumstances. As illogical as it may seem, some aggregators actually charge higher fees on higher transaction amounts.

There is one last “killer” factor I should mention – Customer Service. I looked at a fair amount of aggregator websites before I started writing this. Some of them had only an email address for Customer Service, some had a telephone number you could call, but only during certain hours. I actually saw one that had a Customer Service number you could call but only between 6:00 AM and 6:00 PM Pacific Daylight Time. That’s tough luck if you are open late. I know for a fact there are a number of aggregators where if you call in the evening someone in another country will answer and introduce themselves as being named Sara or George. Really? I’m not saying they may not know what they are doing, but can we at least make me think they are being honest with me from the start by using their real names?

Let’s get real about the need for great customer service: if your business is suddenly having problems accepting credit cards, you are losing sales. It doesn’t matter what the problem is, you need to pick up the phone and get it fixed ASAP so you can continue doing business. If there is no phone number to call, or if it is after their limited hours, you may end up turning your laptop or cell phone into a projectile. You are certainly not going to sleep well that night. That’s one reason why we have a 24/7/365 Customer Call center located in the USA. Even if it is an electronic or mechanical problem on your end, that we may not be able to fix over the phone, you’ll at least know someone is aware of it and working on it and you may be able to get a decent night’s sleep.

I’m not going to tell you that everyone should dump their aggregator and find a merchant services provider. Yes, we would love to do business with you and help you grow your business with all of our services, but only if it is right for you! I’m not even going to tell you that there is some magic threshold where if you accept more than a certain dollar amount of transactions or process a certain volume of transactions you should switch. This business is far too complicated for that simple of an answer. The closest I’m willing to do is to tell you is that if you are processing $30K to $40K in credit card transactions each year it’s time to think about doing some serious number crunching. EPS and other merchant services providers have the capability of tailoring a pricing structure to your needs and you may well be better off financially than using your aggregator. It’s certainly is worth your time to figure out if you’ve reached the point where you should switch – or how much further you have to go before you’re there. You’ve worked too hard to build your business to give away money.