Credit Card Processing for Startups

Online commerce, electronic payments, and credit card processing have become fundamental aspects of today’s economy. As a result, almost all startup companies need to decide, how they are going to process payments for themselves or on behalf of their clients.

People often tend to ask questions like: “What are the best payment processors?” (sometimes “What are the best online payment processors?”), “What is the best payment processor for accepting micropayments?”, “What is the best processor for honest pricing?”, “With regards to fees, what is the best payment processing service for a SaaS company with a low monthly price ($5 per user per month)?”, “What is the best Payment gateway for Java which can only validate cards without posting any charge on the card?”, “What’s the best payment gateway for an online factoring invoices marketplace?” etc. In fact, there are no universal answers to these questions, as the situation is a bit more complex and context-dependant. In our article we are going to explain why, and provide some guidelines, which startup businesses can follow to find optimal solutions for themselves.

As we wrote in “Payment Gateways” series, when you are choosing a potential solution to implement, before you look at credit card processing costs, associated with a particular gateway, you need to understand, whether it supports all the functionality you need.

Let us list the fundamental questions, which are relevant for you as a startup company.

Fundamental questions regarding credit card processing

  • Do you need to process payments for yourself only, or do you need to process payments on behalf of your clients (i.e. do you need to function as a payment facilitator)?
  • Do you need only card-not-present (CNP) solution for online recurring payments, or is card-present solution (EMV) also necessary?
  • Do you need to support multiple currencies or not?

In many cases before thinking about your pricing options, you need to verify, whether the listed functions are supported, and whether the gateway supports your MCC code. Beside that, if you are trying to get a merchant account abroad, you need to check, whether you can get it with the gateway you are planning to partner with.

For example, if you are an Indian merchant, trying to get a merchant account in the US, you need to check, that you have all the necessary documents to be underwritten in the US. In the very least you must have a tax ID in the US.

Then (as we’ve mentioned), you need to verify the MCC code and check, if the logic you need is available within the gateway.

As a result of this analysis, it may turn out, that your choice of payment gateways/processors can be reduced to one or two payment platforms.

Reality check

Before addressing a particular payment gateway or processor, you can also perform a “reality check”. Keep in mind that a processor’s revenue amounts approximately to 1% of your processing volume. So, if your processing volume is $ 5000, the processor gets $50. For such a modest reward processors will not offer you complex or customized solutions.

True, Stripe and PayPal may seem to be costly solutions for your business. However, if your processing volume is not very high yet, they may be the only solutions available in your case, because they have a well-developed infrastructure, allowing them to work with the so-called micro-merchants. Larger processing companies may not have such an infrastructure.

Card-present solution

If you need a card-present solution, it is important to analyze the technology you are planning to implement, the upcoming integration, and the cost of devices you are going to use. You should also verify, whether you have all the necessary EMV certifications.

PayFac model

If you need to function as a payment facilitator and issue merchant accounts, then you should pay attention to merchant onboarding and underwriting rules, adopted by your potential processing partner. You should also check, whether your potential partner has some API in place, which allows to simplify onboarding of new merchants.

Availability of starting capital

Being a startup, you may have the funds, allowing you to rent a payment platform for your business needs. If you have both money and time, you can even develop a processing platform using your in-house development team. Finally, you can license an existing white-label payment gateway solution, as we explained in our previous articles.

In these latter cases you can expect lower processing costs, but you will have to pay for support of the necessary infrastructure.

Conclusion

If you have neither the starting capital, nor processing volume, you should not try to find the “cheapest” credit card processing solution, because you are getting what you pay for. If the profit the processor gets from your transactions is low, you are going to be treated accordingly.

In these cases it might be more secure to pay slightly higher processing fees, but partner with a company, which offers robust technologies and has no funding delays. If you save 25 cents on a transaction, but then find that your account is suddenly frozen or closed, it is not a preferable option.

Is it Time to Switch to a New Payment Gateway Solution?

