If you want to sell your products and services online you need various providers, such as a payment gateway and a payment processor. Together these providers facilitate payments from your customers into your merchant bank account.
Merchant accounts are special business bank accounts designed to accept digital payments, both online and instore. They are time consuming and expensive to set up, and they have considerable fees. There may also be considerable regulatory requirements and documentation required to set one up and maintain it.
While merchant accounts certainly have advantages, for small businesses, new businesses and some industries a merchant account may not be feasible financially, or even possible.
Take for example a person starting up their own business selling bespoke crocheted dragons online. This person may only sell a few units a month and either does not meet the requirements for a merchant account or simply cannot afford one. While we hope this person will one day have a multi-million dollar crochet dragon empire, the business is nowhere near there yet.
There are options for this crochet dragon business, one of them may be the services of a payment aggregator.
Payment aggregators have all the infrastructure in place to accept online payments into their own merchant accounts, and they essentially create “sub-accounts” for their clients. They allow the sellers to use this infrastructure for a fee.
Some of the most well known payment aggregators include Pay-Pal, Shopify Payments and Stripe.
Setting up an account with aggregators is usually quite quick, without the need for large amounts of paperwork. In many cases the seller can be approved more or less instantly, and can be doing business online as soon as technically possible.
The fees charged by a payment aggregator are less than charged in the merchant account model. The fees are frequently fairly affordable and predictable, and the seller is not necessarily locked into a long term contract. Pricing models may include a fixed monthly fee, a transaction fee or a transaction percentage, or combinations of these.
However the aggregator model is only cheaper up to a point. Once you cross a certain volume threshold the costs increase, frequently dramatically enough to be unsustainable. Aggregators also may have a transaction limit, and once you reach that point you will no longer be able to transact. Once your business grows to this point you should be looking at alternative payment models, which may include your own merchant account.
If you use a payment aggregator you do not get your money quickly. There is a hold time which could be anything from 2 to 7 business days, or more. This can be an impediment to predictable cash flow in a business.
Payment aggregators assume a huge amount of risk, and their underwriting is considerable. They are exposed to a massive potential for fraud and chargebacks, and as such have a very high level of security. Chargebacks can get a seller into trouble very quickly, and can result in accounts being placed on hold, or even canceled altogether. Accounts on hold could mean no access to your funds for up to a month. Sellers need to understand what happens to their funds when this happens, and again this can be a problem with cash flow.
Payment aggregators make their money on doing huge transaction volumes at low prices. Because they have such a large customer base, they are not shy to cut customers who they consider to be problematic. Quite frankly they just don’t need those customers, there are a lot more where they came from.
Customer service and support can also be a major issue with payment aggregators. Although it has improved in recent times, clients of one of the major aggregators, for example, complained for years that the company did not make a telephone number available for help, and contacting support was very difficult.
All in all the payment aggregator model can be very attractive for small businesses due to ease of getting started and affordable fees. Organizations like Shopify even supply a one-stop service in all aspects of selling online, from providing the web platform to accepting payments.
However it is not necessarily suitable or possible for some businesses to operate within this ecosystem. There are prohibited and restricted items, services and businesses that cannot be sold using some payment aggregators. This could be a global policy, the policy of upstream providers and partners, or may include particular items in a specific jurisdiction. Sellers should carefully check the restricted items in the terms and conditions of a chosen aggregator.
The transaction limits imposed by aggregators can also be problematic. With small businesses there is often a difficult volume gap between where the aggregator is no longer suitable, but the jump to a merchant account is just too large.
Baer’s Crest we know that it can be very difficult for small businesses, startup businesses and sellers of high risk items/services to find suitable payment solutions. We have a wealth of experience in helping these businesses get their products to market and payments in hand. Talk to us about the right payment solutions for your business.