What You Need to Know
The most important thing to understand is that risk is the single largest factor that merchant account providers look at when determining whether to establish a credit card processing account account for a business. Risk is determined by the potential for fraud and the number of chargebacks a business may experience.
What is a Chargeback?
A chargeback happens when a consumer contacts their credit card company and requests a refund for a purchase they made on that credit card. It could be that the consumer didn't recognize the charge, was dissatisfied with the product or service, or never received the product or service. It's not uncommon for the consumer to bypass the merchant and directly reach out to their credit card company first. Right or wrong doesn't really matter ... when the consumer reaches out to their credit card company to demand a credit, a chargeback is initiated. This is not good for merchants because too many chargebacks can result in higher fees and even closure of their merchant account if too many occur.
One way credit card processing companies protect themselves is to hold a "reserve". A reserve is basically funds processed by the business that the merchant account provider holds in a reserve account instead of transferring the funds to the business bank account. The amount of the reserve can vary greatly. It can be a small fixed amount, a large fixed amount, or even a full month of funds equal to the amount of the businesses credit card sales. The amount is determined by perceived risk associated with the busineses. Having a reserve protects the merchant account company from future risks, including fraud and chargebacks.
Higher Risk Business Sectors
In the credit card payments industry, some business sectors are considered higher risk than others, but the list really varies from provider to provider. A partial list of business sectors that often fall into the higher risk category include:
- Adult Related Businesses (Book Stores & Entertainment)
- Check Cashing Businesses
- Credit Repair Services
- Gun Stores
- Jewelry Stores
- Multi-level Marketing Companies
- Telemarketing Firms
- Time Share Sales
- Vacation Packages
Businesses in these sectors are often subject to reserves, as well as higher credit card processing rates. This provides the merchant account company some protection from the higher levels of fraud and chargebacks often associated with these sectors.
Merchant Account Holds & Freezes
One of the most financially devastating things that can happen to a business is a merchant account hold, or freeze. When this happens to a business, they cannot access the account. The funds from open authorizations are also held without deposit for an undisclosed period of time. This means that the business cannot accept new credit card transactions and the income from recently processed transactions is not be deposited for days, weeks or longer.
Despite the horror stories, merchant account freezes are usually a result of the business violating the terms of their merchant account agreement. Violations can include utilizing the merchant account for personal use, selling items that were not included or defined in the merchant account agreement when the account was setup, accepting credit card payments for other businesses under their merchant account, as well as other fraudulent activities.
As a business owner, you can protect yourself from this by first following the terms of your agreement with your credit card processing provider. If something changes in your business that impacts your credit card sales, you should contact your merchant account processor right away. This might include anticipated changes in average ticket amounts or new product or service lines introduced into the business. If you are running an unusually large ticket as a one time occurance, contact your merchant account provider's risk department prior to processing the transaction and let know the details.
The Novera Advantange
- Novera’s consultative approach allows us to thoroughly educate our clients, equipping them to better understand this complicated industry.
- We educate our clients about chargebacks, reserves, and holds, so they are informed and can better prevent these things from happening.
- We take the mystery out of the credit card processing business.
- We work with all types of businesses across the country
Contact Novera to learn more about how we work with businesses to provide the most fair and transparent pricing structure available on the market today for credit card processing.