In this article we decided to reiterate some major credit card processing risks. We keep getting questions from prospective merchants and startup businesses. They want to know what the key risks of credit card issuing and processing are. Questions like: “what is the purpose of merchant underwriting?” and “can I accept electronic payments without a merchant account?” remain rather common.
Many merchants (including those from Asia, Africa, and Latin America) are wondering, why credit card processing costs so much. Some are complaining that payment gateway providers from the EU and the US are reluctant to work with them.
Well, here are some brief explanations addressing each of these questions.
High transaction processing costs
As we know, transaction processing fees consist of base costs (including interchange and assessments) and markups. Interchange fees, charged by card networks, are more or less the same everywhere. At the same time, markups are imposed by processors, issuing banks, and other “middlemen”. So, high markups are intended to offset the risks, including those related to geographical location of merchants. Moreover, if you want to process cross-border transactions, the fees are going to be high, because these transactions involve 4 banking institutions.
Payment gateway integration
Payment gateway integration, usually, calls for some specific procedures. They include getting specifications from the gateway, development and certification efforts, (potentially) PCI audit. Keep in mind: each specific feature (for instance, support for some payment type) requires separate integration and certification. Not every business is ready to go through the whole payment gateway integration and certification process.
The main functions of a payment gateway are to harmonize payment data formats and to ensure payment security. When working with high-risk geographies (from EU/US standpoint), these tasks become harder to fulfil. So, even high risk payment gateway providers are often reluctant to partner with merchants from the respective locations.
Credit card processing risks for banks
Businesses from the listed regions are often having trouble finding an acquirer and, consequently, an issuing bank. Indeed, European and American (US) acquirers are often unwilling to partner with merchants from these geographies. That is because the risk of merchant fraud is very high. As we noted in our previous articles, acquirers assume financial liability for merchants they underwrite. If anything goes wrong with a merchant, it is the acquirer that will be held liable.
For instance, a merchant opens an account in a bank, processes a bunch of stolen cards and disappears the next day.
Fearing such scenarios, acquirers and issuing banks are getting paranoid. As a result, many customers start having problems with their accounts. Once a bank suspects any type of credit card fraud, it simply freezes the account.
How underwriters mitigate credit card processing risks
So, how can acquirers avoid the described fraudulent credit card transactions? Well, they are trying to cushion the risks right from the start. That is, from the moment a merchant account is issued to the applicant. The banks introduce the following requirements to a business that wants to open a merchant account.
1. They require a bunch of documents (SSN, tax ID, credit history, and others) from the applicant. If a business’s commercial bank is located in a country, different from the acquirer’s, then the acquirer might refuse to partner with the business. Banks know that collection of any outstanding balances from abroad will be a complicated procedure. Moreover, credit card chargeback disputing also becomes a problem if the merchant bank is located in a different geography.
2. If an applicant has no processing history, the bank might want to withhold a certain amount on his account. Otherwise, it might withhold a certain merchant services reserve for several days. A startup business often cannot afford this amount of money to be frozen or withheld.
3. Whenever a bank detects suspicious activity, it might block the account. As we wrote in our article on merchant fraud, there are many signs, that might indicate fraudulent activity. They can include, for example, increase of processing volumes, or change of processing hours. Basically, any deviation from established or expected processing patterns might be considered potential fraud.
The choice of acquiring, processing, and gateway partners available for startup merchants is still rather limited. These entities often charge higher fees for merchant services in order to offset the risks related to their operations.
Integration with a payment gateway, especially, a foreign one, is a labor-intensive process. It involves many important steps and details.
The best strategy for a startup might be partnering with a large provider, even at somewhat higher cost. As your startup business grows and develops its own processing history, you can negotiate better processing terms with the provider.
Feel free to consult our experts at unipaygateway.com regarding your particular business use-case.