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What to look for when choosing a payment processor

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One thing every online merchant learns pretty quickly is that a successful e-commerce operation relies on a network of partners to perform the digital ballet of presenting products, taking payment, filling orders and getting the goods to customers as quickly as possible — all while ensuring that no one is taking advantage of them.

At the center of the action, from a business standpoint, are payment processors, the entities that move money from a shopper’s credit card or bank account to the merchant’s account. Finding a fantastic payment processor is, well, money.

But, of course, not all processors are the same. So, how to choose? We turned to the experts to come up with some general guidelines for those wading into the processor search.

First, remember that you often get what you pay for. Of course, you want to preserve as much of your profit margin as you can, but be forewarned: A low rate offered by a processor might not be exactly the deal it seems.

“Normally when you see a low rate they are advertising the lowest possible rate on a transaction. Not the full range of rates,”  says Mark Guagenti, of Chicago-based payment processor Tidal Commerce. “That’s actually called tier pricing.”

Pay close attention to the tier of pricing your payment processor is quoting

A processor might advertise the rate charged for transactions when a credit card is actually swiped through a point of sale terminal in a store. If you’re an online merchant, that’s not you. Other tiers cover online transactions and transactions with loyalty cards that return cash, offer airline miles or other bonuses.

“With tier pricing, they group transactions into buckets,” Guagenti explains. “So, your American Express or specialty cards can be anywhere from an additional 1 to 3 percent per transaction. But you don’t see that up front until you actually get in the door with that processor, (and) see what those rates are.”

Evan Saks says he learned from experience that it’s best to approach selecting a payment processor the way you might decide on what bank to use for your business accounts. His preference? Local, accessible and staffed with people who will talk to you when any sort of hiccups arise.

“(When I’ve) got a problem, I call Michael and he talks to me. Knows his stuff,” says Saks, who sells mattresses online and runs a Boston-based business, Lungfish Communications, providing ecommerce advice.

For his part, Guagenti isn’t sure how crucial it is that your processor be local, but no question, they should be there — by phone, email or text — when you need them.

“You definitely want to steer clear of a processor who doesn’t offer 24/7 technical support. Or who doesn’t offer an 800 number that you can call,” says Guagenti.

Merchants shopping for a firm to handle payments should be able to tell a good payment processor from a bad one as soon as they click on the processor’s website, he says.

“Does their website look good? Does their website look complete? Or does their website offer information? Do they have a blog or a learning financial center where you can go and research topics pertaining to different types of businesses?”

Make sure your payment processor is up on innovation

It is also important for merchants to make sure their processor is keeping up with the latest innovations and consumer preferences, given the breakneck speed at which ecommerce is evolving. For instance, Guagenti says, it’s important to shop around for a processor and a gateway that supports new payment methods like Apple Pay, 3D Secure, MasterPass.

“Those items are becoming increasingly popular,” he says.

There are extra considerations for merchants that are considered “high risk.” The label has to do with the products they sell, not whether the merchants themselves are trustworthy. Take merchants that sell vaporizers, used to inhale flavored oils and herbs, including marijuana, which is legal in several states.

Banks shy away from high-risk businesses, which might include sellers of tobacco products, legal marijuana, gambling sites and others, as do many mainstream payment processors. But Brad Martin, of Soar, writes that there are a number of companies, including Soar, that specialize in serving high-risk merchants.

When shopping for a processor, he recommends that high-risk merchants take steps that make sense for most merchants.

He suggests shopping for a processor much the same way most merchants do — read reviews, look for processors that understand your business, consider the differences in the service provided by each processor you’re considering, he writes.

When searching for a processor — whether you’re a high-risk merchant or not — fraud protection is, of course, a consideration. Saks, for instance, was tipped off by his processor that an order for 25 mattress to be shipped to Stockholm, Sweden, was likely fraudulent.

“Well, it turned out to be totally bogus,” Saks says.

An experienced merchant would see the signs of fraud in the international mattress order, but no doubt the processor’s insight would be helpful to a newcomer or a merchant blinded by the promise of a big order.

That said, it’s wise to remember that fraud detection and protection is not the business that payment processors are in.

“As a processor we can only do so much and we don’t actually get that data immediately available to us to scrub for fraud,” Guagenti explains.

Add a dedicated fraud protection partner to your payment infrastructure

A best practice for merchants, then, is to add a dedicated fraud protection partner to the network of partners that makes their business run.

Relying on fraud reviews from a payment processor is hard to scale and the payment sector has not moved into the vanguard of guaranteed fraud protection — a type of protection that uses machine learning and human intelligence to sift fraudulent orders from legitimate orders.

Providers in the guaranteed space back up their decisions by paying 100 percent of chargebacks and other fraud costs for any approved order that later turns out to be fraudulent.

“Some processors employ fraud management and monitoring systems that are outdated or just not flexible enough to set rules and filters that correspond the exact needs of the merchant,” says Sam Kohli, CEO of Riga, Latvia-based payment processor Paydoo.

Ollie Smith, CEO of the Bristol, UK-based consultancy ExpertSure, has his own checklist of what to look for in a processor. Start with the fundamentals, he says.

“Establish how long the payment processor has been in business, how many customers they have, and overall market share,” says Smith.

Then consider your own business. Are you one of those that falls into the high risk category? Do you sell globally? Are you a traditional brick-and-mortar store expanding into e-commerce?  

With all that firmly in mind, Smith advises retailers:

  • Consider whether the processor’s customer base and marketing resonate with yours. “Do you see the same or similar business providing feedback and testimonials? Do they offer specific solutions for your challenges like accepting mobile payments, or provide a terminal for phone payments?”
  • Ask for a monthly contract. “With no early termination fees…you don’t get locked in. This lets you combat test the solution in the real world and switch if it doesn’t work out.”
  • Seek out reviews. “A highly rated, and well-respected provider will have online reviews and feedback to match. Check Trustpilot, and use Google to search for third-party reviews.”
  • Get interchange-plus pricing. “To get the best apples to apple rate, ask what the provider’s ‘interchange-plus pricing’ is and insist that is the rate you want to pay. Interchange is the non-negotiable rate that is charged by Mastercard or Visa, and the merchant account provider will add their mark up on top. This way all you will be looking at is Interchange  plus .17 percent etc.”

In the end, there are plenty of good processors out there. If merchants keep a few basic guidelines in mind as they search, chances are they will add a valuable ally to the army of partners helping propel them to success.

Bill Marcus

Bill Marcus

Bill Marcus is a business and technology reporter, a contributor to Computerworld, and a host of the Think Further podcasts. He covers New England for Fox News Radio and reports for the Canadian Broadcasting Corporation, and The Irish Times.