Risky business?

If you want an internet merchant account (IMA) from an acquiring bank, you will have to successfully complete your chosen bank’s application process. However, the criteria for acceptance is strict and the timescales involved may mean an IMA is not the right option for your business.

  • Banks consider internet merchant accounts as a line of credit.
  • Your risk to the bank depends on the type of business you have and in what sector.
  • 'High-risk' businesses can expect to pay more for transaction charges.

Your IMA application is also based on the risk you represent to whoever is providing the IMA. Your level of risk is calculated on a number of factors including the type of business you are, the sector you operate in and the volume of monthly transactions you carry out.

Your IMA and charge-backs

An IMA is basically a line of credit between you and the acquiring bank. An IMA is considered a line of credit because it is underwritten by the acquiring bank and because of the charge-backs (see below) your business might attract.

If your IMA is approved, the bank will agree a monthly processing amount or volume (for example £10,000 per month). So assume that by the end of the month you sell £10,000 worth of goods and the money is deposited in your bank account.

If every transaction results in a refund or charge-back, the bank will have to pay the £10,000 back to all the different cardholders. Your business may have used some if not all of that capital and the bank is now liable for the £10,000. And that line of credit is extended to you.

What are charge-backs?

Charge-back refers to the return of funds to a customer.  Charge-backs can occur for many reasons.  These are just some:

  • Customer or vendor has made a mistake at the point of sale (eg expired card)
  • Transaction is disputed by cardholder or card issuer
  • Transaction was fraudulent
  • Duplicate transaction
  • Transaction was not authorised due to insufficient funds
  • The goods or services ordered have not been received
  • Goods were returned

Your business should take whatever steps it can to limit charge-backs as excessive numbers of these will adversely affect your IMA. Some card issuers like MasterCard and Visa fine merchants and their merchant account providers for having too many charge-backs.

If you repeatedly have too many charge-backs (and the bank or card issuer is facing unrecovered losses as a result) then your IMA will be at risk of closure and you may be unable to accept credit card payments. Managing charge-backs, however they occur, is a vitally important part of your payment solution. Some of the ways to avoid excessive charge-backs include:

  • Use postal methods with tracking and proof of delivery
  • Describe goods accurately on your website
  • Deliver on time
  • Make sure customers know about your returns policy
  • Resolve customer complaints quickly.

Assessing your IMA application

When assessing your application for an internet merchant account (IMA), acquiring banks calculate their exposure to risk by examining the following elements:

  • Charge-backs – the risk of refunds on your merchant account
  • Forecast turnover figures – higher turnover can generate higher exposure
  • Average transaction size – if you sell very high-value items (diamonds, cars) this will influence the risk analysis of your business
  • Time from payment to order fulfilment – the longer it takes to dispatch goods to a customer, the greater the risk of an order cancellation
  • Length of trading record – a start-up company is more risk than a well-established business
  • Business sector classification – different sectors have more or less risk associated with them (CDs can be resold for example but airline tickets need identification to use). Some banks have more than 700 different business sector classifications
  • Safeguards you have in place – security checks like verifying address details or phoning customers who place large or repeated orders will reduce the perceived risk
  • You may be asked to put up a bond (insurance) by your acquirer to offset the risk you represent.

If your business operates in any of the high-risk categories then an IMA may not be available to you. Payment bureaus specialising in this area are out there, but you can expect to pay more for transactions and also be liable for interest payments as a result of settlement periods or overdrafts.

Some of the businesses likely to be considered high-risk:

  • Dating services
  • Adult services
  • Travel companies
  • Online casinos
  • Claims management
  • Payday loans
  • Membership and subscription services

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