Five Payment Myths Merchants Need to Know Before Deciding to Build or Buy

09/10/2014

By Avangate

Payments are a hot topic as Apple Pay has just been released, Square raised a new round of funding, and Stripe has signed on to Stellar, a Bitcoin-like payment system. This proliferation of solutions might make it seem like payments are easy to master, and encourage businesses to develop their own payment solutions or plug straight into processors. Small businesses in particular may look at their own payment systems as a way to get to market faster.

But payments are complicated and difficult to execute on – that’s why no one vendor has managed to completely dominate the industry, and why each new solution tackles a new aspect of payment problems.

In order to get payments right, merchants and vendors alike need to take an honest look at the myths and realities affiliated with payments. Only by having a clear picture of how payments really work can anyone make the right decision about whether to build a new payment solution or find the right type of solution to buy. Here, we cover five of the biggest myths that merchants need to know about to make good decisions about payments.

Myth One: Payment Processors Only Charge for Conversions
In general, payment providers tend to charge for access to their complete payments platform, including their payments gateway and all payment methods. This means that payment providers get paid every time a transaction is attempted, regardless of whether it’s successful in putting money in your pocket. So you face fees whenever a charge is processed, whether the card is declined, the transaction is fraudulent, or the customer issues a chargeback. This might not seem like a big deal until you see the frequency of declined, fraudulent, and other charges that you pay for but don’t get paid for. Unless you have a seriously upstanding client base and every transaction goes through, make sure to factor in all the charges from payment providers into your estimate of buying versus building your own.

Myth Two: We Offer “Subscriptions”
They might tell you otherwise, but most payment processors don't truly support recurring transactions. If they do offer support for “subscriptions,” it’s typically achieved through a wallet system or a third-party partnership. This might not seem like a big deal, but it creates additional hassle for merchants like you in the form of additional implementation work, more vendors to manage and contracts to sign, and new rate negotiations as well. Ultimately, do your homework and ensure that any payment processor you choose natively supports subscriptions. If not, you might end up paying for more than you anticipated.

Myth Three: Processors Help with Chargebacks and Refunds
While payment processors may provide you some tools for tracking chargebacks and refunds, they’ll still assess fees for these transactions and possibly charge extra for tools to handle them, so you’re paying up for any assistance you might get. And because the processors make money on every transaction even when you don’t, there’s no clear incentive for processors to get on your side. As a result, you need to consider the long-term health of your business when picking a payment processor and get a crystal clear view into how chargebacks and refunds are really handled. If a processor doesn’t offer enough support, consider building your own system or opting for another processor with more tools.

Myth Four: We’ll Handle Fraud and Tax
It may be technically true that payment processors will help you with fraud, but it can cost you dearly. Typically, you’ll need to purchase a separate fraud tool and manage it yourself, or pay a fee to the payment to use whatever fraud tools the processor makes available. Tax collection, including VAT, and dissemination of payments to government entities are also not managed by payment processors in most cases, and you’ll probably have to set up another contract and go through another implementation process with a vendor who handles taxes to ensure complete compliance. Don’t forget to factor in costs of this crucial component of business, especially if you sell internationally or in countries with complex tax rules.

Myth Five: Authorization Rates Will Improve
As we’ve seen, the majority of payment processors only serve as a gateway and don’t handle their own payment processing, so merchants must secure a separate payment processor to actually get paid. Because of this separation between the gateway and the processor processors, merchants may have little to no insight into or control over how their authorizations are managed, or the efforts being made (if any) to increase authorizations. The increased expense of dealing with a payment gateway and processor, combined with lack of clarity around the charges and authorization efforts for each transaction, can create revenue leakage and cost merchants money needlessly – all without increasing authorizations.

Ultimately, merchants need to educate themselves about specific offerings in all of these areas, and avoid getting taken in by payment processor myths when evaluating the best solution for their needs. For more payment myths merchants need to know, check out Avangate’s Truth in Payments.