This post was contributed to VENTUREAPP by Mark Rasmussen, managing partner at Moolah.cc, a company helping businesses accept payments from anywhere.
It’s nice to have options, and today’s business owner has plenty of them. One decision that almost all founders must make is which credit card processor to leverage. Although there are hundreds of vendors to choose from, they all fall into two basic categories, aggregators or merchant account providers.
To understand the differences between them, you should have a basic understanding of the credit card eco system. It basically breaks down into two sides: issuing banks in one corner representing the cardholders and acquiring banks in the other corner, representing the businesses that accept those cards.
Both aggregators and merchant account providers take risk on all the credit card transactions that a business accepts. How so? It’s called chargebacks. Consumers have at least 6 months to dispute a charge with a merchant, and when a chargeback happens, the money gets paid back to the cardholders issuing bank instantly whether the business owner has the funds or not. Therein lies the risk.
So, when a startup sets up a merchant account, they are entering into a direct relationship with the acquiring bank. The acquiring bank is required to thoroughly understand and underwrite the business, and if approved, will issue a unique merchant number to the business. The business becomes the “merchant of record” within the credit card eco system and are held financially liable by the acquiring bank. Because of this front loaded underwriting process, the setup time for a merchant account is typically a couple days sometimes up to a week process.
On the flip side, when a startup works with an aggregator, they can be setup to process credit cards within a few minutes because the aggregator is already setup as the merchant of record with the acquiring bank. The business is not entering into a direct relationship with the bank, they are attaching themselves as a sub merchant to an already existing master merchant account. The aggregators typically wont take a close look at the business until they start submitting transactions.
Remember, both merchant account providers and aggregators take the same risk – and where there is risk, there will always be a process of underwriting that risk. Merchant account providers underwrite on the front end where as aggregators typically underwrite on the back end, and one situation is not better than the other. You simply have to ask yourself; do I want to go through an underwriting process before I start taking payments or after?
Underwriting aside, pricing tends to differ significantly between the two. Generally speaking, merchant account providers have differing pricing models, typically with numerous monthly service fees and various rate and transaction fees depending on your type of business and how you process. Aggregators will offer flat rate pricing models with no monthly fees that are not necessarily cheaper, but arguably simpler.
The last thing to consider when deciding between the two comes down to what kind of support you are expecting from your payments vendor. Generally speaking, merchant account vendors provide phone and email support, where as most aggregators rely on email only support. This is a personal preference – you might want to be able to speak with someone about your financial matters, but for others email-only support is acceptable.
Hopefully this guide has helped turn you into a payment processing 101 expert. If these factors are taken into account during your decision process, you will accurately determine whether a merchant account or aggregator is the correct fit for your business.
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