Inside the Black Hole

Chargebacks are the single biggest factor why e-commerce businesses get into trouble with their merchant accounts. Visa and MasterCard have both set a limit of one percent on the number of charged-back transactions, in relation to the total number of transactions processed each month. In reality, payment processors will usually suspend a merchant account long before the chargeback ratio reaches 1 percent, because they are fined substantial sums by the Associations for each merchant designated as an excessive chargeback merchant.

Merchants must constantly work on improving their chargeback prevention procedures and pay special attention to invalid chargebacks, which are charged-back transactions for which the merchant is not responsible. To help merchants out in their efforts to eliminate frivolous customer disputes and invalid chargebacks, Visa and MasterCard have developed chargeback verification systems that significantly reduce chargeback levels and greatly improve the chargeback process.

When Visa or MasterCard detect an invalid chargeback, they automatically return it to the card issuer that originated it, and the merchant and its payment processor will never see it. Many processors have also established systems that routinely review exception items, allowing them to resolve issues before a chargeback is necessary. Together, these systems ensure that the chargebacks that you receive are legitimate or that only you can respond to them.

Yet, chargebacks are not always caused by fraud or processing errors or otherwise caused by an inadequacy in the merchant’s sales processing procedures. In many instances customers try to game the system by charging back legitimate transactions for which they are fully responsible. Unfortunately, they often succeed. So, even though chargeback verification systems are becoming increasingly more sophisticated and reliable, chances are that an invalid chargeback or two will often manage to find their way around them and into your payment processing statement. Moreover, a chargeback may be cleared by the verification systems, because it meets their requirements, and still be invalid. In these cases you should follow through as quickly as possible and represent your supporting evidence to your merchant processing provider as a proof that the charges were valid.

Although invalid chargebacks cannot be completely eliminated, you can significantly reduce their number by developing and implementing a set of best practices.

• Make sure that the way you accept and process orders and electronic payments is compliant with Visa and MasterCard regulations that were established exactly to help you fight chargebacks and downgrades (the practice of processing non-compliant transactions at rates that are higher than your qualified rates).
• Ensure that your processor is sufficiently competent. If all of your efforts to contain invalid chargebacks and the assistance that you have received from your processor have not produced the desired effect and the levels of invalid chargebacks remain consistently high, it may be possible that your processor simply lacks the expertise to address the issue and your best option may be to switch to another service provider.
• Do your due diligence when researching your prospective processor and consider all aspects of their services, not just the processing fees. Contact merchants who are currently using your prospect’s processing services and ask how well their processing bank is managing their chargebacks, exception items and re-presentments. Find out how sophisticated the processor’s reporting system is and ask to see a demo.

Remember that the right processing partner will help you process card transactions in compliance with Visa and MasterCard regulations and manage chargebacks successfully, which will save you money and help grow your business.

Learn how to minimize chargebacks and fraud

Learn how to minimize chargebacks and reduce your processing costs. The Chargeback Management kit contains a video and an e-book:

• E-Book – Chargeback Manual (40 pages).
• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).

We are constantly reminded that the world keeps getting smaller and there are few industries where this is more evident than in the e-commerce. By default, web-based merchants have the world as their market and cross-border transactions are for many an everyday occurrence. With the global market, however, come global currency challenges that need to be well understood and adequately addressed to enable you to take full advantage of the opportunities. Let’s take a look at the choices that are available to you for accepting international payments and whether settling your funds in foreign currencies is a good idea.

Before we dive into the details, it is important to point out that Visa and MasterCard are global institutions and payment cards that bear the logo of either credit card association are accepted in every store or ATM that accepts that brand of cards. It does not matter where the card has been issued. What is different is the processing rate that merchants pay for accepting cards issued by foreign banks and this rate is higher, sometimes substantially higher. The same is true for the other global card brands, including American Express, JCB, etc.

Both Visa and MasterCard issuers can add surcharges on foreign transactions involving their cards. In the United States, currently Capital One is the only major issuer that has chosen not to do that and their Visa- and MasterCard-branded cards can be used abroad at no extra charge. The majority of issuers, however, do add a mark-up that can typically range between 0.50% – 1.00% per transaction, on top of the regular processing fees for the type of card used. Processors then pass this mark-up on to their merchants and can add a surcharge of their own.

