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July 01, 2013

Working Smart

Commonly Asked Questions about Credit Card Processors

by Scott Fitzpatrick

Click here to order the July 2013 issue in which this article appeared or click here to download it to your mobile device.


Direct selling companies are constantly in motion; growing, exploding or sometimes shrinking. In general, they are always moving. No other company can grow by leaps and bounds like a direct selling company. Going from $40,000 in one month to $500,000 six months later is not unusual in the direct selling world. But how do you make sure your merchant account provider will not be terrified by this growth? Good communication, that’s how.

To ensure that you receive the best terms available, consider the following when applying for an account, and also throughout the account’s existence.


The merchant account provider is 100 percent liable for every dollar processed, for at least 6 months and sometimes as long as 18 months.


When applying for a merchant account:

Be prepared and professional. Applying for a merchant account is like applying for a loan and should be treated as such. Your company’s viability will be measured, so put your best foot forward. Banks (processors) don’t like to lose money and poorly run businesses can be costly. People tend to forget or don’t realize that the merchant account provider is 100 percent liable for every dollar processed, for at least 6 months and sometimes as long as 18 months. This is a risk they don’t take lightly.

So when you apply for a merchant account, have a thorough business plan that includes projections, product information (ingredients included), production redundancies and compensation plan information. Be ready to answer questions. Qualified underwriters will want to know everything about your business. The more prepared you are, the better your terms will be. I’m not just talking rates. This also includes processing limitations, settlement delays and reserves. Being viewed as a low-risk, likely successful company will help in all areas.

Throughout the existence of your merchant account:

Risk is not only evaluated during the application process; it’s an ongoing process, which changes constantly. Consider a merchant who, during the first three months, processes $15,000. Then Month Four pops up and suddenly that volume grows to $100,000. That merchant’s risk profile has changed. The bank will need to be sure that there are enough products to meet that growth. It is against Visa and MasterCard regulations to sell products that you do not yet have. Products “on the way” or “in production” cannot be sold. That being said, showing your merchant account provider that inventory exists and can meet sales will put them at ease. To further reduce their concerns, show them a plan for the future. For example, if sales were to double, show that you are ready for it. Selling more products and growing quickly might seem like a good idea, but it can also topple a company if it’s not ready, and that’s the processor’s concern. Show them you have a plan.

Having and selling product is one thing; shipping product is something completely different. Showing your processor that product is being shipped shortly after a card is charged will go a long way in reducing anxiety. Proving that people are repurchasing the same products goes even further. It shows that they like the product and the price. Tie your shipping records to orders and show them to your merchant account provider. Your professionalism will help them help you.

If you do not sell shippable goods, you will not have records that show delivery. In this case, indicate that customers enjoy what they have purchased by demonstrating usage. Keep in mind that processors are constantly on the lookout for “money games.” To prove that you are operating within legal guidelines, show your product in action. For example, if you are selling a long-distance service, then have usage logs ready. It is important that you can demonstrate that your product is being used and enjoyed.

Paying commissions affects both a company’s ability to grow and their risk profile. It raises a red flag for processors if commissions are being paid late. To show safety to a credit card processor, submit to them an exemplary commission record. Be ready to share commission logs. It is best if you can show them that roughly half of revenue is being paid back to a strong majority of distributors. This illustrates that customers are buying product and distributors are being paid.

If you have an above-average percentage of “active” members, share that information, too. If your retention is above the norm, let them know. The banks love stability. Anything that demonstrates that people like the program and the product will prove your company is secure.


The banks love stability. Anything that demonstrates that people like the program and the product will prove your company is secure.


Over the last 10 years I have been asked every question imaginable about credit card processing. Most concern risk and pricing, which are inherently entwined. It is important to understand how banks view direct selling companies, and what can be done to reduce the sense of risk and improve the terms offered.

The following are a few of the most common questions I receive from direct selling companies of all shapes and sizes.

Q: Why do credit card processors consider direct selling companies “high risk”?

A: Processing companies consider direct selling companies to be “high risk” for a few reasons, the two biggest concerns being the type of products sold and the business opportunity. However, the ready ability for a direct selling company to experience explosive growth is also a risk factor, as we mentioned above.

It’s important to understand growth from their viewpoint in order to establish the best communication possible. Simply put, the bank wants to be assured that you won’t grow faster than you can fulfill orders, and implode instead.

Q: What do the products have to do with risk?

A: From the processor’s viewpoint, some of the products sold within the direct selling industry have similar counterparts that could be purchased at a mass retailer for less money. This raises a concern for them. You can put their concerns to rest by providing a solid business plan, and by explaining the value-added services that an independent distributor brings to the transaction. Additionally, if applicable, you can point to quality of materials, research or other points that factor into your product price.

The processing companies are run by people who might have fears about the direct selling business model as a whole, or who might know someone who had a poor experience with a direct selling company and has lumped them all together. Implementing a solid product buy-back plan and demonstrating good customer service for returns can decrease your risk profile. Processors are very sensitive to situations involving products that they perceive may increase chargebacks, which can be very expensive for them.

Q: What is a chargeback?

A: A chargeback occurs when a card holder calls their issuing bank and disputes the charge. It usually happens when the card holder is dissatisfied with their purchase or experience with the merchant. Chargebacks should not be confused with refunds because each chargeback carries an associated fee. This can be very costly to merchants. Not only does a chargeback incur a fine, but if there are too many chargebacks, the merchant can lose their merchant account. Visa has a chargeback threshold of 0.5 percent and 50 per month, which means that if you are above the threshold, you could risk losing the  account.

Q: What makes the opportunity aspects high risk?

A: A business opportunity is not a guarantee, and there are many factors that can determine the success of a member.


Demonstrating to the processor that product sales—and not the opportunity—drive commission payments in your company is vitally important to reducing your risk profile.


The business opportunity can also create a perceived precarious situation for credit card processors. Demonstrating to the processor that product sales—and not the opportunity—drive commission payments in your company is vitally important to reducing your risk profile.

Q: Why do processors charge percentage fees to deposit my money into my bank account? At least, this is how it feels.

A: When one considers all of the parties and liability involved, the percentage taken isn’t much at all. Let me explain.

First let’s talk liability. As previously mentioned, the credit card processor is liable for every dollar processed, but only makes a small percentage on the total amount charged. When I say liable, I mean truly liable. If a merchant processes $100,000 a month for three months and then disappears without ever fulfilling sales obligations, then the merchant account provider will have to repay each and every person who charged their card. Now that’s a worst-case scenario, but any dollar that isn’t fulfilled becomes the responsibility of the processor. The provider considers this risk and calculates it into their processing rates.

When people think of a “processor,” they think they are referring to one company. In actuality, a processor is an amalgamation of many groups, each of whom plays a role in the process. The two major processes of a credit card transaction include both authorization and settlement components, each of which comprises multiple parties. Included in the authorization network are the gateway, front-end processor and issuing bank. In the settlement network you have the gateway, back-end processor and the acquiring bank. Each one of these parties plays a pivotal role, and the percentage fee is divided among them all.

In summary, be prepared, be professional and create a solid business plan. These simple things will create good communication with your credit card processor and enable you to focus on your business.



Scott FitzpatrickScott Fitzpatrick is a National Account Executive with Pivotal Payments, a company that provides payment processing services with a wide range of industry-specific solutions.