Are Credit Card Merchant Services for Forex in Trouble?

Are Credit Card Merchant Services for Forex in Trouble?

We got the hint that the landscape for offering credit card merchant services for forex brokerages was changing back in late 2014.

As a big player in high risk merchant processing, our company had recently partnered with a European forex hub on a subscription basis to draw more business from European forex firms. Our first year with our forex partner generated some interest in our services (we had hoped more), and we gave a verbal commitment for a second year’s subscription in Q4 2014, but hadn’t signed anything.

We started hearing rumblings in the credit card processing industry that the card brands had become lukewarm about allowing forex transactions with a credit card (we’ve seen the card brands similarly target other industries). Around the same time, our forex partner began contacting us more and more about extending our subscription for another year.

Then the news broke about the CFTC (Commodities Futures Trading Commission) ban on the use of credit cards for forex transactions in the United States, and we decided against signing on for another year with our forex partner. For months after, they contacted us about our verbal agreement, but we resisted, explaining that the CFTC rule, which went into effect Jan. 31, 2015, was a sign of the times that the forex industry was on shaky ground with the card brands. We also felt the CFTC ruling absolved us from our verbal commitment. Surely there were other credit card merchant services outfits that also opted not to renew.

Although our former partner was (very) disappointed, we don’t regret the decision, especially with the recent news that new, separate standards took effect Oct. 8 for what MasterCard and Visa deem ‘high risk’ securities merchants: those in binary options, contracts for difference (CFD) and initial coin offerings (ICO, in which blockchain businesses issue their own crypto tokens in exchange for bitcoin).

Visa is waiting until December to issue its changes, and it’s going to force forex businesses and other high risk securities merchants to get creative in exploring alternative methods to accept transactions.

What is changing with these ‘high risk brokers?’

MasterCard has declared transactions from the aforementioned merchants will be classified in a separate card acceptance code (6211). Transactions in this code have a chargeback window up to 540 days, thus deeming these merchants high risk. This affects all transactions used with MasterCard credit, debit and Maestro, which are subject to additional scrutiny.

The changes by MasterCard and, eventually, Visa will result in several moves by those merchants deemed high risk:

  • Compliance: Merchants must only conduct transactions in regions in which it is legal and licensed.
  • Alternative payments: High risk merchants will seek alternative payment methods such as wire transfers, wallets and even alternative credit card brands to accept transactions.
  • More emphasis on KYC docs: For merchants, any documentation validating they can operate legally is valuable, and should be readily produced at any time. This includes documents such as:
    • Merchant’s license to operate in a country or region issued by the proper authority.
    • Proper licensing for the trading platform on which high risk merchants operate.
    • Proof of legal representation within the country or region in which the merchant is operating is also advised.

Payment processors for merchants are wise to have copies of documentation on file.

What was the impetus for the MasterCard and Visa changes?

Sometimes the major card brands shift their collective stance on certain industries.

We recall in early 2015 how more than a dozen online pharmaceutical businesses were unexpectedly shut down, leaving their merchants to scramble to find alternatives for credit card merchant services. To varying degrees, we’ve seen it in other industries such as tech support and payday lenders.

It was around that same time that we blogged about the CFTC banning the use of credit cards for forex transactions, noting that the losses were too great and brokerages were falling deeper into debt. US forex traders were still able to fund transactions with debit cards, wire transfers and e-checks, but not credit cards.

Since, the card brands have gradually backed away from the forex industry.

What forex merchants will do in place of credit card merchant services

For high risk securities merchants looking to replace credit card merchant services solutions, they may want to explore electronic check, money transfers or e-wallet solutions. Forex merchants are going to have to tread lightly here by remaining faithful to new regulations and maybe even paying into a rolling reserve to absorb the 540-day chargeback period.

Instabill merchant account managers are always up for a conversation with forex merchants about our high risk payment services and partnerships to find the best solutions at 1-800-530-2444.

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