The Secret Behind Square and Mobile Processing

Want to know the secret behind Square’s payment processing? It’s a rarely discussed bit of industry knowledge. When I started reviewing mobile processors, I had to wonder how the heck services like Square could possibly set up merchant accounts so fast with no setup fee and no monthly fees, and why they had so many pitfalls as well. What I found surprised me: They don’t actually set up merchant accounts.

There are essentially two types of mobile payment processors and service providers out there:

  1. Payment Service Providers or PSPs (Merchant Aggregators)
  2. Standard Merchant Account Providers (Standard Providers)

This is an incredibly important distinction to make, and one that few providers are willing to go through the trouble of explaining.

In 2011 Visa expanded and redefined its Internet Payment Service Provider (IPSP) model to include sales to traditional merchants. Thus, the classification was renamed simply Payment Service Provider (PSP). Providers like PayPal had been aggregating Internet payment service for years. But bringing that same model to physical sales – that was a novel service.

MasterCard also uses the term Payment Service Provider, but Discover uses Payment Facilitator to mean the same thing.

So – what’s the difference? Take a look…

Standard Mobile Processing Providers

(More freedom and security, but more complex)

These processors will set you up with a standard merchant account, opened for your business. In terms of control and capabilities, standard providers usually give you approximately the same capabilities and level of control as any of the processors or resellers we review.

The real difference here is just a matter of marketing. Look at Inner Fence, for example. They were probably the first viable and successful mobile payments provider with an iPhone app back in 2008, before the aggregators hit the market. Basically Inner Fence sets you up with a Merchant Focus merchant account, an Authorize.Net gateway, and their own proprietary processing app and virtual terminal software. What’s the difference between this and just getting a merchant account through Merchant Focus? The app. That’s about it. Some standard providers will specialize in mobile processing, while other will market mobile options under there traditional merchant services.

These standard providers will often offer a tiered pricing structure as protocol, but you can sometimes ask for interchange-plus pricing and negotiate your rates.

Here’s a look at how standard providers compare to aggregators:

Pros:

  • Better account stability (less likely to have holds, but it still happens)
  • Ability to process larger transactions and larger weekly volumes
  • Potentially lower rates
  • Able to negotiate rates
  • Possible to use interchange-plus pricing
  • Ability to use a virtual terminal for computer-based processing

Cons:

  • Higher setup and maintenance costs (sometimes passed on to the merchant directly)
  • May have more incidental fees (such as PCI compliance)
  • May have an early termination fee
  • May require you to purchase a card reader
  • May require separate payment gateway
  • You must be approved for an account

Examples:

Mobile Processing Aggregators

(Less freedom and security, but greater simplicity)

These providers don’t set you up with your own merchant account. They instead provide stand-alone mobile service, usually with a pay-as-you-go pricing structure. They basically pool a whole bunch of merchants together into one big account, with each merchant tracked individually within this aggregation. In order to qualify to perform this service, a PSP and their acquirer must meet several different standards and follow a variety of rules set by the credit card networks, since these types of accounts are extremely susceptible to fraud (very high risk).

This allows them to give you instant access to processing capabilities, and free you from the cost and time associated with setting up a merchant account and payment gateway. At the same time, however, it increases the providers risk. This increase in risk leads to greater levels of caution exercised, which in turn leads to accounts freezes, holds, and sudden terminations.

You’ll usually see strict transaction and weekly volume limits for processing with aggregators. This is in part because of the higher risk associated with these transaction, as well as because of card network rules like this one from Visa:

A sponsored merchant must enter into a direct merchant agreement with an acquirer when its annual Visa sales exceed US $100,000.

While standard providers will usually use a tiered pricing model by default, aggregators tend to opt for a set of fixed prices, usually one for swiped and one for keyed in transactions.

Here’s a look at how aggregators compare to standard providers:

Pros:

  • Instant access
  • Lower setup and maintenance costs
  • Never carries an early termination fee
  • Usually comes with free card reader, if needed
  • Fewer incidental fees
  • Streamlined service

Cons:

Examples:

The Bottom Line

It’s not really useful to call one of these models “better” than the other. Either can be executed well, and either can be a mess. For low volume, sporadic processing with no need for a virtual terminal, an aggregator-style provider will suit you best. For those who want to process a higher volume of payments and have more account control, definitely consider a standard provider first and foremost. Basically, you have to choose between freedom and simplicity.

The mobile processing industry is booming, so expect to see these services with a ton of other value-added options marketed from both standard providers and aggregators alike in the coming months and years. If you want the scoop on a provider, check out our unbiased, independent reviews for more information.

Good luck, and feel free to comment with your opinions or insights!

Tom DeSimone

Tom DeSimone

Tom loves asking tough questions and getting straight answers, so he has a lot of fun calling payment processors for Merchant Maverick to cut through their smoke and mirrors and find the real deals. He has run a full-time editorial business from his home in New York’s Hudson Valley since 2010 and could not imagine a better job. When not busy writing and keeping credit processors honest, Tom enjoys backpacking in the mountains.
Tom DeSimone
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