Recently we read that the Bank of America successfully defends itself from more than 800 hacking attempts each day. It is a staggering, yet believable fact considering we’re in the midst of The Age of the Data Breach. It got us wondering about what acquiring banks fear most.
Our last blog post focused on the five things merchants least like to hear when applying for internet merchant account processing. Every one of our five explanations directly or indirectly centered around an acquiring bank’s reluctance and/or stringent policies when onboarding a merchant.
In the current climate, acquiring banks are constantly playing defense, and no one can blame them. So what exactly is it that acquirers are frightened of?
When it comes to internet merchant account processing, it’s three things.
1. Chargebacks and returns
By far, chargebacks and, to a smaller degree, returns are any acquiring bank’s biggest concern when onboarding a merchant. Theoretically, let’s envision an acquiring bank that boards a nutraceutical business that offers subscription services for its products. Within 6-8 months, the business folds due to lack of funds. In the weeks and months after the business folds, customers begin filing chargebacks to their credit card issuers for a myriad of reasons – the products didn’t have the desired results, they forgot to stop their subscription, or whatever the reason.
Had the acquiring bank not protected itself prior to onboarding the nutra business, it would be responsible for returning the funds to the credit card issuers, who make the returns to the dissatisfied customers.
A chargeback or return is precisely the reason an acquiring back imposes a six-month rolling reserve on a new merchant or a startup. Ideally, the merchant pays into the rolling reserve for six months, while the business and revenue are growing. When businesses fail, like our theoretical nutraceutical merchant, banks hold on to the reserve in the event the failed business incurs any chargebacks or returns.
2. Fraud, which is running rampant
Among the industries that have the most instances of card not present fraud, based on what we’ve read, include the following:
- Retail industry, particularly electronics
- Airlines, which is growing tougher on chargebacks and fraud
- Online gambling, which has high rates of friendly fraud due to buyer’s remorse
- Online gaming, for reasons similar to online gambling
- Event ticketing, with fraudsters who buy, file a chargeback then resell the ticket
During the merchant account application process, acquiring banks take fraud rates among these and other industries into consideration. Acquirers’ trepidation in onboarding such industries is similar to handling those businesses with traditionally high chargeback rates.
Let’s envision an online electronics retailer selling high end gear – A/V equipment, lights and accessories – that’s getting hit with friendly fraud to the point that it has to close its proverbial doors due to bankruptcy. Then the electronics merchant disappears. Without any proactive measures in place (such as a rolling reserve) and a number of friendly fraud cases still pending, it is the acquiring bank that bears the burden for outstanding chargebacks.
3. High volume
Some merchants feel high volume is a good thing – the more volume, more sales and more profits, right? Not exactly. Keeping in mind acquiring banks’ disdain for chargebacks in internet merchant account processing: when a merchant exceeds their volume limit imposed by the acquiring bank, the bank usually holds the excess funds, then releases them to the merchant at the end of the merchant account contract.
A way to alleviate high volume concerns is to open a second merchant account, or multiple merchant accounts to spread the volume around, and simultaneously spread out chargebacks.
Moreover, merchants are imposed volume caps to prevent excess chargebacks. Another scenario with a hypothetical fraudulent nutraceutical merchant: The merchant sells an exorbitant amount of a product that fails to deliver results. At the end of the month, the merchant cashes in the profits but decides deletes his/her website and disappears. It’s the acquiring bank that is now on the hook for whatever chargebacks the fraudulent merchant incurs.
Hence, the rolling reserve in internet merchant account processing
Inevitably, part of internet merchant account processing, we feel, is to educate merchants about fees and the reasons behind them, as well as the reasons why banks impose such measures as a rolling reserve and volume caps. Such measures that acquiring banks take is often a surprise to merchants, especially startup merchants.
Discussing such issues is why our policy at Instabill is to begin each merchant account relationship, whether it leads to a solution or not, with a one-on-one conversation. An initial conversation enables the merchant to ask whatever direct questions s/he might have and gives our merchant account managers the opportunity to discuss our solutions in depth.
Begin that conversation today at 1-800-530-2444.