PayPal problems and PayPal alternatives are almost always a concern for businesses that are processing credit card sales through ‘The Worlds Most Loved Way To Pay.” PayPal has a reputation for being arbitrary, ambiguous and heavy handed in it’s decisions to close accounts. There’s no doubt that every business should employ the use of PayPal alternatives, however, any merchant account/payment processor can and does freeze accounts based on a series of risk mitigation factors.
PayPal is still the #1 choice amongst consumers and business owners for processing online payments, but, PayPal’s risk exposure increases exponentially, every day. Each day, thousands of people open new PayPal accounts, and each day, millions of transactions are processed through PayPal’s money transmission system. PayPal is liable for that money.
Chargebacks are the most inherent risk that merchant, or payment processor, take when accepting credit card payments. Some credit card companies allow as much as 6 months for a customer to file a chargeback. Traditional merchant accounts used a variety of measures to offset this risk, many of them advised by the FDIC.
First they vetted a merchant by:
- Entity Structure
- Number of Years In Business
- Business & Personal Credit Reports
- Previous Years Tax Returns (up to 3 years back)
- Previous Years Sales Revenues
- Banking History
- Collateral– Cash Reserves
The next step in the “Risk Assessment” procedure is to look at the ‘industry’ risks associated with a particular merchant. The decision maker will evaluate the estimated revenues to be generated via credit card sales, and then examine a host of other factors such as ‘industry average chargeback rates’, and ‘industry average fraud complaints.” Some ‘industries’, have higher risks of chargebacks and fraud than others do.
For each ‘factor’, there is a ‘risk score,’ which when aggregated and averaged, will determine whether or not the merchant will be approved at all, and if so, if collateral and/or rolling reserves will be required for the account.
These factors include:
**The industry standard risk averages for refund rates, chargebacks, and fraud complaints for any industry tracked, recorded and published by various financial institutions and the FDIC. The risk mitigators aren’t ‘guessing’ at a 34% chargeback rate in the make money online info product marketing industry… they are relying on published statistical reports which inform them of the percentages. One such research resource is Tower Group.
This is why “Gary Joe Jim Bob’s” brother-in-law didn’t need any collateral or rolling reserves for his ‘feed store’ in Podunk, Kentucky. The industry is not rife with chargebacks and fraud cases, and the exposure to the processor is minimal.
Certain other industries however, like the ‘make money online information product’ publishing industry carry obscene chargeback and fraud risks.
Knowing your own industry risks is your first step in protecting your revenue from a payment processor freeze. Some other tips include:
- Have a proper business plan with a strong financial plan that outlines your operational costs, projected income and expenses, and your own salary.
- Manage proper AP/AR procedures- pay your invoices and salaries, including your own, on a schedule.
- Keep at least 30% of your gross earnings in your account for ‘reserves.’
Of course, make sure that your processor allows processing for your particular industry and model, comply with their Terms of Service by having all the proper contact information and disclaimers clearly visible on your website, and comply with all regulatory agencies of your industry.
These simple steps can help you protect your account from being frozen, but nothing can guarantee that it won’t happen. If a payment processor or merchant account processor wants to freeze your account, they can, and they will. A prudent business practice is to spread your sales revenue across the accounts of more than one payment processor. In the event that your processor does freeze you, they can hold every penny of your money, without intersest to you, for up 6 months. Having all of your operating capital tied up for 6 months can crush your businesses ability to operate. Spreading your revenue through several accounts can mitigate the fallout of a freeze, leaving as much as 5/6 of your money out of the processors reach.