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

Payment processors, like Stripe and PayPal, have three categories of businesses. The third, and it’s surprisingly broad, is the high risk business category.

Why, though, would a company like Stripe drop a business? If a business is issuing an unusually large number of disputes or chargebacks, Stripe flags them for review and terminates their account. PayPal does the same thing.

What makes a business high risk?
Often, digital products, software and other online deliverables are labeled high risk. 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.

If a business knows it’s likely to get a lot of chargebacks, they could potentially close out their PayPal or Stripe account and flee with the money. When the chargebacks come in, PayPal or whoever will be left having to pay out of their own pocket, because the account they would normally draw money from is gone.

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 remain in their good graces, and it can be devastating to have one pull the plug.

The other factor is the rate of disputes and chargebacks. 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.

Related: 25 Payment Tools for Small Businesses, Startups and freelancers

Why doesn’t everyone go with a bank processor instead? It’s up to you as a small business owner to recognize whether you’re likely to be at high risk, or if you’re safe enough to use PayPal without worrying about it.

Payment processors, like Stripe and PayPal, have three categories of businesses. If a business is issuing an unusually large number of disputes or chargebacks, Stripe flags them for review and terminates their account. If a business knows it’s likely to get a lot of chargebacks, they could potentially close out their PayPal or Stripe account and flee with the money. While PayPal, Stripe, and the others are a simple, easy integration for small businesses, they are also less secure for all the reasons mentioned above. It’s up to you as a small business owner to recognize whether you’re likely to be at high risk, or if you’re safe enough to use PayPal without worrying about it.

While PayPal, Stripe, and the others are a simple, easy integration for small businesses, they are also less secure for all the reasons mentioned above. Banks are much more secure in terms of risk, and have a much easier time dealing with chargebacks and high risk businesses.

Related: Looking for a New Payment Company? You’re ‘Due’ for Some Good News.

Of course, that’s only easier for PayPal or Stripe or whichever of the hundreds of payment processors you could be using. Imagine being the small business who abruptly has their account terminated, no notice, no recourse. What do you do?

It’s all a matter of risk and risk management.
Anything that causes PayPal to pay out when they shouldn’t have to cover the costs, or undermines their relationship with a financial institution, is something they are liable to close an account over. It’s a million times easier to terminate a small business account than it is to arrange a deal with a big bank.

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