As a merchant, you might already be aware of your risk exposure when you accept credit card payments, and hopefully, you’re taking the necessary precautions to alleviate that risk.
It can be helpful to understand the different kinds of risks that each entity in a given credit card transaction is exposed to. The credit card processing industry is a complex network of financial institutions, middlemen, and businesses that all play a part in the few seconds it takes to complete a credit card transaction. A better understanding where these unique risks lie can help you better understand the fees you pay as a merchant, both apparent and hidden processes. You are involved in each time you process a credit card.
For a customer to be able to visit your business and make a credit card purchase, they first need to be issued a credit card by their bank. When the bank issues a credit card to a consumer, they are essentially extending credit to them and trusting that the cardholder will be able to repay their credit card balance. As a business accepting credit cards, the base fee you pay for each transaction is called the interchange fee. The interchange fee, while set by the card brands, goes to the issuing bank to help pay for the cost of mitigating their risk, among other costs associated with its part in facilitating the transaction.
When and if you sign up for a merchant account with a traditional processor, you can expect to be required to submit adequate documentation and wait while they ensure that you aren’t a high-risk business. High-risk businesses are considered more likely to incur excessive chargebacks, which can be very costly to businesses. Some measures processors take to ensure your business isn’t high risk can include credit checks and reviewing your business’ financials. This can take anywhere from a few days to a few weeks, but it is an important step for processors to adhere to before approving your business for a merchant account in order to mitigate their risk.
If your business is deemed high risk, then your application may be denied or you may have to try signing up with a high-risk credit card processor who specializes in serving high-risk businesses. There is a price to pay with these processors, however, as they will likely require even more documentation, they will charge much higher fees, will lock you into long contracts with less flexibility, and will often place what are called “reserves” on your account. Again, there is often a heavy price to pay for elevated risk.
As a merchant, the primary risk you are exposed to is the risk of incurring chargebacks. Chargebacks are essentially a customer dispute about a charge that they either don’t recognize, was charged by mistake, or if it was fraudulent. As a merchant, you carry the financial responsibility of any potential reversals for transactions that you process. To mitigate this risk, you should monitor your transactions for suspicious activity and beware of fraudulent activity.
Consumers are exposed to risk as well, as their credit cards can be stolen or compromised and used fraudulently. However, your customers are provided fairly comprehensive protections against the abusive use of their credit card by the card brands and their issuing banks. For example, if their credit card is stolen and used at your store, they can call their issuing bank and have the charges reversed. They can also dispute charges for purchases that are not recognized, were never received (if ordered online), or where the goods or services received were not as described.
Ultimately, everyone who is involved in credit card processing faces risks unique to their relative position in the chain of players involved with processing a transaction. However, by working closely with your credit card processor to understand your risk profile and having a full understanding of the cardholder protections your customers are entitled to, you can effectively manage risk while continuing to process transactions safely and securely.