Third-party payment processors are extremely useful for small business owners, especially those who operate on-line. This kind of service allows managers to circumvent having a dedicated merchant account – a process that is both quite costly and time-consuming to set up.
Working with a third-party payment processor allows a new business to immediately start accepting a wide range of payments, going all the way from checks, credit cards and e-wallets to crytocurrencies.
While it’s undeniably a great option for many business owners, there is an obvious drawback: transaction rates will be higher for all payments compared to having a dedicated merchant account.
There is also a subtle drawback that often proves more troublesome: it keeps you from making decisions regarding payment risk management. As you’re about to learn, this limitation holds the potential to cause serious problems to your business.
Understanding payment risk management and its implications
All business owners should be familiar with the concept of payment risk management. Simply put, this is the anticipation that some payments could be at risk of defaulting. There are several possible payment related events that might interfere with normal processing, from cancelled payments to lack of funds to outright fraud or credit theft.
Given the rampant growth of e-Commerce and its association with increased payment risks, modern companies now have to develop strategies to balance risks of capital loss with risks of offending clients. Determining whether a transaction is unapproved or fraud-related is usually a tricky assessment that must be made judiciously. It’s also an option you won’t have when dealing with third-party payment processors.
Third-party payment processors don’t allow you to manage payment risks
This is unseen drawback of third-party payment processors could make your company question whether it might be best to create a dedicated merchant account. By working with a third-party, they will handle payment risk management on their own. Often this could lead to payment related issues that may work against your business.
Transactions can be frozen in large numbers when any payment related red flags happen to be raised, and your clients may resent your company if they third-party payment processor fails to settle a payment issue adequately. Keeping this in mind, you may find that it might be the right time to set up a dedicated merchant account.