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Why Payment Processors Suspend Their Legitimate-but-High Risk Merchants Of course payment processors drop shady businesses but lots of honest businesses are deemed too much trouble to bother with.

By James Parsons Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

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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.

Related: The 15 Most Popular Online Payment Solutions

What makes a business high risk?

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.

The other risk is one of financial damage. 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. Then 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. This is also why PayPal often requires a bank account as a secondary reserve; so they have a well to draw from if you try to liquidate and leave.

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

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. After all, it's a million times easier to terminate a small business account than it is to arrange a deal with a big bank.

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?

The answer lies in the realization that there is another kind of payment processor available. 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. The alternative is to sign up for merchant processing via a bank directly. Banks are much more secure in terms of risk, and have a much easier time dealing with chargebacks and high risk businesses. On top of that, there are even specific high risk credit card processors available for the truly risky businesses.

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

Why doesn't everyone go with a bank processor instead? Well, they're a pain to set up and get running. It's more work to go with the more secure option, so people take the path of least resistance. 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.

James Parsons

Content Marketer and Author

James Parsons is an entrepreneur, marketer, web designer, growth hacker and Apple fanboy. When he's not writing at his blog, he's working on his next big project.

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