As with any business, the goal is to attract customers, and retain them. This means evolving with technology and trends that determine success in the era. Credit card processing is a prime example of such technologies.
According to Mark Sands, CEO of High Risk Merchant Account LLC, “Even for the most experienced CEO, determining the best merchant account company can be an extremely daunting task.” While there are so many credit card processing companies today, most only offer low risk merchant account solutions. Mr Sands went on to say, “Finding a high risk merchant account that can handle higher volumes and help mitigate chargeback ratios, should be every CEO’s prime concern.”
Choosing the best credit card processing company for your business can present an overwhelming prospect. This is especially true for small business owners who have never heard of a “high risk merchant account” prior to setting up the elements needed to get their business running.
Below we will explore the variables every CEO should be concerned with when seeking payment processing for their business.
What is a High Risk Merchant Account?
There is no industry-wide principle that identifies a business as high risk and absolves other businesses of this designation. It is subjective to the views of the payment provider or acquiring bank involved and can be based on a number of factors. What some processors consider a risky business venture could be just fine for others. However, there are still standard guidelines that providers adhere to when assessing how risky a business is for them. The primary reasons include:
- History of chargebacks: This is when a dispute is initiated by the issuing bank for the return of funds.
- Credit score: Your business may be deemed high risk if your credit score is too low because repaying any negative balance will pose an unpleasant challenge.
- Industry reputation: If the industry is known to be an easy target for fraudsters or it has a high rate of dissatisfaction.
- High transaction volume: If the business processes loads of transactions, there is greater risk that fraudsters will attempt to steal important data and credit card details.
- Refunds: If your business frequently gives out refunds, processors may assume that you must be doing something wrong and may deem your business high risk.
- New business: If your business is just making its entry, there will be no credit card processing records to assure processors of its growth potential. The absence of credit card processing history easily renders your business an uncertain risk.
Who Needs a High Risk Merchant Account?
There are a few business types you would expect to be in the high risk category, while there are also some entries that may surprise you. The following businesses would need a high risk merchant account in order to accept credit card (or debit card) payments:
While this industry typically deals with fraud and legal issues, it is also risky by association. Though it is legal to bear arms in the United States, the cultural climate still stigmatizes the ownership and usage of firearms. As a result, banks are often subjected to criticisms and could even be penalized for doing business with merchants in this industry.
The gaming industry is notorious for chargebacks and fraud. Its legality has also sparked several debates, leading to a tussle with state and federal laws. With the overturning of a 1992 ruling of the Professional and Amateur Sports Protection Act (PASPA) by the Supreme Court in May 2018, however, intrastate sports betting will be allowed in states that allow it, with more states expected to follow. The ruling is also expected to pave the way for adjustments in legislation related to online gambling, sports betting, and the way payment processors offer their services in this industry.
Since controlled substances and medications that cause irreversible effects if misused are major causes for concern, it makes sense to find pharmaceutical companies on this list. The cannabis industry is one of the biggest markets in this category to get the short end of the stick. Though the medicinal and recreational use of marijuana has been legalized in many states of the U.S., federal government backed financial institutions will not hand accounts to merchants so easily. And when there is a difference of opinion between local and national authority, the latter usually wins.
Any business outside the shores of the United States will be considered high risk as it creates the possibility of fraud. If most of your customers reside in the U.S., but your company’s headquarters are located overseas with an offshore merchant account, this will raise red flags.
Getting a processor to approve your merchant account application for adult content can be difficult. These businesses include anything from dating websites to pornography.
Payment Concerns for Every Small Business
Many small businesses start with lots of potential and promise for the future. However, despite the vision, innovation and objectives of the business, payment processing presents a unique and expensive challenge. While there are so many payment processing companies for businesses, making a sense of the many options can be confusing.
Here are three of the biggest payment processing concerns for every small business – and how you can overcome them.
Many small businesses handle their payment processing needs as an individual component of their operations. Managing new transactions requires that these businesses input payment data into the software they use. However, this manual mode of data entry is time consuming and prone to error.
But you can automate your transaction management process with the right payment integration solution. Working with the right payment solution can help to sync your incoming transactions seamlessly with CRM, accounting and other software platforms you use to manage your business operations.
While established business owners view processing fees as the cost of doing business, it can be a challenge for small businesses. Processing fees are calculated based on different factors, including type of business, average transaction volume, methods used to accept payments, type of card used, etc. Since it may be possible to negotiate many charges, it is important for small business owners to discuss with their providers to determine how each fee works.
Transaction issues can creep in at any time, even in the dead of night. Will your payment processor be available after business hours? If not, you need to look elsewhere. It is important to work with a processor that is always ready to help address any problems you are faced with, especially as a small business looking to gain traction.
