Online transactions completed by credit or debit cards require the eCommerce business to have a merchant account; or access to one through a payment gateway service provider.
When purchases are made online, funds are taken from the buyer’s card account and deposited in the seller’s merchant account. Once the funds have cleared, they can then be transferred into the seller’s business account. A merchant account acts as a ‘half-way house’ helping to protect the eCommerce business, the online buyer, and the credit/ debit card provider.
Assessing merchant risk is part of the process of application for a merchant account. The merchant account provider carries out due diligence, with its risk assessment based upon the information provided to it by the merchant.
The higher the risk associated with the business wanting to open a merchant account, the higher the charges levied by the merchant account provider. In the highest risk cases, an account application may be declined.
Why assess the risk of an eCommerce business?
Credit and debit card companies indemnify their customers against faulty goods and services as well as their non-appearance. Every time a purchase is made, the card company accepts this risk. Due diligence checks carried out by the merchant account provider are designed to minimise these risks.
How is merchant account risk assessed?
Merchant account providers reference historical data of problems and defaults to assess perceived and real risk. This data shows that certain industries have a poor track record of timely order fulfilment, which increases the risk of chargebacks.
Highest risk industries include pornography and online gambling, for which eCommerce businesses often require specialist merchant accounts.
On the next rung down the ladder of risk, those businesses providing travel and accommodation services, and some membership sites (including gym, discount and group buying sites) are considered moderate to high risk.
The lowest risk is attributed to straight forward e-commerce where the customer buys a product or service which is either received digitally or physically delivered within normal postal times.
Benefits of using a comprehensive online payment service
Small business and start-ups in particular may find it difficult to obtain a merchant account. Often this is due to the confusing nature of the application process. Turning to a comprehensive online payment services provider mitigates such problems. You’ll find help on hand with applications, with experience of the best wording to use on all information needed. Such experience is vital to successful application and securing the best rates possible.
Many SMEs choose to use a gateway provider’s merchant account for cost and simplicity reasons.
Whatever your needs, discussing with an advisor is always recommended: they will have the knowledge and experience to advice on the best solution for your particular business and situation.