As merchant services industry is rapidly moving forward, new payment gateway solutions are emerging. These new solutions often offer new functionality. They are more flexible and capable of satisfying the new needs of merchants and resellers/ISO/Payment Facilitators.

The purpose of this article is to outline the main signs, indicating, that it might be appropriate for you to switch your current payment gateway solution to a new one. While some of these signs are relevant for all merchant services industry players, others apply to specific groups, such as merchants or intermediary entities (ISO and payment facilitators).

Let us review some of the signs, indicating that it is time to search for an alternative payment processing platform.

  • Processing costs and fees – your cost of processing is too high and the processing fees are being re-adjusted even though your volume has significantly grown. You may have started with small processing volumes, but now your volumes are much higher, so your current transaction processing cost is significant, because the fees you are paying are the same as before. If you are not able to re-negotiate transaction pricing with your current processor, then you should look for alternatives.
  • Funding delays – it takes too much time to get the funds you are entitled to. The funds are arbitrarily frozen and delayed, while you have a good processing history, there are no problems associated with your account and no particular reasons for suspicion and funding delays. If you are unable to resolve the issue with your current processing partner (i.e., your processor cannot provide a suitable solution), then, perhaps, it is time to look for a new one.
  • Lack of multi-currency support – you need to accept payments in multiple currencies, but your current payment platform does not support multi-currency payment processing. While you can use a different payment platform to handle additional currencies, it might also make sense to find an alternative payment gateway solution that will handle everything with one interface (from one entry point).
  • Lack of the necessary features – when you have started, your processor had a satisfying feature set, but since you started using the existing solution, your needs have changed. Now there are certain features, that you need, that are not available within your current payment processing platform. For example, traditionally, you worked with e-commerce transactions, but now you would like to handle card-present payments as well. You need to work with payment terminals and offer new solutions to your customers, but your payment gateway provider is unable to support the new technology. Or, perhaps, you would like to enroll in 3D secure program, in order to improve transaction security, but your provider does not support the respective features.
  • Reporting issues – reporting is not customizable enough. I.e., the reports are not presentable in the format that you need. There are no ways to export raw data in a format, allowing you to manipulate it. Some of the data, you would like to be able to see, such as details of processing costs is not available, etc. Perhaps, as a result of unclear reporting procedures, you experience problems while trying to reconcile your deposits properly.
  • Integration inconvenience – it is possible, that the technology, offered by your payment service provider, is not the most modern (up-to-date) one. While you managed the initial integration, supporting it imposes unnecessary costs on you. You might consider looking for an easier and more natural solution.
  • Limited branding functionality – you would like to present payment processing interface to your customers under your own brand. However, your current payment platform does not allow you to do that. As a result, lack of required branding functions limits your marketing capability and hampers your relationships with your customer base.
  • Merchant onboarding problems – as we have explained in our previous article, merchant onboarding problems are extremely relevant for payment facilitators and ISOs. More and more systems today offer real-time merchant onboarding and provisioning, which is a critical feature. It becomes one of the driving factors of competitive advantage in the merchant services industry. You may be used to submitting paperwork manually and waiting for a couple of days for the MIDs do get issued. However, your customers are demanding a more streamlined process. If your current payment gateway solution is unable to accommodate it, you may consider some additional or alternative options.

Conclusion

If some of the listed issues resonate with the pinpoints, that you have with your current payment processor, perhaps, you should consider some changes to the existing payment gateway solution, or even switching to a new one.

How to Streamline Merchant Onboarding and Provisioning

This article is primarily targeted at payment facilitators and payment aggregators. As we wrote in our previous articles, in order to process online payments, an entity must obtain a merchant account. This process involves two aspects: underwriting (sometimes also called MID provisioning) and onboarding. In this article we are going to describe, how to facilitate the process in today’s payment gateways, and explain, how payment facilitators can simplify merchant underwriting procedures.

