10 Mistakes to Avoid When Choosing a Payment Processor

July 29, 2023

In the United States, around nine million vendors accept Visa, Mastercard, and Discover. Around six million accept American Express.

As a merchant, it makes sense to accept credit cards. Especially if you own an online business.

Thankfully, since credit card processing is a competitive industry, any business large or small can accept credit cards without it breaking their budget. But that doesn’t mean all payment providers are the same.

If you’re looking into choosing a payment processor, you need to find the right one for your business’s needs. We want to help you find the right payment service provider.

Keep reading to learn the 10 mistakes you should avoid when finding a payment solution provider.

What a Payment Processor Does

A payment processing company processes credit and debit card transactions for both e-commerce and brick-and-mortar merchants. Using technology solutions, you connect the payment service provider with the customer in order to make a sale.

The merchant payment processor accepts payments on your behalf. They then deposit the funds into a merchant account they provide for you.

The customer uses a credit or debit card to pay for their goods or services. The issuing bank approves the customer to use their card to pay you.

How a Payment Process Works

Technology is used to make this transaction. The first type of technology is a payment gateway which is software that links your debit/credit machine or shopping cart to the card processing network.

The payment gateway also encrypts the data to keep it private before sending it to the payment processor. The issuing bank either approves or denies the request for payment depending on the number of funds available in the customer’s account.

If approved, your merchant provider then tells your merchant provider to credit you with those funds.

Payment Processor

The second type of technology is the payment processor which does the following:

  • Moves the transaction through the processing network
  • Sends you billing statements
  • Works with your bank

Once the funds are sent to your merchant bank, it’s deposited into your account where funds are typically immediately available. However, sometimes you can access your money before the merchant provider even receives the funds.

Reserve Funds

Other times, the merchant provider might keep a portion in your account known as a reserve which you can’t access.

This is for cases where funds are returned back to customers at a later date if they’re unhappy with the product and/or service you provided them with.

1. The Lowest Rate Doesn’t Necessarily Mean the Lowest Cost

It’s easy to find payment providers who offer low rates. But if you notice an asterisk, that means there’s some fine print you need to read.

That fine print may mention clauses addressing higher processing fees you’ll pay on certain types of transactions. Those rate hikes can not only cut into your margins but they can turn a profitable transaction into an unprofitable one very quickly.

Different Cards Have Different Rates

Also, you need to realize that payment processors charge different rates for different factors such as:

  • Type of credit card used
  • How the transaction was processed

There are also typically three different tiers of rates:

Qualified Rates

Qualified rates are the lowest rates but they’ll only apply to specific types of cards that are physically swiped through a credit card terminal. If you have an e-commerce company, you won’t qualify for this rate.

Mid-qualified Rates

Mid-qualified rates are usually for certain rewards and business card transactions as well as credit cards that are key-entered into a terminal rather than physically swiped. They’re also at a higher rate than qualified rates are.

Again, e-commerce transactions typically won’t qualify for mid-qualified rates.

Non-qualified Rates

Non-qualified rates have the highest rates. Typically these rates are applied to cards that offer airline miles, cashback rewards, and loyalty points.

Flat Rate Pricing

You may also have the option to pay a fixed percentage for all your transaction volume. In this situation, it doesn’t matter what the actual costs are.

Instead, all fees are placed into a single rate.

Interchange Plus Pricing

You may also find some merchants offer interchange-plus pricing as an option. This is when they charge you a fixed fee on top of the interchange.

However, keep in mind that there are a lot of different interchange fees so the percentage may vary from company to company.

2. Assuming the Payment Processor Offers Security and Data Protection

In 2018 there were around three million fraud cases reported to the Federal Trade Commission (FTC). Out of those cases, 14.85% were for identity theft.

And those numbers are only going to increase which means it’s up to you to keep your business safe. Look for a payment processing company that not only offers you the latest cutting-edge tools to help out if their technology doesn’t keep your data secure but also processes payments in the safest way possible.

Make Sure Your Payment Service Provider Offers Data Protection Services

That means having full EMV (Europay, Mastercard, and Visa) compatibility along with a gateway that offers the following:

  • Encrypted data storage
  • Payer authentification
  • Fraud scrubbing

Most businesses have no idea they’ve been hacked until it’s often too late. And your business is responsible for the safekeeping of your customer’s personal information. Make sure your payment processor is as serious about fraud protection as you are.

3. Being Solely Responsible for Fraud

$46.8 billion dollars are lost each year to retailers due to loss of inventory related to fraud, error, shoplifting, and theft. Those who steal often pay you using a hacked credit card account.

Others pretend they never received your product when they did. While online merchants refund the money and reship the product and assume it’s a general business expense, it does add up.

Find a credit card processor who can help alleviate the monetary burden of accumulated fraud activities.

