How to be a 3rd party processor?

[yowzator]

I'm looking for information on how to process credit card transactions on behalf of my clients. The end result is that my clients should not need to get their own merchant account. Places like PayPal, Amazon Payments, Google Checkout, 2checkout, etc are doing things like this.

When I buy something from a website that uses a PayPal buy now button, my credit card statement has a line item on it that says "PayPal*MerchantName". I want the same type of thing.

I have a merchant account through Costco right now, but they told me they don't support that. Where do I need to go to get a merchant account that will support that? Are these providers much more expensive?

I'm currently getting 1.99% at costco, and the fees from Google are 2%, PayPal 1.9 - 2.9%, etc. I assume they get really good rates because of volume. But the rates are going to be important.

And once I have figured out where to get this type of merchant account, do they provide the tools I would need to change the text on the credit card statement on a per order basis?

I'm just getting started with this, so I apologize if my questions are basic. But I've googled and can't find any good info on this. Any help would be appreciated!

Thanks.

[LifeinAsia]

The first thing you need is a LOT of money. Look at the names behind those: Google, eBay (PayPal), Amazon, etc. You won't find Joe's Corner CC Transacting in the list. Because of the huge potential liability from processing payments for others, I assume that you would need to maintain a huge reserve.

Now, if you're only talking about a handful of clients, you might be able to get away with less of a reserve, but I would guess it would still be 25% or more of monthly volume.

My guess is that you should contact Visa/MC directly to ask if they know of companies that would be willing to set up a merchant account like that.

[sun818]

Have your clients pay $49 and get a 2Checkout account.

[jweighell]

You'd be crazy to do it yourself - have you thought about fraud screening and chargebacks etc?

Just charge your clients for integrating with an existing processor.

[yowzator]

Thank you very much for the responses.

We are in the very early stages of developing our business model and are looking for where we can find more information on everything that would be involved in becoming a 3rd party processor. I am very aware that what I'm talking about would be a major undertaking with many risks. I also expect that it would require significant capital. However, for our business model, offering this type of service would be quite beneficial and possibly a necessity. And we should have the funds available to make it happen.

Perhaps I should rephrase the questions. These other companies (paypal, etc.) all appear to have been able to work through the problems involved. I guess I'm looking for information on how they did it. I'd like to create a list of all of the potential problems that I would need to address along with any ideas for solutions.

What techniques does Paypal, etc. use to avoid fraudulent use of their systems?

How can they protect themselves from merchants who sell items but do not deliver and get lots of chargebacks?

Any ideas on how a "smaller" player like 2co got into this business and didn't get killed by fraud?

What other types of problems and concerns do I need to be aware of?

Perhaps these questions aren't appropriate for this forum since it seems to cater more to smaller merchants. Are there any other good online resources that I should go to for answers to business questions like these?

Thanks again for everyone's help!

[LifeinAsia]

I don't know any of these issue for a fact, but I can provide my guesses.

What techniques does Paypal, etc. use to avoid fraudulent use of their systems?

I do know that they do IP screening when peopel login. There have been lots of stories about people having their PyPal accounts temporarily suspending because they accessed it while on vacation. In fact, last year when I went overseas, I contacted PayPal to let them know in advance when I would be overseas and from which countries.

How can they protect themselves from merchants who sell items but do not deliver and get lots of chargebacks?

They just pass the chargebacks on to the merchants. That's why PayPal accounts are linked to a bank account. If you get a chargeback and don't have the balance in your PayPal account, they take the money from the linked bank account. They probably have the rare time when someone closes their linked bank account- in that case, PayPal probably has to resort to other legal means to recoup their loss.

No idea for the others, but I would also be curious to know from a business standpoint.

I guess a lot has to do with the scale of what you're planning to do. If you're talking about a few dozen merchants, you'll probably have to jump through fewer hoops and come up with less capital than if you're talking about thousands of merchants.

[yowzator]

They just pass the chargebacks on to the merchants. That's why PayPal accounts are linked to a bank account. If you get a chargeback and don't have the balance in your PayPal account, they take the money from the linked bank account. They probably have the rare time when someone closes their linked bank account- in that case, PayPal probably has to resort to other legal means to recoup their loss.

This is one of my biggest worries. I'm envisioning a merchant who signs up, links a valid bank account, has some sort of event that drives lots of traffic and sells 1000s of items in a very short time. They get their money deposited from us into their account, then they close their bank account. About 30 days later, we start getting a flood of chargebacks because the merchant never shipped anything. And we no longer have an easy way to get the money from the merchant.

