PayPal and Stripe are the world’s foremost online transaction processing companies which offer alternatives to traditional cash transactions.
Whether you are an entrepreneur or part of your company’s management staff, it has become vital to use some form of a merchant account to ensure the survival of a business in the twenty first century. With all the hype surrounding these giants in the industry, the question arises, how one goes about determining whether an account with a tech company such as PayPal or Stripe is more advantageous than a high risk traditional account.
In this article we will breakdown all the complexities regarding PayPal and Stripe versus an account from a traditional high risk payment processor.
Choosing a Stripe/PayPal Merchant Account
Before you try to wrap your head around choosing between Stripe of PayPal, one needs to understand the fundamental differences between them and a traditional high risk processor. Payment processors basically offer individual accounts for each merchant to operate and process their own business transactions. PayPal however works on an inherently different principal, by acting as a single low risk merchant account and allowing numerous businesses and companies to operate and process transactions via their single account. This is an oversimplified version of quite a complicated process, but for all intents and purposes it holds true.
Obtaining a verified merchant account from major financial service providers is sometimes quite a cumbersome process and requires payment of monthly service fees. However availing the use of a PayPal or Stripe account requires much less verification in return for higher transaction processing rates.
Obviously such a system must have its pros and cons.
The major reason for the popularity of PayPal is its accelerated approval rates and lowered scrutiny on the merchants it acquires. Accounts are approved in real time and can start accepting and processing transactions virtually immediately. The amount of information required for verification process is far less than traditional payment processors.
An unsettling con about the use of PayPal is that due to the fact that the tech company knows the bare minimum about each merchant operating on its platform. They are low risk payment processors. Whenever any questionable transaction occurs a business’s account is frozen and PayPal reserves the right to with-hold the account’s money for as long as is deemed necessary.
Merchant Underwriting Procedure
The verification process for each account is tough and stringent criteria have to be met. The entire process of information gathering and verification is called underwriting, the prospective account holder has to provide particulars on certain states of affairs.
The key bits of information required are the account holders:
• Personal history or credit
• Business history (not applicable for new startups)
• A detailed business model
You may wonder why such details are needed in the first place. To understand this, one must understand the nature of credit card transactions. The possibility of chargebacks can exist for up to six months after a transaction has been processed. Merchant processors are wary of the fact that new or high risk and possibly fraudulent businesses might make many sales, get paid and close up shop, only to receive a multitude of chargebacks which become the responsibility of the payment processor.
Merchant account providers use the underwriting process to get to know you and your business in detail. They can grasp the fundamental risks your business might incur. They are also able to provide individual and personalized support to aid in the growth of your business. The increased knowledge about you and your business make it less likely that your accounts will be frozen in the unlikely event of suspicious transactions or an unprecedented spike in the number of chargebacks.
Reputable financial service providers work closely with their clients and have sufficient background information to accurately judge each situation individually and can advise you on how to reduce and manage your risk effectively.
So the key factor to consider is reliability. Platforms such as PayPal and Stripe are unpredictable and for low risk merchants, as they can freeze your funds at any time. A reliable and respectable payment processor would be a better and safer option, especially if your business is considered high risk.
It is this unique and tailor-made service that make using a payment processor a more viable and long lasting method of processing cashless transactions.
When to Use and When Not to Use PayPal/Stripe
Failure to understand when to use a PayPal or Stripe account can cost a business dearly and even result in bankruptcy. It’s prudent to know when using a PayPal account is the best option.
When to Use PayPal or Stripe
As mentioned before part of the underwriting process involves a significant amount of underwriting. A business must be seen to have sufficient market experience. If you own a relatively new start up and have no proof that your business is viable and will be around for the long term future, a PayPal account provides a good proving ground to gain both time and experience in the market place while continuing to grow and earn. However, it must be noted that the charges for each transaction are much higher as PayPal takes a significantly larger percentage.
A business that has regular low volume sales (less than $10,000 a month) should also consider using a PayPal or Stripe account. It’s less like that spikes in a low volume account would be attention worthy of an aggregator such as PayPal. It is therefore less likely that your account would be closed.
When not to use PayPal or Stripe
Those businesses who process a high volume of sales, and are considered high risk should avoid the use payment aggregators such as PayPal or Stripe. The transaction rates for each sale are already much higher for these platforms and the cost of chargebacks are even greater.
Although using a PayPal account might be useful in the short term, there can be many fatal drawbacks to high risk businesses. Carefully consider all options and research all avenues before taking any decision.

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