Into the Black Hole

Almost every week I get contacted by a merchant operating some type of a high-risk business or other whose merchant account has just been terminated by a mainstream U.S. payment processor — think First Data or Chase Paymentech. At first I was surprised that a processor specializing in low-risk merchants would even look at the types of businesses that were coming my way, never mind taking them on board. After all, in years past I have worked with both of the aforementioned processors, as well as other traditional ones and know how tight their underwriting standards are. And yet, the just-terminated high-risk types just kept coming, and still are.

So I thought I’d share with you my observations and thoughts on why very high-risk merchants are boarded with low-risk processors in the first place, how likely it is that such merchant accounts would survive in the long run and what to do if or when such an account is terminated. Let’s get started...

Consumer debt in the U.S. rose for yet another month in March — the eight consecutive increase — we learn from the latest Federal Reserve consumer credit data release, though the increase wasn’t as big as anticipated. In fact, Americans managed to pay down some of their outstanding credit card balances, reversing the gains made in the first two months of the year and maintaining the trend that began in the immediate aftermath of the financial crisis of 2008. The ongoing credit card debt deleveraging process has become one of the most enduring features of the post-Lehman adjustment period.

The increase in the Fed’s credit total is once again entirely due to the growth of its non-revolving components and especially of its student loan and auto loan constituents. The ironic thing about the growth of these two totals is that it happens for diametrically opposed reasons: whereas the strong demand for auto loans is seen as a sign of improving economy and rising consumer confidence, the alarming growth of the student loan total is interpreted as reflecting the reality of still-limited job opportunities. Let’s take a look at the latest Fed data...

Trying to get a merchant account for a high-risk business is often an incredibly frustrating affair. Not only are there too few credit card processors willing to work with you, but even the few who would consider your application seem to go out of their way to make the whole experience as miserable and exasperating as humanly possible. They would take their time, mulling over the paperwork you sent them for weeks on end, then ask for some additional, and seemingly completely irrelevant piece of documentation, and finally tell you that they can’t work with you for a reason they should have been able to identify on the very first day you contacted them. It is as if all the processor is doing is wasting your time.

Well, as some of you might suspect, things look quite differently when looked through the eyes of a high-risk processor. Yes, the application process can be quite tortuous and usually lasts a couple of weeks or more, and yes, the probability of a negative decision is far greater than it is of a positive response, but there is a perfectly good reason for that. And no, processors are not doing it, because they take a sadistic pleasure in making applicants suffer. After all, we can only make money and stay in business if we have clients to process payments for. No, the reason it takes time and effort to reach a decision is that there is a lot of risk to be accounted for. So let me explain how we evaluate risk and what you should be doing to help us do it, and improve your chances of approval in the process...

In its second Consumers and Mobile Financial Services survey, the Federal Reserve looks once again into the reasons why a significant chunk of U.S. consumers are either unbanked or underbanked. The researchers’ findings confirmed the conclusion I drew from the first survey, which was that staying out of the traditional financial system is much more a matter of choice and lack of financial education, than it is about being shut out of it. The surprise was to see just how little progress has been made in a year when a number of excellent financial products were launched that were designed specifically for the unbanked.

And it is not as if nothing has changed in the unbanked world, far from it. Of those currently unbanked, 42 percent told the researchers that they had a bank account at some point in the past. Even more strikingly, the data from the 2011 and 2012 surveys show that 40 percent of those unbanked in December of 2011 had obtained a checking, savings, or money market account by November 2012. However, 4 percent of those who had a bank account in December 2011 no longer had one by November 2012.

Even the most casual of looks at the data tells you that, for whatever reason, the vast majority of unbanked Americans simply don’t want to have anything to do with bank services. Now, even in 2011 such attitudes were difficult to justify and that was much more strongly the case in 2012. The launches of incredibly consumer-friendly prepaid cards such as Chase Liquid and, especially, Bluebird have made the decision to stay out of the traditional financial system a very costly one. It’s about time that the unbanked gave these prepaid cards a try and left the check cashier services behind...

At UniBul, the first thing we do when we receive a qualified merchant account inquiry from a U.S.-based business is to determine whether the applicant could be placed with a domestic acquiring bank or an offshore one is required. Our preference is to find a domestic solution, whenever possible, and that is what we initially focus our efforts on. Only if we fail to find one, we look for offshore options.

But why would a merchant turned down by an American acquiring bank be found acceptable by, say, a European acquirer? Aren’t all acquiring banks subject to the same Visa and MasterCard rules, wherever they may be located? And how is a domestic merchant account different from an offshore one? Well, as these are some of the most frequently asked questions I have to field, I thought I’d help my cause by answering them in a blog post, so in future I can simply refer people to it...