The payment processing landscape has changed continuously over the past several years. With new payment processing options entering the ecosystem, determining the best online payment solutions for startups can be a real hassle. The truth of the matter is, payment processing is not always at the top of the “to-do” list for founders and when it is, it’s a box to be checked rather than a strategic growth opportunity.
The simple truth is that without the ability to accept payment cards, there IS no online business. So what’s a startup merchant to do?
Some owners opt for the traditional approach and contact acquiring banks to establish a merchant account. After countless hours of paperwork, discussions with bank managers, and long waits — many give up.
These frustrated traditionalists then join other new merchants who turned immediately to popular merchant aggregators (PayPal, Stripe and Square). If you’re one of them, don’t be fooled into signing up with a merchant aggregator just because the brand name’s familiar.
While it might serve your short-term need for an online payment solution, ongoing transaction volume growth (aka business success) can be the harbinger of complications and high costs to come.
Don’t Just Jump In — Explore Available Options
Finding the right online payment solutions for startups requires due diligence. Entrepreneurs should be aware of how their business model may impact their ability to obtain a merchant account and what it may mean for fees, rates and chargebacks. This type of research and payments oversight can be a tall order for a business owner to handle alone. Unfortunately, many startups dive right into the easiest, seemingly convenient option, but they aren’t really setting themselves up for success from Day 1.
While exploring options, consider the many challenges new businesses face. Reviewing online payment solutions for startups is just one. The challenges noted relate to your e-commerce business especially if it falls into the high-risk category.
The choice of processor affects business model flexibility, the cost of doing business, and the security of the business. Let’s consider each area of impact using the example of a merchant aggregator.
Business Model Flexibility
Does your startup e-commerce business model include fulfilling purchase orders for other businesses or accepting E-checks? If so, choose among online payment solutions for startups that process check (ACH) transactions as well as payment cards. Some payment aggregators don’t.
Perhaps one of your growth strategies requires expanding online sales to other countries. Be sure the processor you choose supports international transactions and handles multiple currencies.
Startup Payments: The Cost of Doing Business
Each payment aggregator quotes its own fee structure, usually a flat fee per transaction. Some may appear tempting because flat fees are easy to understand. But they aren’t necessarily good as more transactions are processed (illustrated in the math below). Even without incurring a monthly fee, merchants stand to lose a lot of revenue to payment aggregator fees.
- Assume all sales represent credit card purchases.
- Each sale is for a $50.00 product (including tax)
- The fee for each transaction is (0.029% X $50) + $0.30 = $1.75.
- Each row in the table represents a year of e-commerce operations.
| # Trans | $ Per Trans | Fee Per Trans | Revenue | Payment Aggregator | Merchant |
| 50,000 | $50.00 | $1.75 | $2,500,000 | $87,500 | $2,412,500 |
| 100,000 | $50.00 | $1.75 | $5,000,000 | $175,000 | $4,825,000 |
| 1,000,000 | $50.00 | $1.75 | $50,000,000 | $1,750,000 | $48,250,000 |
Congratulations are in order. After only three years, a fifty million dollar business is operating 24 x 7 x 365.
But not so fast… It turns out that 15% of sales are telephone or mail order (MOTO) transactions. Those cost more at (0.035% X $50) + $0.15 = $1.90 each. And 35% of sales represent cross-border transactions, which also cost more at (0.039% X $50) + $0.30 = $2.25 each. And that’s before currency conversion costs. All of which results in an average transaction fee of $2.42.
| # Trans | $ Per Trans | Fee Per Trans | Revenue | Payment Aggregator | Merchant |
| 150,000 | $50.00 | $1.90 | $7,350,000 | $285,000 | $7,065,000 |
| 350,000 | $50.00 | $2.25 | $17,500.000 | $787,500 | $16,712,500 |
| 500,000 | $50.00 | $1.75 | $25,000,000 | $875,000 | $24,125,000 |
| 1,000,000 | $50.00 | $2.42 | $50,000,000 | $2,420,000 | $47,580,000 |
Add on a fee for disputing chargebacks (up to $20 each) and other miscellaneous fees, and suddenly the online payment solution for startup chosen by the merchant doesn’t look so good — especially if the payments aggregator requires a rolling reserve account to cover the potential business risk relating to chargebacks.
While considering options, don’t overlook the upside of working with a payment processing partner instead. It can result in more competitive pricing because they’re often able to tailor rates to each individual business.
Security of the Business: Protecting Online Transactions and Customer Data
Merchants are responsible for protecting both customer data and the security of online transactions. The chosen payment platform must support 3D Secure and PCI DSS (the Payment Card Industry Data Security Standard). Otherwise, the cost of fraud can ruin a business.
Not all online payment solutions for startups offer fraud guarantees, nor do they offer an effective dispute process. Be sure to understand fully any guarantees offered.
Payment aggregators may not guarantee against fraudulent chargebacks, and in case of a significant issue their reaction may be to freeze merchant funds or terminate the account. They react to issues after-the-fact, rather than helping online merchants prevent them.
There is a Better Way
A full-service payment solution provider is a better option, particularly for startups. They’ll help startups land a dedicated merchant account — which costs less over time — through one of many cultivated banking relationships.
The right merchant account provider works with its merchants as partners to ensure a secure payment gateway is up and running quickly so the businesses can start accepting credit card sales.
And they’ll stick around to make sure that not only are a merchant’s current needs met, but also that the startup payments solution provides the desired flexibility and can scale up for future growth.
So why not let a full-service payment solutions provider setup your startup for online payments success — right out of the gate.