Square, Stripe, and Other Payment Facilitators: They May Be Quick and Simple, but Is There a Catch?

When Square and Stripe entered the online payments arena, they made it simple for merchants to accept credit cards online and, in many ways, revolutionized credit card acceptance. While ease of use was a vital step forward, there are many pitfalls to working with Payment Facilitators that can end up costing merchants significantly. 

Understanding the differences between Payment Facilitators and obtaining your own Direct Merchant Account is crucial. It is particularly relevant when you consider the impact merchants have reportedly experienced withheld funds through no fault of their own. 

Recently, numerous reports surfaced regarding Square's decision to withhold 25-30% of merchants' deposits; money merchants said they needed. This unilateral action confused merchants which led to a stream of dissatisfied customers. Square stated it was doing this to protect merchants against risky transactions and customers who demanded their money back (New York Times, June 23, 2020). But several affected businesses provided documents to The New York Times, showing they had not had any returns or risk flags. 

On the one hand, Square's decisions are reasonable; on the other, the impact on merchants that rely on uninterrupted settlements have been devastating. Square, and companies like them, face real losses if they cannot manage their risk across all of their customers' businesses properly. Often, reserves are enacted to protect losses; however, customers are frequently lumped in with other companies' business risks instead of those directly related to their operations. 

The draw to Square, Stripe, and other similar services is understandable; it is difficult to fault any business that decides to pursue this path. The ability to deploy quickly and with limited information up-front is appealing. However, the choice to open an account with a Payment Facilitator comes with considerable sacrifices, so it is essential to evaluate the pros and cons of each route. Should you choose a Direct Merchant Account or a  Payment Facilitator? 

Let’s begin by discussing a brief history of L3 Payments and how it was set up to help merchants like you. In 1999, members of the L3 Payments Leadership Team offered a similar service to today's Payment Facilitator model. We were initially registered as a HRIPSP (High-Risk Internet Payment Service Provider). The Payment Facilitator and HRIPSP model are similar in that they both require opening a Master Merchant Account with an acquiring bank before opening sub-accounts on behalf of merchants within the Master Merchant Account.  

Our experience operating an IPSP means we now appreciate the risks and challenges of bundling multiple merchants under one account. We understand that it requires an intricate and meticulous system to balance a diverse portfolio of various business types while conforming to Visa and Mastercard regulations and mitigating liability.  

It is possible, but not necessarily preferable, for a Payment Facilitator to examine each merchant individually (even in a bundled portfolio) to create policy based on their performance. One example is adopting a plan that does not hold funds from merchants with little to no returns or chargebacks, and is a profitable segment within the portfolio. In practice, it is often the many compliant, excellent performing merchants who prop up and allow the less compliant transactions to exist at all. 

We sold the HRIPSP we managed in 2004. After, we focused solely on direct merchant account placement because it offers clear and tangible advantages to merchants over the Payment Facilitator model. A growing, online business cannot afford to be impacted arbitrarily by companies from other industries with varying policies and attitudes towards customer satisfaction, amongst other factors. 

L3 Payments Merchant Services

Top Reasons to Open a Direct Merchant Account:


  • A Direct Merchant Account is underwritten specifically for the merchants’ business type, policies, payment term, and other elements and is not influenced negatively by the activities of another merchant. You cannot afford to be impacted by risky business activities that have nothing to do with your own business.  

  • Square, Stripe, and other Payment Facilitators set up merchants quickly, with limited information collected up-front, but this comes at a significant long-term cost. Quick deployment may be attractive, but it hinders the Payment Facilitator's ability to truly learn your business' unique characteristics and evaluate their risk. As a result, once you begin processing credit cards, the risk department may swoop in and freeze your funds. After they freeze funds, they will attempt to gain a better understanding of your business and its risk. This freeze could result from rapid growth, too many refunds in a short period, operational deficiencies, amongst other reasons. The sensible alternative is to make sure that the bank understands risks up-front to avoid a disruption to your business.  

  • Reserves are impacted by other business operations that have nothing to do with your business performance. Yet, they directly apply to your processing as you are evaluated within the overall account.  

  • One-size-fits-all-pricing may seem great at first but is often detrimental to a merchant. As you scale your business up and your performance is consistent, you will want to leverage your history for better pricing.

  • Excellent customer support. Have you ever tried to call a Payment Facilitator for customer support when your funds are held? Was it easy to reach a human being that cared and had the authority to help? We hear story after story from merchants who experienced held funds, and who needed to make payroll or pay important vendors but could not find the help they needed in sufficient time. With an L3 Payments direct merchant account, you will speak directly with an L3 team member who cares and has the authority to support and lead the efforts to resolve any issue you may face. 


Direct Merchant Accounts: Setup is Painless:

  • Although opening a direct merchant account is more stringent, the additional effort is worth it. 
  • It is easier to apply for a direct merchant account than merchants are led to believe. Working with a company like L3 Payments will provide you white-glove service through all the necessary steps, from application to approval. 

While the temptation to launch your business with a Payment Facilitator like Square, Stripe, or PayPal is understandable, there are clear advantages to processing payments through your own merchant account that is underwritten with the unique attributes of your specific business and exacting requirements in mind.

Contact us today to learn more about our programs and the advantages of taking control of your payment processing instead of leaving it in the hands of a third-party who do not have your best interests at heart.  

L3 Payments Merchant Services

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