If you’re building a new tech startup, you probably envision accepting credit card payments at your company will be as simple as getting a PayPal or Stripe account, copy and pasting some HTML onto your website, and away you go.
For some very small businesses with very few products or services, that may be all it takes. But for the vast majority of eCommerce and online businesses, the process of accepting credit and debit card payments (what is called ‘Merchant Services’) is slightly more complex. Thus, it helps if you’ve got a basic understanding of some of the common issues that may arise when trying to accept card payments ahead of time.
- Low Risk v. High Risk Businesses
In general, retail or brick and mortar transactions are considered low risk for the credit card processor. Their risk level is lower because the incidence of transactional fraud is much lower, such that the credit card processor is willing to forego a lot of the underwriting and risk analysis that they conduct on an online or phone sales business when providing credit card processing to a low risk business.
By contrast, an online or phone sales business is considered higher risk. That means that if your business will accept credit card payments online, there will generally be more in terms of underwriting that the credit card processor you apply with will want to do. That’s even more true if your specific startup has high priced goods or services (generally products over $200), is in a highly regulated industry (like financial services), or has a long time between payment and delivery of the service (like travel or custom furniture sales). Businesses with any of these characteristics will almost certainly be categorized as high risk, which means that you can expect that the application process to accept credit cards will be a little more difficult and the prices you’ll pay to accept credit cards are typically a bit higher.
Most startup business owners aren’t the type of people that initiate chargebacks, and thus may never have heard of the chargeback system. The term chargeback, refers to situations in which your customer, within 6 months of making a purchase, expresses dissatisfaction with the service or claims that the charge was illegitimate, and thus seeks a refund through the credit card companies dispute resolution system.
Chargebacks are a real concern for eCommerce and phone sales businesses, not only because they are expensive and a hassle to deal with, but if your business has too many chargebacks you will be terminated by your credit card processor. Thus, as a tech startup it’s important to not only understand the chargeback system, but also for you to understand what tools are available to you to avoid chargebacks and fight illegitimate chargebacks.
- Purchase Fraud
If you plan to sell eCommerce products at your startup you need to be aware of purchase fraud. Purchase fraud is when scammers either use stolen credit cards to make purchases of goods at your online store, or use their own credit card but then try to use the chargeback system to obtain a refund for the product that they purchased. In either case, their goal is to obtain your service or product without having to pay for it.
Exposure to purchase fraud can be financially devastating for a startup business, because in most cases not only does the business owner not receive the revenue for the sale, but they’ve also lost the underlying cost of the product because it’s usually already been shipped out by the time the fraud is detected.
- Payment Gateways
Most tech entrepreneurs are generally aware of the role that a processor plays in the credit card world, and the role of a shopping cart. What they’re less familiar with is what a payment gateway is, and why they need one. A payment gateway is the technology that securely transmits your customer’s card data from your shopping cart to the credit card processor. There are a number of payment gateways on the market, and while they each distinguish themselves either on price or by incorporating fraud protection or chargeback management tools, for most tech startups the most important differentiator is which payment gateways integrate with the shopping cart and credit card processor they want to use.
The world of credit card processing from the perspective of a tech startup entrepreneur can seem very simple from the outside, and for some businesses it always remains that way. But if you plan to accept payments over the phone, orders for over $200, ship products, or have more than a half dozen products, it behooves you to take some time to learn more about the details of the credit card processing world so that your merchant account is setup in the best way possible to benefit your new business.
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