Traditional merchant onboarding

Traditionally, merchant onboarding process was performed manually. Any potential merchant had to complete a paper form and prepare some documents, which were submitted to the underwriter (underwriting bank). If underwriting was successful, the underwriter sent back a MID, which was then configured within a payment gateway.

Some payment systems went beyond manual process. They offered future merchants to complete their merchant application forms online. After the form was reviewed by the underwriter, a so-called “download sheet” (“tier sheet”, “VAR sheet”) was returned to the merchant by e-mail. The sheet contained the merchant ID as well as other parameters needed to configure the payment gateway for processing.

The described onboarding procedure is not very efficient. The key drawbacks are as follows.

  • Data from paper forms has to be manually input into the computer system. This requires considerable effort of many physical operators.
  • The process is time-consuming. In many cases when the process is handled on paper, the process would take several days. Online forms, in some instances simplify the process, but it could still take 24 hours or more to get the MID set up.
  • When the MID is set up, the payment gateway still has to be configured manually.

On top of that, any part of the process, that involves human participation, increases the possibility of human errors, causing further delays and pushing the moment when the merchant can start transaction processing even further away in time.

Improved merchant onboarding practices

More and more software companies, that include credit card processing as part of their product offering, such as POS systems and restaurant systems, are trying to keep up with the requirements of today’s market. Consequently, they want to provide merchants with an opportunity to get their MIDs and start processing right at the moment when the merchant signs up for the core product.

In order to achieve this, several things have to be accomplished. In fact, accomplishing even some of these items will allow underwriters to streamline merchant onboarding process.

The most fundamental component of merchant onboarding streamlining/automation is the opportunity to submit the data to the underwriter online. There are two approaches, commonly used for this end.

  • API or file-based approach. Some underwriters have either API- or file-based process, allowing merchants to send their data online, and underwriters – to verify this data and issue MIDs instantaneously. However, file-based process might still take up to 24 hours.
  • Blocks of MIDs. Some underwriters are able to issue blocks of pre-allocated live MIDs (not yet assigned to any particular merchants). Underwriters allow aggregators and payment facilitators to use these MID blocks only for merchants with certain pre-approved MCC codes, i.e., merchants, selling a certain type of products or services (say, restaurants). These merchants can start processing right away, under condition that the PayFac provides the information on every merchant, that got the new MID assigned, to the underwriter within 24 or 48 hours from the moment the merchant starts processing.

If at least one of the listed approaches is implemented, merchant underwriting process can be almost completely automated.

The next thing to automate is the acquisition of merchant data. This can be accomplished through implementation of an API or an online merchant application form, which an applicant can complete to provide required data.

After the acquisition of merchant data you have to integrate with the acquirer, so that the data, input into the form by the applicant, could be automatically submitted to the acquirer through API or in a file (according to the first approach described above). The acquirer will then issue a MID, which can be used for processing and is automatically configured within the gateway.

If merchant data is not sent to the acquirer in real time, but the acquirer provided a pool of pre-approved MIDs (according to the second approach described above), the MID will be taken from this pool. The next day (within 24 hours) a separate process will include the new merchant into the report on active MIDs, sent to the acquirer. However, the merchant will be able to process transactions during these 24 hours as well.

We should stress, that pre-allocated MIDs are mostly suitable for payment facilitator model, when all the sub-merchant funds are deposited to a main payment facilitator account and it is the responsibility of the PayFac to re-distribute the funds. Otherwise, if the deposit accounts need to be different (there is no PayFac between the merchants and the acquirer), the acquirer will, most likely, expect to receive deposit information before the MID becomes active.

Conclusion

Our recommendation to software companies is to pay attention at merchant provisioning and onboarding mechanisms, used by given payment service provider or payment facilitator, before deciding whether to partner with it or not.

Our recommendation to PSPs is to form partnerships with those acquirers, that can either provide a real-time MID provisioning API or pre-allocate MIDs for immediate merchant activation.