If you’re an entrepreneur who sells partly or entirely via the Internet, you know you need to manage your relationships with credit card processors intelligently to ensure you’re getting good terms and so your ability to take credit card payments stays strong. Otherwise, you risk jeopardizing your revenue stream.
With that in mind, I recently sat down with Brad Weimert for his best advice on how to work with processors. Weimert is a true expert in this space—he founded Easy Pay Direct, an online payment gateway provider that matches merchants with credit card processors. Currently the company’s platform serves more than 60,000 clients.
Here are some of his best insights about working with card processors.
1. Accepting credit cards comes with more risk than you might realize. Most merchants assume that accepting credit cards is their right--and that credit card companies, which earn transaction-based fees, will gladly allow anybody to accept cards.
But that’s simply not the case, says Weimert. The fact is, there’s a big risk associated with taking credit card orders online. When credit cards first started, the goal was to get consumers to have cards and get businesses to accept them. That mission, of course, has been accomplished very well. But now, the message from credit card companies to consumers is: ‘You’re safe—we’ll take care of you if you get charged incorrectly or fraudulently, especially online.’
The result has been that customers using credit will now dispute charges more quickly than ever. “The rules are that, at a minimum, a consumer can dispute a charge for six months from the final point of delivery,” says Weimert. “So if you ship a product to somebody, or they download a product, they could dispute the charge for the next six months.”
He continues: “The pivotal shift in thinking for business owners today is to understand that you are functionally borrowing the revenue that you bring in until that six-month period has lapsed. Any of your consumers could dispute it for six months, and that's how your credit card processor and your bank are looking at that transaction.”
2. It’s easier than you think to lose your ability to accept credit card payments. Customers’ increased willingness to question or fight online credit card charges puts your business at risk. If you have more than 1% of your transactions disputed during any given month, the credit card merchant may be able to pull the plug on you—and block you from accepting card payment at all. “It doesn't matter if you are doing a quarter of a million dollars a year or $50 million a year. Those are the rules,” notes Weimert.
This is obviously a major concern for businesses with revenues generated entirely or mostly from credit card payments.
3. Think you’re not at risk? Think again. You might assume that all your clients love you and wouldn’t dispute your charges. And your chargebacks--a demand by your credit-card provider to make good the loss on a fraudulent or disputed transaction--may be few to non-existent.
While that’s terrific, it doesn’t change your risk profile. Here’s why.
- Your pricing could put you at risk. “You could have no chargebacks, but if you have an individual transaction that's more than $2,000, say, your risk profile goes way up,” says Weimert. “Your business might be clean. But in aggregate, businesses that do $2,000 transactions are seen as much riskier.”
- Your marketing affiliates could put you at risk. Weimert explains: “Let's say you get one bad affiliate, and everyone or nearly everyone they send your way disputes charges. And let’s say that leaves you liable for $100,000. Do you have that money in your bank account liquid to pay that back? If not, Visa and MasterCard essentially say, ‘the consumers get their money back until we figure this out’. That's a big liability.”
- The industry you’re in could put you at risk. Even if you’re company is perceived to be low risk, a bank at any point in time is monitoring its risk as a portfolio of various business, product types, and marketing models. “They could decide, at any given point in time, that they’re done doing business in a particular channel or industry,” says Weimert. “That happened recently—some providers stopped serving companies that sell supplements.”
2 smart solutions
So what do you do? Weimert offers a few strategies for success with merchant relationships.
1. Be willing to undergo stricter underwriting. Some payment processors will accept your application to take credit cards immediately, with little to no due diligence done on you or your business. Although that gets you up and running immediately, these processors will move fast to suspend your account if they believe you are risky to them. Weimert believes these processors are a fine way to go if you’re business is new and you’re testing a product or solution in the marketplace.
But once you hit a certain amount of revenue—around $500,000 or so, says Weimert—it’s time to up your game and work with merchants who conduct stricter underwriting upfront. That means they vet you and your business and work to understand what you sell and how you sell it before they give you the ability to take cards. Essentially, they assess your riskiness on the front end—making it less likely you find yourself suddenly unable to accept card payments.
2. Develop multiple merchant relationships. Having more than one merchant account is a key step. Otherwise, you’ll immediately be in crisis mode if your one and only merchant shuts you down.
The smart move is to process, say 30% of your transactions with one provider, 30% with another and 40% with yet another—a structure Weimert calls load balancing. This is a better idea that simply having one merchant you are active with and another, inactive relationship as backup—a set up that can create problems. “If you get two merchant accounts, for example, but only use one and you think you’re safe—well, it doesn't work that way,” warns Weimert. “Say you have all of your volume with one merchant and you get shut down. You don’t get to just suddenly transfer that volume to a new merchant. They’re going to wonder why you were shut down and be unwilling to take on your entire volume out of nowhere.”
Caveat: This can be a tricky area to navigate. If you load balance the wrong way and you’re seen as trying to manipulate your chargeback numbers, you could end up being prevented from accepting credit cards for five years. Best advice: Get guidance on how to do it right.
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