Stripe has been praised by many as the safest way to accept online payments. But for what type of business is Stripe safe?
Stripe is NOT safe as a long-term payment processing solution nor is it safe for high-risk merchants (roughly 90% of all online businesses).
As an all-in-one payments solution for retailers, Stripe is convenient. It’s quick to get started; it’s got built-in security features and a user-friendly experience for both customers and merchants. But that doesn’t mean it’s safe?
Many small businesses get shut down overnight by Stripe with no warning and no way to recover. Is convenience a fair trade for the level of risk Stripe puts onto e-commerce businesses?
First, what is Stripe? It’s a payment facilitator, NOT a merchant account.
There is a lot of confusion over what Stripe.com does. Some business owners think it’s a payment processor, others think it’s a payment gateway, and most think it’s a merchant account.
Part of this ambiguity is Stripe’s strategy. The details don’t matter, it’s a service that simply works. You’re a business that needs to accept credit cards and customers need a way to pay. That’s where Stripe comes in. But things aren’t that simple.
Stripe is not a merchant account.
Stripe is more of a mix between payment platform and service provider; a payment service provider (PSP).
To get even more granular, Stripe is a payment facilitator (payfac), also known as a payment aggregator. It’s like PayPal and Square in this regard. It falls into this category because it processes transactions (Visa, MasterCard, American Express, ACH, Apple Pay) at checkout on behalf of businesses and shares the responsibility with them to be compliant with card network rules and regulations.
How does Stripe allow you to process payments?
Stripe provides you with a sub-merchant account which lives underneath their own merchant account. Remember, Stripe is a business, too. So when you use their service, you are really nestling your startup underneath theirs and they give you a bit of the processing power granted to them by their partners.
That sounds strange, we know. That’s probably why Stripe hides details like this, otherwise merchants would get confused and find another solution.
It’s also why it’s impossible to negotiate terms, transaction fees, monthly fees, and rates with Stripe. They operate on flat rate pricing only.
And yes, Shopify Payments is the same thing as Stripe, so don’t go flocking over there just yet.
Who is Stripe safe for?
Stripe is ONLY safe in these two scenarios:
- Merchants who process less than $15,000 per month with zero high-ticket items.
- Low-risk merchants who sell products they hold in a warehouse that are ready to be shipped as soon as a customer makes a purchase.
If you do want to use Stripe anyway, you could use it along with another PSP or payment processor. Stripe is willing to process around $15k with no questions. So as soon as you start to reach that limit, swap to your other processor. Stripe is actually a great backup processor if you need to process payments fast—but NEVER as a primary solution.
Why is Stripe safe in only these two scenarios?
Because Stripe is a payment aggregator. They are an intermediary for your business, not a standalone payment processing solution. They give you a payment gateway with PCI compliance, SSL/TLS, and authentication methods to ensure secure payments.
Stripe “processes” your online transactions, but the money isn’t deposited directly into your bank account (business account) nor does it go through a proprietary processor. Instead, payments are sent to a 3rd-party processor that has their own policies regarding high-risk transactions.
Stripe cannot support high-risk businesses of any kind because they have to abide by the terms of service from all of the payment processors they work with.
Since they’re a middleman, not a merchant account provider, Stripe can refuse or terminate service at any time if they feel that you’re violating their terms of service.
While their terms are available for you to sift through freely, they don’t hint at what is and isn’t possible during the onboarding process. A lot of businesses sign up quickly only to get shut down in a month or two—right when sales are picking up—because they violated terms they didn’t know existed.
Who would want to deal with all the hassle?
Why does Stripe shut down accounts so quickly?
Your business could be shut down for any number of reasons. For example, if you are in a high-risk industry or your business model doesn’t fit Stripe’s preferences, you’re more likely to get shut down. Even if you’re running a legitimate business, Stripe can shut you down and take your funds while they investigate whether or not they want to do business with you.
Here are the biggest reasons why Stripe shuts down accounts:
- High-risk industry
- Too many chargebacks
- Too many return requests
- Significant increase in sales volume
It sounds a bit ridiculous to get your online store shut down because you had an increase in sales. Isn’t that a goal for every business owner? And this is exactly why we say “no” when asked, “is Stripe safe?”
The Two Main Reasons Stripe Isn’t Safe for Your Online Business
To begin with, there are two main reasons why Stripe isn’t safe, and both are related to businesses being high risk.
Chargebacks happen when a customer disputes a transaction through their bank, not through you. They’re a great loss for businesses because business owners must refund the customer in full, pay a chargeback fee, forgo any reimbursement for shipping, and see an increase in their chargeback ratio.
The higher your sales volume, the greater potential for chargebacks—especially when selling high-ticket items or seeing a sudden spike in sales.
Stripe needs to protect itself. It needs to be able to cover the funds of a disputed transaction. The Stripe payment aggregator does not want to have to reimburse anyone on your behalf. It’s safer for them to shut you down and eliminate the risk entirely than to see your business through to it’s full potential.
Online businesses also have one major factor that sets them apart from brick-and-mortar businesses: card-not-present transactions (CNP).
CNP mean the merchant did not accept the payment in-person. The debit card or credit card information was typed in, and therefore much riskier (since you cannot verify the identity of the cardholder).
Merchants who process CNP transactions are considered to be significantly higher risk than those who do card-present transactions. The reasoning is that anyone could have taken those card details. It’s a way of limiting fraud. Neither customers nor merchants want to deal with stolen credit card numbers.
There’s no way around CNP transactions as an online business. You can, however, implement security measures like 3DS and 2FA.
How can Stripe businesses avoid being shut down?
Here are the best ways to avoid being shut down:
Get a Merchant Account
If you run an online business, then you need a merchant account.
Doesn’t matter if you’re high-risk, low-risk, or medium-risk. You need a merchant account that matches your business model and supports your merchant category code. This is the only way to operate without worry.
Keep Chargebacks Low
If you want to keep using Stripe, then keep your chargeback rates low, maintain strong customer service, and provide accurate information when registering your business with Stripe.
Chargebacks might sound impossible to manage, but there are companies that can help. Up the ante with your customer support and entice customers to make returns instead. That’s one of the best ways to mitigate chargebacks.
Follow Payment Processor Rules
A lot of first-time business owners think that once they get their Stripe or merchant account set up, they can start selling whatever they want. Not true. This is another reason why Stripe is unsafe.
You need a separate merchant account for every business you have. Or if you continue running on Stripe, then you need a new Stripe account for each business. You can’t share capabilities between the two.
However, you can have multiple merchant accounts on a single business. So you can have a Stripe account open as well as your own merchant account and swap between the two.
If you run an online business, you’re better off getting a real merchant account. DirectPayNet can help.
Your business depends on customer confidence and trust. When you lose those, you lose everything.
So, what are your options?
As a business owner, you need a way to accept credit card payments that’s reliable and trustworthy. The good news is that there’s a better option than Stripe: get a high-risk merchant account with a PCI-compliant payment gateway with customizable APIs and a compatible payment processor.