Why High Ticket Transactions Present Risks
Some industries are naturally bigger and more luxurious than others. Typically, the individual order charges of a t-shirt company will be smaller than that of a high-end electronics company. While this seems pretty obvious, a business owner may fail to recognize that these details shape how credit card processing companies will view them when they apply for a merchant account.
Payment processors are generally cautious when dealing with businesses that have high average transaction charges. To the layman, these big companies and their high ticket transactions represent huge profit. But to the merchant account processor, it has risk written all over. High ticket transactions are especially risky for financial institutions in two ways: first, if your customer is not satisfied with your service for any reason, the probability that they will want to do something about it largely depends on how much money they spent. For instance, if a customer spends $10 on toiletries, they will likely wave it off as an error specific to their order. This will hardly be the case if thousands of dollars have been spent on a pink-gold bracelet with pink diamonds.
The likelihood of fraud is a second reason high ticket transactions are significant risks for processing companies. Think for a moment: if an identity thief successfully stole the personal details of a victim’s credit card, which items will he/she likely purchase? You guessed right. They would rather go for luxury items than a Venti latte. Large and expensive items give fraudsters value for their ‘effort’, so companies that sell these products will likely raise more eyebrows with merchant account services.
Ultimately, this means that you will find it much more difficult to get a processor willing to approve your merchant account application if your company processes high value transactions.
Why High Monthly Volumes Present Greater Risks
Market your products, make more sales, gain customers, enjoy increased revenue and have peace of mind. You would be forgiven for thinking it’s that easy. But if you are a merchant account holder, growth can present some obstacles you need to be wary of, especially as a high risk merchant.
When a merchant account are approved, a ticket for a specific monthly maximum amount is given. Merchants may be at the risk of being shut off if they exceed the maximum ticket amount. Since processors are responsible for a merchant’s chargebacks and refunds, they have to dig in to cover for the merchant if the merchant does not have the funds available at a given time. As a result, high monthly volumes present two tricky prospects for processors: more volume means more profit, or more volume means more liability.
Hence, it is your duty as a merchant to know your maximum monthly limits. Exceeding these limits can cause held funds, missed deposits, or even lead to the shutdown of your account, and this can be devastating for your business. Still, this does not prevent your growth in any way. In fact, most processors are happy to see you grow, and would be willing to work with you to help this development. You can play your part by reaching out to your processor before you need the increased monthly volume. Provide all the needed documentation for review.
Do not wait until the last minute.
Chargebacks Present Greatest Danger to your Success
With the evolution of technology, successful businesses must now ensure clients enjoy a mobile first experience as well as seamless online payments with credit or debit cards. Still, on a yearly basis, businesses record losses running into billions of dollars from chargebacks and fraud. This is proof that accepting online payments comes along with certain amount of risk.
There are many reasons a customer can legitimately file chargebacks, and disputes and fraud attempts rank highest. And the reality is: chargebacks can hurt your business in the short and long terms. For every successful chargeback, you not only lose revenue from that particular transaction, but also any shipped merchandise or service you provided, and you will, in most cases, owe your acquirer a chargeback fee.
If the ratio if your chargebacks to the total number of transactions gets to a certain level, you will be made to either pay higher processing rates or you could even lose your merchant account, with short notice in most cases.
Understanding Chargeback Ratios
As the name implies, a chargeback ratio is the number of chargebacks filed against your business in a given month compared to the total number of transactions within the same period of time. While this seems pretty simple at first glance, it can get tricky when you study how the figures are calculated.
The industry-wide chargeback threshold is 1% of your total transaction volume. However, you do not have a single chargeback ratio for both Visa and Mastercard. It is possible to have a good standing with one network, while breaching your chargeback threshold on another. For instance, if your business processed 15,000 Visa transactions within a month, you would be breaching the card network’s threshold if 150 chargebacks are filed against your business in that period. But this would not affect your chargeback ratio with Mastercard. Still, breaching the thresholds on either card network could still lead to the cancelation of your merchant account.
To make things even more complicated, you cannot say you are safe if your chargeback threshold is under 1%. While the chargeback threshold for Visa and Mastercard stands at 1% of total transactions, credit card processors are allowed to impose stricter rules for their own good. For instance, if you have a merchant account with Stripe, they can decide to enforce a maximum threshold of 0.75% of your monthly transactions per card network. This makes sense because you as a merchant will not deal directly with the card associations (Visa and Mastercard). Instead, these card associations hold processors and acquirers responsible for their merchants and could hit them with fees if a merchant violates the chargeback threshold within a month.
