Stripe: A Nightmare When Scaling Quickly

Introduction

Stripe, a leading online payment processor, has garnered attention for its robust features and user-friendly interface. Like any service, it comes with its own set of advantages and disadvantages. This article delves into why Stripe is a nightmare for quickly scaling businesses and alternatives for businesses growing fast. We'll give you all the background to fully understand why scaling a business can be so difficult, including how banks perceive companies during the payment processing phase and the associated risks and why efficient and reliable payment processing is crucial for businesses of all sizes.

How Banks Perceive Companies

Banks react to businesses based on the amount of risk the bank decides the business poses. When assessing companies, banks consider several factors:

Likelihood of Risky Behavior 

Banks will conduct a thorough assessment to determine the likelihood of fraud, chargebacks, and general financial instability. Companies with higher perceived risks in these areas (often referred to as High Risk Merchants) may face higher reserves or processing rates because of the perceived risk of their business.

Credit and Financial Health 

Company financial health and credit history are crucial to the bank's perceived risk. Banks look at the overall financial performance of the company, as well as outstanding debts and creditworthiness to decide on rates and reserves. Often times, companies with poor credit may face higher fees or additional requirements.

Compliance and Regulatory Adherence

Compliance with financial regulations and standards is non-negotiable for banks. Always adhere to laws such as anti-money laundering (AML) regulations and Know Your Customer (KYC) requirements because non-compliance can result in closure of your payment processing account or legal action.

Stripe and the Bank

Now that you understand how banks assess risk, let's discuss the relationship between Stripe and the bank. Stripe is able to board merchants immediately and without previous processing statements because of the trust they have built and their ability to mitigate risk. They use a few strategies to manage risk:

Machine Learning Algorithms

Stripe employs sophisticated algorithms that analyze vast amounts of transaction data in order to detect fraudulent activities, allowing them to quickly assess risk levels.

Behavioral Analysis

Stripe’s systems can also analyze the behavior of the merchant and its customers to trigger risk mitigation with any unusual or suspicious pattern.

Radar for Fraud Teams

Stripe's Radar automatically detects and blocks some fraudulent transactions to reassure banks about onboarding new merchants quickly.

Tiered Risk Management

A tiered approach to risk management is used to build trust with the banks. New merchants start with high reserves that gradually decrease as they build a transaction history and demonstrate reliability.

Continuous Monitoring

Once the merchant is boarded, Stripe will continuously monitor transactions and adjust risk measures dynamically.

Stripe and Scaling Quickly

In the name of managing risk (especially for new or rapidly scaling businesses) Stripe often holds a portion of the business' profits as reserves. This is in anticipation of potential chargebacks or refunds that the bank would be responsible for if the merchant couldn't pay. Stripe and scaling quickly often result in the merchant's funds being held for months as a time. There is often nothing the merchant can do to release the funds until Stripe and the bank satisfy their risk management needs. However, these funds are often integral to the continual growth of the company.

What can businesses do when all their funds are going to be held for the next 3 months under their Stripe account? Open a secondary payment processing account with a different provider to continue the growth of their business.

What to do When Scaling Quickly with Stripe Fails

Choosing a small or midsize payment processor over a large one like Stripe can offer significant advantages, particularly for businesses looking to scale quickly without having funds held in reserves. Smaller processors often provide more access to customer service and faster response times lead to quicker resolutions to any issues that arise. Additionally, smaller payment processors often have partnerships with the banks they board their merchants with. This direct line from your payment processor to the bank allows for more streamlined scaling processes.