4. Limiting Your Customer’s Payment Options

There’s nothing more frustrating to a customer than getting all the way through the buying process only to find out the merchant won’t accept they’re preferred method of payment.

And while it seems odd, most customers value convenience over security. Thankfully, you can easily find a payment solution provider who can let your business offer payment options such as:

  • Touchless pay
  • Mobile pay

There are also a lot of e-commerce services available.

Payment Options are Good for Business

And providing as many payment options as possible is good for business because it helps you:

  • Attract more customers
  • Increase sales
  • Reduce cart abandonment

More choices mean a happier customer experience.

5. Foregoing Help and Support

Even if you have been in business for a long time, it’s still a good idea to make sure you’re working with a payment provider who offers help and support when you need. If you’re a new business, you definitely need help and support to set up your merchant accounts.

Look for a company that not only makes it easy to set up a new account but also offers round-the-clock transaction and technical support for as long as you’re their customer.

Otherwise, you run the risk of losing time, money, and customers while you figure out why you’re having difficulty accepting payments all on your own. Find one that can meet your budget, technical needs, and volume demands, whether that means your company is ebbing or flowing in terms of sales.

6. Not Understanding the Importance of the Payment Card Industry Compliance

It’s a big mistake to try to handle PCI (payment card industry) compliance on your own. There is a PCI Data Security Standard (DSS) that the U.S. payments industry has standardized with a complete list of rules and regulations for preventing, detecting, and reacting to security breaches.

To adhere to these standards by yourself is time-consuming and expensive. Look for a payment solution provider who takes PCI DSS rules and regulations seriously and helps your business stay compliant.

7. Failing to Understand Rates and Fees

Watch out for hidden fees. It’s not uncommon for a payment processor to charge additional fees in addition to their processing rates. Many of these fees are buried in the fine print such as:

  • Cancellation fees
  • Withdrawal fees
  • Batch-processing fees
  • PCI compliance fees

In fact, there are some payment service providers who charge a fee for PCI DSS compliance support even though they don’t provide that as a service.

How to Control Extra Fees

You can stay in control of these fees by asking your payment process to provide details of all potential additional fees upfront. If they refuse, it’s a sign they may have additional hidden fees they don’t want you to know about.

And that’s a sign that you should find a payment solution provider who offers transparency in how they do business.

Track Your Customer’s Card Usage

Then you can track your customer’s card usage to help you determine your estimated processing fees for the next few months. That should help you figure out what effective rate you’ll really pay.

If you find out those fees are larger than you’re comfortable paying, try working with a processor who offers flat-rate processing. That way you’ll pay one rate instead of various rates based on the tier system.

8. Choosing a Payment Provider Who Won’t Give You Fast Access to Your Funds

In the early days of accepting credit cards, it was not uncommon for a payment provider to freeze your account while they investigated the following circumstances:

  • Suspicious activity
  • Irregular transactions
  • International sales
  • Sudden spikes in sales volumes

However, things have changed and today the payment provider needs a good reason to freeze your money, especially since clearing valid sales even if they triggered an anti-fraud response is now an easy process.

Verify You Won’t be Locked Out of Your Account

Always verify that your service provider will never lock you out of your own account.

Especially since if that does happen, your bills begin piling up while you have no way to pay them without your account funds.

9. Not Understanding Your Contract Commitments

While contracts are dry, long, and boring, you need to read your entire contract before signing it. Especially since it contains all the information regarding the services and commitments you’ll receive from your credit card processor.

But you also need to understand and be aware of the commitments you’re making to the payment service provider when you sign with them. Not only are there standard monthly fees you might have to pay, but you may also have to agree to volume commitments.

Find Out if You Have Monthly Volume Commitments

A volume commitment isn’t unusual and it varies depending on the size of your company and how much volume you expect to do. Often, you’ll receive a lower rate based on higher numbers of monthly transactions.

And if you can’t reach that agreed-upon volume in transactions each month, your fees may go up.

10. Not Fully Reading the Terms and Conditions of Your Contract

Most contracts are binding so examine yours carefully before you sign it. This will help you avoid unpleasant and possibly expensive surprises in the future.

While contracts shouldn’t be purposely misleading, it will contain large amounts of legal terms that aren’t always easy to understand or very straightforward in the type of language it uses.

Address Questions and Concerns Before You Sign Anything

Look for clauses or terms that make you feel uncomfortable. If the payment solution provider is worth working with, they’ll happily address any questions or concerns you have before you sign with them.

Do not hesitate to speak up before you sign. It will be much more difficult to do so after you’ve signed your contract.

Get Started Today

We want to be your payment processor. We work with all types of companies throughout a wide variety of industries, especially those in high-risk areas.

Our rates are competitive and we’re here to provide you with the support you need 24/7. Click here to apply for your merchant account with us today.

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July 29, 2023 | Merchants | Dustin