Reducing Chargeback Ratios
As you already know, high chargeback ratios lead to heavy fines and even potential termination of your merchant account. Since Visa and Mastercard have and maintain their chargeback monitoring programs, it is only ideal that you develop a detailed plan to minimize your chargebacks. There are three ways you can achieve this:
Communicate with Your Customers
Ensure there is an open channel of communication with your customers. This will help them better understand the product or service being provided. Open communication is the first step to chargeback reduction. Since most customers do not see the need to contact a merchant before filing a dispute, providing them enough information about what to expect can help reduce chargebacks on your delivery.
Be Consistent with Your Brand Name
A customer could file a chargeback if he/she does not recognize the name of a business on their credit card statement. To keep this in check, ensure you are consistent with one company name, especially where different store locations and franchises are concerned.
Keep Detailed Sales Records
Documenting records of fulfilled orders can boost your chances of responding to chargebacks. It helps to preserve evidence in form of photographs or video when a customer returns opened packages. If the delivered item seems undamaged, your chances of winning against a chargeback will be improved.
At the very least, ensure you reach out to your customer immediately as most chargebacks can be disputed amicably if you react quickly. Doing your utmost to resolve issues quickly and efficiently will also prevent future issues from creeping in.
Mitigating Chargebacks Quickly
Established as a means to resolve conflicts between cardholders and merchants, the chargeback system has now become an ever-present threat to ecommerce merchants. For every $100 chargeback, it has been estimated that merchants could pay up to $300 when factors such as fees, product costs and penalties are considered.
Here are four ways you can ease the burden of chargebacks:
Be upfront with your customers to ensure they fully understand your product, service, costs and other factors involved at the time of purchase. With over 86% of customers preferring to file a chargeback without contacting the merchant, it is important that you let them know what to expect ahead of their purchase. Once a transaction is complete, send a receipt to your customer immediately. This receipt should include what they purchased, the price and how they can contact you if there are any concerns. Ensure you keep the communication lines open at all times.
If your customer raises an issue, a knowledgeable customer service team should be readily available to respond to their concerns quickly. Keeping in touch with your customers can go a long way in helping you resolve chargebacks. Give them a number of communication options like a chat function on your website, your email address or a phone number.
Make the Refund Process Easy
While this outcome is not ideal for any merchant, it would be wise to make the refund process as seamless as possible if your customer is not satisfied with your service. Whether this is through a self-serve function on your website or via your customer service department, refunds are better and much less costly than chargebacks.
Prevent Fraudulent Transactions
Card-not-present transactions are increasingly responsible for credit card fraud today. However, you can still avoid potentially fraudulent transactions. Common measures you can adopt include checking a customer’s address, phone number, and name with the card issuing bank, following recommended security and verification steps by credit card companies and working with a professional anti-fraud service.
Keeping Your Merchant Account in Good Standing
Keeping your merchant account in good standing generally means that you’re adhering to the terms of your merchant account agreement. Here are three recommended practices that can help you ensure your merchant account remains in good standing:
Look to increase your transaction volume daily or weekly. Rather than ‘maxing’ it out within the space of a week or two, spread the volume out over the course of one month. Most banks watch merchant accounts closely for the first 3-6 months. Slowly increasing your transaction volume will reduce the chances of your account being flagged.
Ensure your transaction volume for each month is consistent. This is especially important because banks do not like to see major increases in transaction volume. It will also help to keep your chargeback ratio stable. On the other hand, processing high and low transaction volumes within a short period of time will automatically increase your chargeback ratio as chargebacks are usually filed several weeks or even months after the service delivery.
As banks run audits on your service, your customer service will be put to test to see how long it takes for a live person to respond on the phone. Ensure your customer service is functional by managing short hold times, so customers do not have to wait too long to speak to a representative. The longer a customer waits, the more likely they will file a dispute.
Diversifying Payments with ACH Processing
Diversification is key to success in business. Offering ACH payments to your customers will give you an vital edge in the every competitive online marketplace. In 2008 alone, ACH payments accounted for $2.1 billion in sales from customers in the U.S. Good news is, ACH payments are not only secure, but easy to make. Its full transaction tracking and 3-10-day settlement feature means that ACH will help expand your online market presence and boost your ecommerce revenue.
What’s more, ACH payment processing will also offer payment alternatives to customers without credit cards, minimize physical check risks, reduce acceptance times for check-payment, protect your credit rating and even help identify payment errors quickly.
When seeking a reliable and reputable merchant account processor, ensure you go prepared with all your concerns and questions to determine which processor is best suited for your business. Do not just settle for anyone. Do not settle for the first merchant account processor that comes your way.
Ensure you only work with a merchant processing company that has an integrated high risk payment gateway. And remember, there is no such thing as instant account approval for high risk merchants. And keep in mind too that choosing the wrong processor could spell the difference between the financial success of your business and the loss of your financial security.