If your business sells globally, you will have several options for settling your daily batches:

• Multi currency. With this option you can accept card payments and receive funds in several major currencies, typically North American, European and some Asian. This service could work for those of you whose customers are located mostly in the major world economies.
• Cross currency. With this option you can accept payments in a much greater number of world currencies, but the settlement will be done in a limited number (about a dozen or so) of major currencies. The benefits are that your customers will be able to pay you in their local currency and you will not have to deal with any foreign currency conversion.
• Local currency. With this option you can accept payments and receive funds only in your local currency. You can provide your customers with an estimate of the equivalent amount in the local currency, but it would be solely for information purposes. The local currency option would be best for those of you who would prefer to keep your operations and accounting simple and would rather not deal with foreign currencies at all. When a payment card transaction is authorized and cleared, your funds will be settled in U.S. dollars and you will be charged a conversion fee.

Once you select the option that would best address your requirements, you will need to make sure that you sign up with the right processor. It is important that, before setting up your merchant account, you check what your prospective processor’s conversion rates are. These rates may be different for MasterCard and Visa, as well as for debit and credit cards of the same brand. You may find that a provider that offers higher processing rates actually has the cheapest solution for your needs, because they don’t mark-up the conversion or cross-border fees charged by the issuers. American Express and Discover do their own processing and their rates are the same regardless of the processing bank, so you don’t have to worry about comparing them.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

Businesses operating in certain industries are not allowed to set up U.S.-based merchant accounts. The decision on who exactly should be placed on this “black list” is made by the Credit Card Associations of Visa and MasterCard and is mandatory for all of their member banks. What this means is that no U.S.-based processing bank is allowed to acquire transactions from blacklisted entities. Processors are free to make additions to the list and they take full advantage of their prerogative.

The biggest factor in determining whether a particular type of business should be prohibited from setting up a merchant account with a U.S.-based processor is the chargeback generation potential. Visa and MasterCard historical data show that in some industries the chargeback rate is simply unacceptably high. Both Associations require that member banks monitor their merchants’ chargeback rates on an ongoing basis and calculate the merchant’s chargeback-to-transaction ratio (CTR) for each calendar month. Members are required to file monthly reports with the Associations for their:

• Chargeback-monitored merchants (CMM) – merchants with a CTR in excess of 0.5% and at least 50 chargebacks in a calendar month.
• Excessive chargeback merchants (ECM) – merchants who, in each of two consecutive calendar months, have a minimum CTR of 1 percent and at least 50 chargebacks in each month. If a merchant’s CTR is higher than 1 percent for three consecutive months, the processor is required close the merchant account, although it will probably do that much earlier.

Processors keep a very close eye on their merchants’ chargeback ratios, not least because they get charged a fee for submitting each CMM or ECM report to the Associations, not to mention issuer reimbursement fees and violation assessments for excessive chargebacks.

With that in mind, it is understandable that processors can be very picky with new applicants. Although restrictions vary, typically applications from merchants engaged in the following activities will not be considered for U.S.-based merchant account, regardless of exception:

• Any merchant engaged in Illegal activity.
• Adult oriented products or services (all media types: internet, telephone, printed material etc.).
• Internet / MO/TO pharmacies (where fulfillment of medication is performed with an Internet or telephone consultation, absent a physical visit with a physician).
• Re-importation of pharmaceuticals from foreign countries.
• Internet / MO/TO firearm or weapons sales (including ammunition).
• Internet / MO/TO cigarette tobacco sales.
• Occult materials.
• Online gambling.
• Lotteries, raffles, illegal gambling.
• Escort services.
• Collection agencies engaged in the collection of uncollectible debt, as defined by the Associations.
• Credit repair agencies.
• Sports forecasting or odds making.
• Get rich quick schemes.
• Medical marijuana.
• Foreclosure protection / guarantees.
• Lifetime subscriptions (any product or service).

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).

Launching a business can be a messy and intimidating process. Not only do you get to set up your business operations, which in itself is a huge challenge, but you have to deal with a myriad of administrative, legal and accounting issues. You also get to select providers for various services, some of which you probably never knew you needed or just took for granted. Credit card acceptance perhaps most often falls into the latter category. Most new businesses select their payment processor based solely on their pricing proposal and some live to regret their choice.

While it can be really hard to differentiate among all the credit card processing providers out there, you can do a lot to substantially narrow the field. There are also plenty of free resources to help you learn about the risks associated with the acceptance of bank card payments on your website and to develop a strategy to address them. Your goal, when developing such a strategy, should be to ensure that payments are accepted in a way that is fast, secure and reliable.

Your customers’ satisfaction must be a top priority. Satisfied customers don’t dispute transactions, nor do they complain about bad service. And that’s important not just because it promotes your customer-friendly business image, but also because it keeps your merchant account (i.e. credit card processing service) in good standing with your processor. Why? Because dealing with a customer dispute goes beyond the cost and time needed to address it. If it is not adequately addressed, a customer dispute can lead to a chargeback, in which case you will lose the whole transaction amount. And that’s not all. If you cannot keep your chargeback rate in check (it must be below 1 percent of your total transaction count for both Visa and MasterCard), your processor will suspend and eventually close your merchant account.

