A High-Risk Merchant Checklist
According to some reports, the total number of non-cash payments transactions will reach $671 billion in 2019. There are 13,000+ FinTech companies, including payment gateways, so it is easy to get lost in this endless ocean of financial services. In this post, we will provide an overview of how to choose the right PSP if you run a high-risk business.
Not all merchant accounts are created equal. Although online merchants have access to thousands of merchant account providers that help to accept payments online, knowing a few key differences is crucial for securing a long-term solution to accepting payments online.
Most have heard about PayPal, Stripe, Square, Google Checkout, and Amazon Payments – all of them are one type of Payment Service Providers (PSPs): aggregators who process transactions through their own merchant account(s). Some even prohibit or restrict entire industry categories outright. Let’s explore the most common pain points from the perspective of high-risk online businesses, how to avoid them, and what to look for when building a reliable payments processing system.
1. Finding a PSP specializing in high-risk verticals
You should know that many factors might get your business labeled as ‘high risk.’ Moreover, they can be sorted into two categories: red zone and grey zone. Most big name payment processors like Adyen, PayU, and PayPal aren’t necessarily always the best fit for high-risk merchants. Mass-market aggregators optimize their services toward low-risk merchants, with low processing fees thanks to lower payment processing and chargeback risks. Although they can board a merchant quickly, they often terminate high-risk accounts after just a month of the account going over a listed chargeback threshold listed in the terms and conditions – all without making any recommendations or giving appropriate analytics to the business owner while something can still be corrected. Maintaining a low chargeback ratio (1% or lower) for the high-risk industry is the best way to keep things superb with your provider. Unfortunately, Visa’s chargeback guidelines and Mastercard’s chargeback guidelines aren’t identical, plus your payment processor will have a say in what’s acceptable and not.
Sadly, this situation is all-too-common with a high-risk business company owner who wants a fast solution but doesn’t evaluate whether a specific payment provider is a fit since they don’t necessarily understand all the nuances of payment processor provider agreement. In cases like these, merchants not only lose their newly issued merchant accounts but also risk getting blacklisted in the Terminated Merchant File (TMF), or MATCH list. Nobody wants to be on the list together with merchants added to the list due to too many chargebacks, suspicion of participating in fraud, or for money laundering.
2. Fear and loathing in the high-risk payment segment
One of the most crucial things for an online business is having a payment provider that understands business needs and provides useful recommendations relevant to their vertical – this is especially vital right before the critical chargeback threshold is reached that causes merchant accounts, or MIDs, to get terminated. A good PSP should be able to offer such an “all-inclusive” approach and tools for a company in the areas of processing, legal, anti-fraud, and analytics for the merchant to quickly course-correct should their chargebacks begin to climb.
3. Sometimes, fast onboarding is not a good thing
For all the payment service providers out there, there are two categories that make all the difference. First one is the aggregators, also called ‘iPSP,’ which own a single MID which they subdivide for a large number of merchants. The second category is providers with a payment gateway solution that works with banks to open individual merchant accounts on behalf of and only for the benefit of each merchant. The distinction between the two is key when it comes to who has access to the money and control over the account.
If a business signs with an iPSP, all funds ware controlled by the payment service provider. This option is fast for the merchant, but funds flow is subject to fees by the PSP, and this solution does not allow to manage the chargeback ratio, increasing the chance merchant accounts are terminated without notice.
In the case of an individual merchant account, each business owner signs a contract directly with the bank. This process takes longer, but each merchant is advised by the PSP’s support team who help to prepare all the necessary documents for bank submission. Also, these providers typically offer additional services, such as:
Anti-fraud monitoring and chargeback control
PSI DSA and other compliance tools
Support with opening multiple MIDs
Legal support in case of disputes
In general, PSPs who help issue individual merchant accounts spend up to 100 hours on each merchant, so they are interested in maintaining those account for as long as possible and in good standing. In our opinion, the second individual merchant account approach is better for high-risk merchants since a more involved relationship cements the provider’s loyalty towards the merchant and their interests are better aligned – this is why the payment services company will alert the merchant when the chargeback ratio starts to increase and will help the merchant solve a number of problems with chargebacks, should such a situation arise.
4. Processing high volumes like a pro
Owners of growing businesses within the high-risk category often face a situation where banks impose processing volume limits, and the PSP only allows one MID per business. It’s difficult to juggle several PSPs at one time, but some PSPs do offer multiple merchant accounts, allowing to redistribute risks while working with a single payment provider.
When merchants decide to work with several providers, managing all the accounts and keeping track on statistics may become so complicated that in the end, merchants end up having most of their accounts terminated. Therefore we recommend choosing a single provider who works with more than one bank. Both the merchant and the PSP must abide by the bank policy, but each bank’s policy varies, therefore the more banks there are in the provider’s portfolio, the more opportunities for business are possible.
It is also important to understand locations where each acquiring bank works because most banks do not offer high-risk processing in Brazil, Latin America, Africa, and some other locations.
5. Why analytics really matters
Several chargebacks in a row can easily cause untimely account termination, so it is important to have access to analytics data and early notifications when risky trends surface. Often, PSPs are not very proactive with feedback, so merchants do not always see the full picture of their business.
At the very least, merchants need to demand a report on chargebacks, by region, their structure and balance – this is why it is better to look for a company with a comprehensive analytics platform, with reporting and alerts tools that can help prevent merchant account termination.
6. Why detecting and fighting fraud matters
According to Statista, in 2018, US merchants lost an estimated $6.4 billion in payment card fraud loss. The number is huge – that is why it is so crucial to have a PSP with an anti-fraud solution. Each business is different, so fraud patterns and their effect on chargebacks in different industry verticals vary widely. However, merchants shouldn’t rely on a one-size-fits-all fraud solution. Just because a payment service provider advertises a built-in tool to fight fraud, anti-fraud is not a boxed solution, but rather an ongoing process that needs to be proactively managed by both the business owners and the risk analysts.
This becomes especially important in industries requiring customer due diligence and enhanced due diligence (requiring proof of origin of funds). Merchants who are being offered such a solution need to ask if it has been tested on other merchants in the same industry, and what specific algorithms can the payment service provider offer that will maximize revenue and catch most cases of fraudulent transactions.
High-Risk Merchant Takeaways
Running an online business placed into a high-risk business vertical requires a more thorough approach compared to a regular online store. To simplify the payment provider process, here’s a brief checklist of questions to ask a PSP: