Merchant Account Risk and Security

Merchant processing through merchant accounts is the way of paying through electronic payment for the business owners. Getting a merchant account and merchant processing involve gathering sales information, obtaining authorization for the transaction, collecting funds from the card-issuing bank, and reimbursing the business owner.

There are risks in opting for merchant processing. Whenever it has something to do with finance, if something goes wrong, someone will definitely lose money. Through merchant processing, it is important that nothing gets wrong with the processing or acquiring banks, or business owners who are with these banks under their merchant accounts can find themselves in mud.

But if the bank is adept management and can control the risks, then merchant accounts can be safe and business can prosper. There can three major or primary risks: strategic risk, credit risk and transaction risk.

Strategic risk is more on the side of bank who is offering the merchant account services.  If the bank management lacks the overall business plan and strategic direction then the bank may encounter some strategic risks.

The second risk is called the credit risk. Credit risk can arise from chargebacks.  Chargebacks have significant effects and risks to the acquirer/ processing bank and to the business owners themselves. Acquirers or bank processors experiences risk to their earnings and capital.

What are chargebacks?

Chargebacks are when customers or persons who have purchased the product would like to refund the purchase from the bank who have issued their credit card. Reasons for refund can different depending on the situation, but commonly, refunds are attributed to dissatisfied customers. With chargebacks, the buusiness owner is not contacted by the dissatisfied customer to resolve the issue.

For service providing banks, chargebacks mean that the merchant or the business owner do not have enough money or have declared private.

There are businesses, by their nature, have higher chargebacks compared with other businesses. Reasons for higher chargeback rates can be brought about by the products themselves that these businesses are selling. High priced and high in demand, like high end electronic devices and jewelry.

Other businesses that are considered to be high risk are adult book stores, adult entertainment, adult novelties, adult video stores, advanced sales, check cashing services, child pornography, collection agencies, credit repair services, dating/escor, diet marketers/ programs, exotic dancing establishments, multi-level marketing, interned pharmacies, pornography, sexual encounters firms, telemarketing, time share, travel clubs/tours/guides and vacation packages.

As protection for these kinds of risks, processing or acquiring banks get a special account called the reserve and put some business owner’s funds there. In cases when a business owner declared bankruptcy or closes down, processing bank are unable to process future chargebacks. So what they do is set up a reserve account to that the processing bank can access the funds held in reserve to cover the chargebacks.

Another risk is called the transaction risk. Processing banks are always facing daily transaction risks whenever they are processing credit cards for the business owners. The risk is mainly around the process of transmitting sales information to the card-issuing bank for collection and reimbursement. Other transaction risks are employee errors, system breakdown of the bank or natural calamity.

Merchant accounts can also have risks in balance with their benefits. There are different ways to counter the risks, but the most effective medicine is early detection.