So, what should you do to mitigate card processing risk and minimize payment acceptance costs? You should begin by taking the following steps:

• Learn about credit card processing risk and train your staff on how to manage it. Your risk exposure in an e-commerce environment is to a large degree determined by your business policies, operational practices, fraud detection and prevention tools, security controls and the types of products and services that you provide. You should have a complete understanding of the risks inherent in online transactions and should be well prepared to address them. We have previously written about e-commerce risk management and encourage you to take full advantage of our expertise. Once you prepare yourself to deal with risk management, you should make certain that your staff gets adequate training on e-commerce risk management as well and are just as prepared to implement your businesses’ policies as you are.
• Do your due diligence when selecting your e-commerce merchant account provider. When examining a payment processing proposal for your e-commerce business, you should go beyond the proposed processing rates and fees. Be advised that your rates and fees are only as good as your ability to process transactions in a way that is compliant with Visa and MasterCard regulations and that provides sufficient protection against fraud and chargebacks. Make sure that your prospective processor can provide effective risk management control and has thorough understanding of fraud risks and liabilities. You need to be sure that your processor will be able to keep your transactions safe and minimize fraud losses. Call a few of the processor’s e-commerce clients and ask what their payment acceptance experience has been, what kind of issues they’ve had, how quickly and expertly they’ve been addressed, etc. We have written in detail about selecting a merchant account provider in a separate article and encourage you to review it as well.

Learn how to minimize chargebacks and fraud

Learn how to minimize chargebacks and reduce your processing costs. The Chargeback Management kit contains a video and an e-book:

• E-Book – Chargeback Manual (40 pages).
• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).

In the payment card industry, reserve is a specified percentage of the merchant’s sales deposits that is retained by the processing bank in an escrow account to serve as a protection against future chargeback exposure or to cover existing chargebacks. The reserve’s amount is determined during the merchant account application process and is estimated as a portion of the expected monthly revenue from the applicant merchant’s card transactions.

Reserves are typically imposed on merchants that operate in high-risk industries or have little or no card processing experience. Reserve accounts do not last indefinitely and after the satisfactory completion of a predetermined period – typically six months to a year – the withheld amounts are returned to the merchant. In the case of a rolling reserve, a predetermined amount is held every month for a certain period. On the month following the expiration of this period, the first month’s reserve amount is released to the merchant. The next month the merchant gets the second month’s reserve amount and so on until there is no longer a reserve.

Certain business operations are considered higher risk than others, because historically they have generated higher levels of chargebacks. All merchants that operate in a card-not-present environment fall into this category. Mail order, telephone order and e-commerce merchants are prime examples. Yet, only a small percentage of these businesses will be asked for a reserve, as most merchants within this category do not present a huge chargeback liability. The biggest factor that influences an underwriter’s decision on whether or not a reserve should be required is the level of risk that the applicant merchant’s operations present. Typical high-risk operations display one or more of the following characteristics:

• Selling specific types of products or services, such as adult products, auction houses, companion / escort services, coupons / certificates / prepaid or gift cards, dating services, diet / weight loss programs, membership-based services, etc. If an applicant’s operations fall into one of the above listed category, this could be sufficient for imposing a reserve.
• High average transaction amount.
• High overall processing volume.
• The applicant business has previously had its merchant account terminated.

Underwriters may also impose a reserve on an applicant with bad credit history, in addition to requesting a personal guarantee. When a reserve is required, the minimum reserve amount is typically set at about 20 percent of the anticipated card processing volume. New merchants are usually allowed to build up their reserve by sending in transactions which are not withdrawn until the minimum reserve amount is accrued. After that, the merchant is allowed to withdraw the excess funds for transfer to their designated bank account.

Each processor has its own underwriting policy, so it is a good idea that you request several credit card processing proposals, when looking for a merchant account, and compare the proposed terms. It is likely that one processor will ask for a reserve, while another will not. A reserve requirement, however, is just one of the factors that you should consider when selecting a payment processor for your organization. Processing costs, customer service, transaction reporting capabilities, chargeback and risk management tools, fraud prevention services are all very important and should be carefully evaluated.

Learn how to lower your card acceptance cost

Learn how to accept credit and debit cards at the lowest processing costs. The Payment Card Acceptance kit contains a video and an e-book:

• Video – Card Acceptance Best Practices for Lowest Processing Costs (18 min).
• E-Book – Payment Card Acceptance Guide (19 pages).