Why Payment Processors Suspend Their Legitimate-but-High Risk Merchants

Why Payment Processors Suspend Their Legitimate-but-High Risk Merchants

Why Payment Processors Suspend Their Legitimate-but-High Risk Merchants.

It’s difficult enough running a business online without having to worry about your payment processor. For most, it’s a given that you can simply set up PayPal or Stripe and things will run smoothly. For others, however, it’s a struggle to stay in their good graces, and it can be devastating to have one pull the plug.

Payment processors, like Stripe and PayPal, have three categories of businesses. One is the normal business they work with these with no problems. One is simply the list of prohibited businesses, such as online casinos and drugs. The third, and it’s surprisingly broad, is the high risk business category.

Essentially, it comes down to two factors. First is the nature of the product. Often, digital products, software and other online deliverables are labeled high risk. The reason is simple; there’s no tracking number for shipping and no easy confirmation of delivery. When a product dispute comes up, shipping confirmation is one way companies like PayPal confirm whether or not the product was actually delivered. With products where the delivery is a link in a confirmation email or a software product key, it’s much more difficult to track.

The other factor is the rate of chargebacks and disputes. Many digital products have higher rates of chargebacks, because they’re easier to scam and because the service provider is doing business globally rather than in just the US, UK, Australia, or other primary business region for a company like PayPal.

Why, though, would a company like Stripe drop a business? Chargebacks are a primary factor, of course. It’s a matter of maintaining a good relationship with credit card companies and banks. Stripe doesn’t want to jeopardize their relationship with financial institutions, so they carefully prune out their own clients. If a business is issuing an unusually large number of chargebacks or disputes, Stripe flags them for review and terminates their account. PayPal does the same thing.

Read More