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Merchant Account Providers Want Chargebacks?

I recently stumbled upon a blog entry suggesting that gateway providers and merchant account providers both want merchants to get chargebacks. This was clearly written by someone who does not understand how the credit card processing industry works.

Fraud is the number one concern of every single credit card processor bar none. The security and fraud department is the largest growing division for every one of them. For some merchant account providers it is even larger then their underwriting department!

First of all, let me debunk the myth that they are all after the chargeback fees. First of all, the gateway providers don’t get one red cent from them. Zero. They do not benefit from chargebacks at all. But they do stand to lose a customer who gets their merchant account closed from having too many chargebacks (more on that later). Those very same customers may also default on payment for their gateway fees. Once again, no positives for the gateway providers.

As for the credit card processors:

1: The typical chargeback fee is $25. This covers the cost of an employee dealing with the chargeback. That’s it. Someone has to physically handle each and every chargeback presented to an merchant account provider and they need to get paid.

2: Let me explain how chargebacks works. If a consumer requests a chargeback for an online transaction they get their money back every time. Period. Because 75% of all credit card fraud occurs online (even thought is accounts for less then 10% of all transactions) Visa and MasterCard always side with the consumer on chargebacks related to Internet purchases. But what if the merchant doesn’t have the money in their account? Or at all? Guess who pays for it? Their processor does, that’s who. So every time a chargeback is done the merchant account provider stands to lose the entire amount of that sale. I hardly think they like that situation much less encourage it.

If you’ve ever experienced the underwriting process of an merchant account provider you would see that the vast majority of the time dedicated to underwriting an account is spent on fraud prevention. It’s on their minds before the merchant ever has an account.

It is also important to note that Visa and MasterCard start fining merchants and their merchant account providers who have too many chargebacks. Once a business experiences more then 1% of their sales as chargebacks they are subject to fines up to over $100,000 per month. This is because Visa and MasterCard don’t want merchants who are that much of a risk. The merchant account providers don’t want those accounts either not only because of the potential fines they face but the potential loses they face in unrecovered chargebacks. So, merchant account with a number of chargebacks simply lose their accounts and usually are unable to ever accept credit cards again.

(I did comment in that blog but my reply was never posted. I guess they didn’t like their theory being undone.)

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One Response to “Merchant Account Providers Want Chargebacks?”

  1. jestep

    From the mensioned blog: “Its up to Visa, Mastercard, Discover, and American Express to put pressure on payment gateways and credit card processors to get their act together and to stop placing all burden on the merchant and to stop raping the merchant with fees.”

    I have to agree that this guy has got it completely wrong. Visa and MasterCard’s policy of consumer protection is what places the burden on merchants, not the credit card processor. Apart from that, what would a credit card processor do anyway. They aren’t going to pay the merchant back for money that was processed fraudulently through the merchant’s merchant account. Whether the system is wrong or not is irrelevant. The merchant is still responsible for the money that goes through their merchant account.

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