Do PayPal or Square Aggravate You?

Oh, I’m sorry I meant aggregate…. I suspect I may have caused some confusion last week, so let me clarify. In last week’s blog titled Business Account Frozen? Stop Using AggregatorsI discussed the implications of using a payment aggregator vs processing your business’ credit cards through a traditional merchant account.

I am guilty of, on multiple occasions, thinking in and speaking in Processor-ese (this is the language we speak in the land of payment processing). As a result of this shortcoming, I feel the need to elaborate (or translate) on the term “payments aggregator.” This is a term that, as far as I can tell is fairly new in our industry and not necessarily very clear to business owners. These days it is a term often used when referring to the big guys like PayPal or Square.

In the past, aggregators were better known as third-party processors. They are really the exactly the same thing; they use their commercial bank accounts to process credit card payments for their merchant clients.

If you care about making money, using the option of a third party processor should be YOUR LAST RESORT. It should be common knowledge that these third party processors were designed for businesses with a bad credit history, new businesses with no history, or overseas merchants and other high risk businesses. Why is this the last resort?

First things first. You are essentially giving another company control of your money. Especially these days, aggregators are freezing business accounts left and right (I’ll explain why later). And second, it’s more expensive- as any product or service would be when you add a “third party.” Unfortunately, this option is seemingly becoming more and more attractive to business owners trying to avoid the application for their own merchant account.

The Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency have issued guidance for banks regarding the risks associated with third-party processors.

An excerpt from this guidance report makes it pretty clear about how the FDIC feels about these aggregators, “…telemarketing and online merchants, in the aggregate, have displayed a higher incidence of unauthorized charges and associated returns or charge backs, which is often indicative of fraudulent activity. It continues, “Payment processors [third party] pose greater money laundering and fraud risks if they do not have an effective means of verifying their merchant clients’ identities and business practices.” Which they don’t, hence it is so easy to process through them…

Finally, the FDIC starts to make their case for how banks should handle these accounts, “In these cases, financial institutions should perform enhanced due diligence and heightened account monitoring.” Ohhh, this must explain why there are so many Square and PayPal users with their accounts frozen…heightened account monitoring.

The problem is, with all the marketing tactics and branding that for example, Square uses, business owners aren’t doing their homework to understand the implications of using an aggregator for their growing business. They see a cool ad and hear a buzz, and like any other product or service, they sign up for the coolest new trend.

Unfortunately, this isn’t a pair of sneakers we are talking about; this is your business and this is your money.