Small Business

The Squares And Stripes of Credit Card Processing Aren’t For Everyone

Walk into an independent coffee shop or craft show these days and you’re liable to see the distinctive square credit card readers that signify the use of a company known as Square to process credit card orders for the joe or the jewelry that’s on offer.

Square and other trendy companies including Stripe and Braintree have become disruptors within the very untrendy industry of credit card processing. In large part, they’ve done so by focusing on several factors long lacking in the payment industry: service starts that are fast and cheap, and billing that’s simple and transparent.

As with any trend, however, it’s possible to become swept up with the tide towards these insurgent processors, perhaps at a cost to your company. A possible case in point: In a recent earnings call for Square, Sarah J. Friar, the company’s CFO, reported that most larger sellers (those that generate more than $125,000 in annual payments) that sign on with the company do so “at our standard pricing rates,” which aren’t necessarily optimal for such bigger companies.

Here’s a rundown of why you might want to be cautious before signing on with these relative upstarts--though we’ll begin with what they do offer, and why it can be compelling for the right company.

The Pluses

Many of the newer credit card processing companies bundle and aggregate multiple merchants into one account, allowing them to almost instantaneously allow a business to start processing payments. Some of the more traditional credit card processors may take several days, or even over a week, to complete all the paperwork and due diligence involved in opening a merchant account. In addition, the new breed of processors usually don’t charge annual, monthly, or setup fees.

Rather, they use a so-called fixed pricing model that folds those fees into a single price. The top fixed-rate processors charge usually between 2.7% and 2.9% per transaction. This makes it clear what your costs will be — an appealing proposition to anyone confused by the various fees imposed by payment networks.

The Caveats

Those pluses help make some of these smaller processors among the companies we recommend for smaller sellers, especially those with sales volume of less than about $17,000 a year. But sellers large and small should also be mindful of these factors before settling on a Stripe, Square, or other such processor.

Big sellers could pay more. A fixed-rate structure well serves sellers with sales volume so low that the monthly or annual fee of a traditional processor would be spread over a relatively small number of transactions. In that case, despite the lower fees per transaction you can generally expect from a regular processor, those fees could easily make the old-school processor more expensive for a small seller.

But the converse is also true. For sellers whose volume is large enough to dilute any monthly or annual fees, the higher per-transaction cost of an aggregator could be costly for a large seller. It’s no surprise, then, that Square celebrates those larger sellers who are signing on for the company’s regular fee structure. Some of those clients are likely paying more in processing costs than if they went with a regular processor, or at least negotiated a more favorable rate with the company than its many mom-and-pop clients pay.

High debit-card fees. Do you process a lot of debit-card transactions, or do you expect to do so? A new-breed processor might be costly for you. With traditional credit card processing plans, businesses pay less for debit transactions than they do for accepting credit cards. Fixed-price models don't discriminate between card types, meaning that business owners end up paying a lot more--up to four-and-a-half times as much--for those debit transactions. A typical debit card transaction may end up costing around 0.5%-1% per swipe with a traditional processor, and a whopping 2.75% with a fixed-rate processor.

Possible freezes in service. The time you save in setup can be lost later in the form of service interruptions. When you search the web for information on various fixed-rate processing companies, you'll quickly come across dozens of complaints about how their accounts were suddenly and inexplicably frozen. Unfortunately, this is a common occurrence when it comes to these new processors due to how quickly they onboard new businesses.

As explained above, companies like Square are able to get a business up and running quickly because they pool multiple retailers under one account --which is why they are sometimes referred to as aggregators. Since these processors don't do much due diligence at the onset, their compliance and anti-fraud departments are extra-sensitive to compensate for that, stopping a transaction the moment it looks even a little bit suspicious. The downside for small business owners is that this often results in their funds being temporarily frozen — at least until they contact the customer service representatives and figure out what the issue is.

These problems are far from universal, and may sometimes subside as the processor becomes more familiar, and perhaps less skittish, about you as a new client, or if you eventually receive your own account with the company. Nonetheless, they can pose an inconvenience, or worse, for your business and its revenue.

Robert Harrow

Robert is the head of the Credit Card vertical at ValuePenguin and has been covering the card industry since 2014. His work has been featured in Reuters, Marketwatch, the New York Times and more.