Merchants don't like to hear that they are high risk. They automatically know that means their merchant services are going to cost them more. And it's almost as if they feel like you’re judging them, personally.
Being a high-risk business is not a personal judgment on the business type, products, or the owner. It is a judgement on an industry. For each merchant that an acquiring bank onboards and provides a merchant account for, the bank must weigh the level of risk that merchant will bring.
Before providing a high-risk eCommerce merchant account, banks must measure the risk they will take on. There are several things they look at to determine the level of risk a merchant brings. Banks will consider industry type, the products sold, national and state regulations of the products, and public perception. But the three main things banks are concerned with include type of transaction (card-present?), amount of chargebacks, and potential for fraud.
First and foremost is the reality that these purchases are made without any face-to-face contact with the customer. The sheer fact that they are eCommerce and not brick-and-mortar brings greater risk. Not only are transactions made over the internet, but they're often international transactions.
Banks also have to look at the amount of refunds and chargebacks the business incurs. And of course they must consider the amount of fraud that is attracted to the industry.
These are the three main criteria for high-risk designation, and of course eCommerce has all three.
Risk is elevated with Card-Not-Present (CNP) transactions.
Remember the old days when you would hand your credit card to the cashier? They would look at the back and it would say “check ID” but they almost never did. It rarely happens like that anymore. You never hand over your card, you dip it in the machine yourself. Many times people don't even pull out their actual card, they just pay by tapping their mobile wallet or watch. But, even if the cashier never sees the card, it is still considered a card-present transaction.
As soon as the first World Wide Web browser was created, people began moving to a more digital lifestyle. It didn't take long for online stores to pop up and people began shopping and buying things over the internet. Fraudsters found it easier to use stolen credentials online. And banks and processors found that these transactions were a lot more risky and prone to fraud than in person payments.
Without a physical location, it's more difficult to monitor businesses. Banks have accepted the unscrupulous merchants and opened themselves to transaction laundering. Transaction laundering involves processing payments for another business that is not approved to process payments. An online merchant would get approved for a merchant account for one site. Then they would actually route the transactions for another business or other products through their merchant account.
A few bad players in online commerce over the years have ruined it for all the good businesses.
Payment transaction fraud runs rampant in online sales.
As eCommerce has grown and expanded, so have the opportunities for fraud. U.S. Ecommerce is responsible for almost $600 billion in sales annually. But it's also responsible for an estimated $26 billion dollars in CNP fraud. As we say, fraud follows the money.
The fact that online transactions do not require a physical card invites credit card fraud. Fraudsters don't have to try to duplicate a real card with stolen credit card numbers or copy a signature. The online environment creates many ways for fraudsters to hack into accounts and gather sensitive information. And it's often difficult to recognize potentially fraudulent transactions.
The EMV shift has also been responsible for moving fraud further into the eCommerce world. As it became harder to commit in-person credit card fraud, fraudsters moved online.
Certain business types also attract more fraud than others simply due to the nature of the business. Luxury items, jewelry, travel, telecommunications, and financial services all experience high levels of fraud.
Chargebacks could be the greatest threat for businesses (and their banks).
Chargebacks are another problem for both businesses and their acquiring bank. Merchants incur huge losses from chargebacks, including loss of merchandise, revenue from the sale, and shipping costs. But they also lose money in the cost of fighting chargebacks and the fines and fees they’re charged for each chargeback filed. Recent estimates have found chargebacks cost merchants $3.13 for every $1 in chargebacks they incur.
Processing banks are also at risk for significant losses due to chargebacks. Consumers have between 60 and 120 days to file a chargeback. This is long after the processor has deposited the transaction funds in the merchant's account. When a cardholder files a chargeback, it triggers a forced refund. The processor must refund the money even before getting it back from the merchant.
If a merchant has a significant amount of chargebacks, the processor is out the money until the review process is finished. If the merchant loses the chargeback filing, the processor will recoup the money from the merchant.
Merchants can also fail and go out of business, leaving several months of possible chargebacks in their wake. This also put the bank on the hook to reverse those transactions. And puts them at risk for litigation to recover the funds.
Some industries are simply more prone to chargebacks than others. Software sales, media and eContent, travel, and online gaming all fall victim to excessive chargebacks.
What to look for in a high-risk merchant account provider.
As you can see, online businesses have a lot to deal with already. The last thing they need is a merchant account provider that’s not prepared to handle the challenges of processing for high-risk businesses.
If you're going to accept credit cards online, it's imperative that you have an experienced high risk merchant services provider.
An MSP that specializes in high-risk processing has built strong relationships with acquiring banks equipped to serve the industry. They have the processes in place needed to work with high-risk businesses effectively.
High-risk banks have curated teams solely for managing compliance policies. They work directly with federal agencies such as the FDA to ensure their policies remain compliant. Their underwriting teams are highly educated in risk management techniques and fraud compliance. They also employ expert teams to handle ongoing website and transaction monitoring in an effort to quickly identify non-compliance or potential fraud.
ECommerce Solutions that support, manage, and mitigate risk levels.
Merchant service providers that specialize in high risk also have supporting solutions to assist these business types with the challenges of being high risk.
High-risk ecommerce businesses must work to lower chargeback rates and mitigate their potential for fraud. Unfortunately, studies estimate that up to 86% of all chargebacks could be attributed to friendly fraud. Because of this, robust chargeback and fraud management software is a must.
It is imperative for merchants to implement ways to manage and reduce chargebacks. Fraud detection software will analyze transaction risk and identify potential fraud red flags. Chargeback management software allows you to execute and maintain business best practices as well as manage and dispute chargebacks.
In addition, there are preemptive steps business owners can take to help reduce “friendly fraud” chargeback filings by their customers. Start by implementing best practices within your website and customer experience. Then follow it up with robust software support.
Experienced merchant service providers understand this and have researched the best solutions to offer clients.
Ecommerce merchants need someone on their side. Underwriting requirements can be complex and compliance issues difficult to maintain. But when you choose a credible service provider who specializes in high-risk, you won't have to do it alone. You’ll have a provider dedicated to your success, one prepared to support your business through the life of your partnership.
Bankcard International Group is a merchant service provider that specializes in high-risk industries. We have over 20 year's experience navigating the challenges of high-risk payment processing. Our merchant advisors are all ETA-Certified Payment Professionals dedicated to the highest level of personal integrity.
To learn more about eCommerce payment processing contact us today! It's time you see what it means to truly have partner in payment processing.