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  1. #1
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    Question Accepting, Holding, and Sending Online Payments

    Hi, I was wondering what is involved in setting up a site that manages money.

    I'm not talking about selling items, I want to coordinate payments between two party's. (an escrow service)

    SO what I need to do is:
    - Accept a payment from the first party
    - Keep a record of that payment in my site's db
    - On request, pay the 2nd party

    Can I use a payment processor (like paypal) to accept payments, and automatically send payments?

    Thanks, I posted a similar topic here which was more to do with the business side - now I want to look at the technical side of things.

  2. #2
    Follow Me On Twitter: @djg gold trophysilver trophybronze trophy Dan Grossman's Avatar
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    Just about all payment providers you look at are going to forbid what you're proposing, processing payments on another's behalf, called factoring. It's a very high risk business -- you are assuming risk for other people's bad customers. That passing of risk to you is why people go to escrow services, but having to take on that risk is why there are so few of them.

  3. #3
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    Yeah, I do understand there is the risk of disputes. But I do see space in the market for the service I have in mind. I know this idea is - just an idea. I'm miles from actually going ahead with it.

    Is it that high risk? Assuming the following workflow:
    1: Party 1 pays my site $600 and submits a written payment agreement.
    2: I hold the funds, and await fund release by party 1.
    3: Party 1 releases the funds, and I dispatch payment to party 2.
    4: (in case of disagreement) A mediator from my site steps in to review the agreement. Worst case scenario, funds are split evenly.

    The worst case scenario as I see it is that I am left with two unhappy customers. Maybe I'm not seeing something?

  4. #4
    Follow Me On Twitter: @djg gold trophysilver trophybronze trophy Dan Grossman's Avatar
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    The worst case scenario doesn't involve party 1 or party 2. But for the sake of example, the worst case scenario that does: party 1 isn't happy with party 2 and you get a chargeback. You lose $600, plus a chargeback fee, plus your processing fees on the $600, plus have a chargeback on your record. You've already paid party 2, so you're over $1200 in the red on that transaction. Right out of your pocket.

    Too many (read: 1% of your monthly volume) and you lose your merchant account and may be blacklisted from getting one elsewhere. Whether you are able to successfully dispute the chargeback is irrelevant -- only the fact that they occurred counts.

    Those chargebacks, which you can't not expect, are on top of the ones you get from just plain fraud.. stolen credit cards and bank accounts and the like. That's your worst case scenario and a reality for anyone trying to get into payment processing online. You not only lose the $1200, but since the information about the payer you've been given is fraudulent (you try to contact them to find they knew nothing about the transaction until they saw it on their statement), you have no leads to go after to recover.

    You won't find a single major online retailer that doesn't lose a significant percentage of profits to payment fraud, and as a processor, you'll be targeted even more heavily. This is what put all of PayPal's competition in the 90s/2000s out of business. PayPal lost millions a month to it but managed to come through thanks to IGOR (look it up some time). These are the companies you're following in the footsteps of.

  5. #5
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    Yeah I see. Sorry - I'm a little new to all the payment stuff.

    You are comparing the service I describe to paypal, but wouldn't I be using a service like paypal to process the payments? Would chargebacks still go though to me?

    I'd just like my site to act like a third party, possibly using paypal to accept and send payments (if I can do this with paypal).

    Thanks walking me though this...

  6. #6
    Follow Me On Twitter: @djg gold trophysilver trophybronze trophy Dan Grossman's Avatar
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    Yes, the chargebacks would go through to you. But PayPal would never let you run this business; factoring is prohibited, as it is with just about any payment processor. The only way you'll get this off the ground is by talking to merchant providers and banks individually, and it seems like you're unlikely to convince them you're able to mitigate the types of scenarios I'm showing you. They'll be well aware of the risks associated with intermediating payments; you won't get by without knowing exactly how you're going to be different to eliminate the risk of taking you on.

  7. #7
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    Ok, thanks. If I do decide to peruse this it would be on a very long term scale - so i'd be willing to learn exactly what i'm getting into.

    One more question (this is the last one I promise ) I don't know if you've used sites like escrow.com or guru.com (the escrow part) - but they first require a written contract covering all scenarios, what happens in the case of a dispute, etc. If a dispute occurs they have Arbitration, which they say is legally binding.

    Do they still suffer from these problems even with all the contracts and arbitration?

  8. #8
    Follow Me On Twitter: @djg gold trophysilver trophybronze trophy Dan Grossman's Avatar
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    Of course they do. Fraud that gets through all your screening systems is just a loss your company takes; you don't know the identity of the perpetrator so there's nothing you can realistically do about it.

    The agreements are going to deter some people from filing a chargeback, but not all of them. You'll lose the funds, get the chargeback fee, and have the mark on your record going towards that ~1% limit most processors will hold you to (it's really up to them, but in the end they have to stay under a low limit with VISA/MC to keep processing). You then have to dispute the chargeback with the bank, presenting your agreement and other evidence you have, and you'll likely be able to win many of those cases. You get the funds back, but again, you've lost the fee and you still have a chargeback on record.

    If you lose the dispute with the bank for some reason, your recourse is the court system. You have this legally binding agreement, but it costs money to enforce it. Now you're spending time and money with lawyers to recover the payment. And once you get the judgement, after all the time and legal fees, you still have to collect on it. If the losing party doesn't have the money anymore, you're SOL. You can turn it over to a collections agency, losing even more of the payment, but there's no guarantee they can get the money either.

    A company like Escrow.com operates on the basis of having a sufficient number of sufficiently large problem-free payments flowing through the system that their margins are high enough to eat the costs of fraud and pay the legal team to handle the disputes. If you don't have that volume, it'll eat away at revenue until you're losing money each month instead of making it.

  9. #9
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    Ok, thanks for the help - thats what I needed.

    I'm new to the financial side of things so forgive my ignorance

  10. #10
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    I just scanned all the posts and I didn't hear anything about using a bonding company to help get you started. I would think this would reduce your liability significantly. You will still have to work with a bank who is willing work with you under the escrow-type terms. Nonetheless, I wish you luck.
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