I'm assuming PayPal and the others take this risk because the chances of the typical merchant selling 1000s in a short time period are slim. But I'm looking for a better way to protect from this. I suppose we couldn't hold the merchants funds for 30-60 days to watch for this fraud, but then very few merchants would use our service.

[rachel123]

hold the merchants funds for 30-60 days to watch for this fraud, but then very few merchants would use our service

ha ha, NO one would use your service if you did this. But you could set processing limits on new accounts and require them to make a deposit with you for their estimated monthly volume (also their montly limit) that they cannot exceed without penalty...depending on their application and the level of risk in their business.

[LifeinAsia]

ProPay has a slightly different businesses model. From what I remember, they impose a low monthly limit for the first 3 or 6 months (when we looked at them, I think it was $1000/month, so it wouldn't have worked for us), then you can submit requests for increases. I think they held onto the money for a few days before you could request a withdrawl (well, even with a regular merchant account it's 1-2 bunsiess days before it hits your bank).

We also used one processor in South Korea that only released funds once/week. (I don't think they added the merchant's name to the charge on the card, so I think they had a higher number of chargebacks to deal with.)

So not having funds available for a few days isn't that uncommon- it's a trade-off for not having a tradtional merchant account.

[T_Miller]

A) Costco, Sam's Club, Local Banks, etc are just RESELLERS of merchant accounts for *actual* processors like First Data. A lot of insight on this arrangement and how merchant accounts work would be found by reading the contract you signed. Read if very carefully and ask "Why does it say that?".

B) PayPal, Google, 2Checkout, etc are just middlemen. High-Volume middlemen, but middlemen nonetheless. They are *not* direct processors. Same thing, read the contracts/TOS and you can learn a lot about how they operate.

I use PP Website Pro and my company is displayed on the customer statement, not PP, so that ability is there.

PayPal and Google are public companies. It's not that hard to research how they operate as it's available in public documents (Annual Reports & SEC Filings). In fact, it just took me 10 seconds to find a PayPal contract with First Data in 2000. Now THAT should show you everything you can expect to run up against. BTW, PayPal wasn't called PayPal on that contract until it was amended later ;>) And yes, it's easy to find on Google.

Now if you're wanting to work directly with MC/VISA/AMEX/DISCOVER (become an actual processor) you'll have to approach each one separately with a lot of backing (several hundred million I'd except).

Hope that helps.

[yowzator]

Thanks again for all the responses!

So not having funds available for a few days isn't that uncommon- it's a trade-off for not having a tradtional merchant account.

LifeInAsia: Thanks for your helpful comments. As you indicate, holding funds isn't uncommon, but I'm sure that any sort of lengthy hold on funds would discourage a fair number of merchants. My plan is to try to limit that hold as much as possible.

B) PayPal, Google, 2Checkout, etc are just middlemen. High-Volume middlemen, but middlemen nonetheless. They are *not* direct processors. Same thing, read the contracts/TOS and you can learn a lot about how they operate.

T_Miller: This is good to hear. I actually was reading the PayPal TOS this morning and found a reference to Wells Fargo. I'm definitely looking to be a middleman here if at all possible.

I use PP Website Pro and my company is displayed on the customer statement, not PP, so that ability is there.

I use PayPal Payflow Pro with a Costco merchant account (Evalon) and I too have my company name displayed on the customer statement. But that alone isn't good enough. What I want is to be able to customize the name on a per-transaction basis. If merchant Joe's Tires sells something, the statement should say "MyCompany.com*Joe's Tires" or some such. If another merchant "Designer Clothes for You" makes a sale, it would say "MyCompany.com*DesignerClothes4You.com". And so forth. I haven't found a way to do that with the Payflow Pro APIs.

Now if you're wanting to work directly with MC/VISA/AMEX/DISCOVER (become an actual processor) you'll have to approach each one separately with a lot of backing (several hundred million I'd except).

I'm sure it would take plenty of money to become an actual processor. And doing that really isn't in my business plan. Which is why I'm trying to figure out how PayPal, etc. have done it. I realize it must have still cost a lot for them, but not as much as it would take to become a new Evalon, FDMS, PaymentTech, etc.

I think my next step will be to approach the processors directly (Evalon, Wells Fargo, First Data, etc.) and see what I can find out.

[T_Miller]

Couple Google searches you should try ;) :
PayPal First Data Contract

and

PayPal Wells Fargo Contract

Good Luck