Q & A

To be able to process payments and begin accepting payments cards for your ecommerce business, you’ll need to get a merchant account. This is set up separately from your business banking account and is created solely to allow you to process credit and debit card payments. A merchant account is set up between you, a payment processor and a merchant bank.

Once you have a merchant account, you also need other payment processing solutions to ensure your system for accepting payment cards is PCI compliant and secure from fraud and chargebacks. Additional tools may be needed depending on your business type and model.

When choosing a payment processing partner, you should consider your business model and what special payment processing requirements that may entail. In general, payment processors should offer transparency, offer low-commitment solutions and disclose all fees upfront.

You may also want to consider what type of payment gateway is offered. Some payment processors offer customized payment gateways that are tailored to your unique needs, including tokenized payments, domestic and international processing, recurring billing capabilities, customer vault and load balancing. In addition to gateways, many payment processors also offer add-on tools to help streamline and secure your payments operation, including virtual terminals, chargeback management, fraud prevention and anti-fraud tools.

A high risk merchant account is a subset of a merchant account, which is an account that enables businesses to accept credit and debit card payments from customers and must be approved by a financial institution.

Some business models inherently pose greater risk to the financial institutions. These may include adult websites (reputational risk), membership sites (longer chargeback terms), startups, MLMs, direct selling (all pose a volatility risk), and gaming (high rate of chargebacks). These types of merchants, and those on the TMF or MATCH watchlists, are required to open a special merchant account called a high risk merchant account.

High-risk merchants can be classified that way for a number of reasons:

• The business is on the TMF or MATCH lists, which is a blacklist created by credit card companies
• The business has no financial history and/or the business’ guarantor has low or poor personal credit
• The business sells future deliverable products (event tickets, airline tickets, hotel reservations)
• The business has recurring billing (gym memberships, online book clubs)
• The business has a high or volatile sales volume that is incongruous with financial history

A merchant can be deemed high-risk for any of these reasons and more. Industries that typically fall into this category include:

adult, chat, dating, downloadable software, call centers, memberships, benefit clubs, start ups, MLM, free trial, streaming services, Business Consultation, Coaching, Continuity, E-Cigs, Informational Products, International Merchants, Internet Marketing, Merchants who have filed Bankruptcy, Merchants with large launches or volume spikes, New Companies/No Processing History, NonProfits 501(c)3, NonTangible Products, Nutraceutical, MLM, Self-help products, Seminars, Subscription based Product Offerings, Travel, Trial Offers

As a high-risk merchant, it can be difficult to obtain a merchant account, though it’s not impossible. High risk merchants need to find a payment processor that is willing to work with your business model. There are many merchant account providers that cater to the high-risk segment.

One thing high-risk merchants need to be careful of is that they receive fair rates and quality service. Because there are a large number of high risk merchant account providers, merchants should vet each option with care to ensure they know the details of the contract, including rolling reserve requirements, hidden application fees and termination fees.

A Chargeback ratio is the ratio of chargebacks to transactions that a merchant receives. The universally acceptable chargeback ratio is generally 1 percent. Once that threshold is crossed, a merchant may be deemed “high-risk” or given an “excessive chargeback” designation, requiring ongoing monitoring in addition to sometimes steep fines and penalties imposed by the card brands. Once a merchant is placed in this category, they may face merchant account termination if they are not able to bring chargebacks down to a more reasonable level.

Chargeback ratios vary widely by industry, and ratios experienced by high-risk merchants may vary and fluctuate quite a bit.

Chargeback fraud is a specific type of fraud that happens when a consumer buys a product or service online with their credit card and then disputes the charge with their issuing bank, even after they receive the products or services for which they paid.

Sometimes referred to as “friendly fraud”, this type of fraud presents a unique set of problems to merchants who only find out about the chargeback after the fact, making it harder to fight. Customers use friendly fraud to “double dip” and secure a refund while also keeping the product or services they purchased with their credit card online. Since the customer disputes the charge with their bank and bypasses the merchant, it can be difficult for merchants to fight the dispute. This costs merchants in multiple ways:

• Merchant experiences losses associated with the cost of product/service
• Merchant experiences losses associated with fulfillment
• Merchant experiences increased chargeback ratio, potentially deeming them high-risk to the card brands and resulting in additional losses from fines and fees

Merchants often seek out third-party solution providers or consultants to help reduce chargebacks. Some solution providers offer chargeback alerts or notifications, which enable the merchant to find out about a chargeback before it is too late and work with the issuing bank to resolve the issue before the chargeback is finalized.

Another alternative is for merchant to improve internal processes to ensure that chargeback are not a result of procedural errors or lack of adherence to best practices. Some steps merchants can take to reduce chargebacks include:

• Use clear billing descriptors
• Improve customer service protocols and ensure timely responses to customer complaints
• Be sure contact and customer support contact information is clearly visible on all invoices and on your website
• Maintain accurate records of online purchases, authorization information and shipping information to combat false disputes that arise
• Fight chargebacks for which there is a good case and strong evidence; this allows merchants to avoid negatively impacting their chargeback ratio and facing penalties from the card brands