In the Long Run All High-Risk Merchant Accounts Are…

The high-risk end of the credit card processing spectrum has one huge advantage over the more pedestrian parts of the payment industry scale: it’s great fun to work with businesses which, for one reason or another, have been placed there. In the several years which I’ve spent working with high-risk merchants, I’ve rarely had a case in which the latest applicant hasn’t presented me with a new challenge. To be honest, nowadays if a merchant looks “normal”, I immediately become suspicious and my paranoia usually turns out to be well-founded.

But a successful conclusion of the application process (or an unsuccessful one, for that matter), doesn’t put an end to the fun. No, it is precisely when a merchant account is set-up and my new client starts using it when I am on highest alert. Trust me, this is no time for celebration — surprises at the beginning of a relationship with a new merchant can take many different shapes and, along with the fun they bring along, they can quickly undo all the hard work we’ve done over the previous weeks or, often, months. For example, a merchant would start taking payments for things he never told us he would sell, or his average ticket would be several times as high as the one stated in the application paperwork (which could indicate selling things that are different from the ones he told us about), or his volume would explode far and above beyond the one he was approved for, or his volume would turn out to be much smaller than what he asked (and was approved) for. The list goes on and someday I would probably go through it in some detail, but you get the picture. However, surviving the initial crisis, while it may or may not make you stronger, doesn’t guarantee a loving relationship in the long run, or even the medium one, if it comes to that. If you are not careful, you may easily lose your merchant in a few months’ time, even if all works swimmingly. Let me explain.

What Does a Merchant Want?

From a high-risk payment processor’s perspective almost every qualified merchant account applicant requires a unique solution to be built for him. For example, two businesses may look identical on paper, but if they are incorporated in two different countries, we may need two different acquiring banks, which, in turn, would lead to different contract terms. Alternatively, two businesses may be incorporated in the same country and operating in the same line of business, but if their volumes or processing histories are markedly different, they may get different terms even if we use the same acquiring bank or we may once again need to utilize the services of different acquiring banks, which will again produce different terms. And these are two examples of pairs of businesses with much in common!

In contrast, a merchant’s requirements never vary, irrespective of the applicant’s location, line of business, volume, or anything else. A merchant always wants the lowest possible discount rate, low reserve (or none at all, if he can get it), fast payouts (next-day funding is everyone’s favorite) and high credit-line ceilings. Different merchants may prioritize these items differently, but you can always count on them being on everyone’s list. On the one hand, the knowledge of a merchant’s priorities makes a processor’s job easier and anyway, there isn’t much about it that we can get wrong. The thing that is easy to forget, however, is that a merchant never stops looking for better terms, never. And processors forget that basic fact at their own peril.

The Long Run

In the high-risk world, the long run is much shorter than elsewhere — actually, I’m not sure if such a concept even exists. But if it does, it is the six-month period immediately following the initial merchant account set-up that leads up to it. Why six months and not, say, three or nine? Well, the thing is that high-risk underwriters like to see six months’ worth of processing statements when evaluating new applicants; otherwise, they are unlikely to even consider the application. That being the case, merchants with short or no processing histories find themselves at a huge disadvantage and their primary concern is simply getting a merchant account, never mind the terms. Of course, well-funded start-ups with solid business plans and a team of experienced executives will get the merchant account they need, and on terms typically reserved for far more experienced merchants, but these are special cases. For the vast majority of the start-ups in the high-risk world getting that first merchant account is an uphill struggle, which many of them lose. And the few that do make it through the process usually end up getting less-than-rosy terms.

Now, from a processor’s perspective, it makes perfect sense that a high-risk start-up should get a high discount rate and funding delayed by a week — after all, the merchant is yet to prove that it can manage the inherent risks and not get flooded by chargebacks within three months of operation in an industry in which an extremely high ratio of start-ups founder for that very reason. Yet, however reasonable the processor’s rationale may be, the odd start-up which will survive that initial stage will not forget the high discount rate for an instant and will pounce on the first opportunity to lower it. If the processor is smart, it will review the merchant’s performance and offer better terms at around the six-month mark. Otherwise, the merchant itself will find them elsewhere. See, at that time, armed with its six-month history, the merchant will be seen much less like a potential liability and more like an opportunity by prospective processors — the game will have changed completely. To make matters worse for the first processor — the one which took all the risk — the merchant now feels cheated that his current discount rate is a couple of percentage points or more higher than what he is now being offered. The upshot, more often than not, is that the merchant signs up with another processor. Of course, the original processor may have forestalled the defection if it had made a better proposal a month earlier and explained why it could now offer better terms.

The Takeaway

In the long run, all high-risk merchant accounts are terminated, and not always by the processor. But it is in everyone’s interest that the relationship is made to last for as long as possible. For a processor, the loss of a successful newly-acquired merchant which took weeks of painstaking work to approve and set-up is, understandably, painful. But sticking to its first processor holds certain advantages for the merchant, too. See, the longer the merchant’s processing history with a given processor, the bigger the leeway that processor is likely to allow, should the merchant’s road get bumpy, as high-risk roads tend to get from time to time. Of course, that is rarely a consideration for a merchant who feels cheated.

Image credit: Bump.ru.