Risk Management Guidelines
Explain ACH delays?
The vast majority of electronic transactions go through an automated clearinghouse (ACH). This enables you to have your merchant account with Bank A, your business checking account with Bank B, and handle transactions from customers using Banks C through Z. The clearinghouse system is run by the U.S. government. ACH processing adds a delay before money spent in your business is available in your checking account. This delay is usually two or three business days. You should account for this in your cash-flow planning, and be sure your deposits are made in a timely manner. Merchant banks may add an additional ACH delay to accept a high risk or high volume merchant account, such as an online store or a merchant whose personal credit is poor. Be sure you understand all such delays before signing with a credit card merchant account provider.
What does a fulfillment house do?
If you don't want to get a merchant account or merchant bank card, you may consider going through a "fulfillment house." These are businesses that make the "back end" of your business run hands-free. They take orders on a toll-free line, process credit cards, and pack and ship merchandise. All you do is sell. The disadvantage, of course, is that fulfillment houses take a cut of your sales -- about two or three times the percentage that a merchant account would cost. Often, they also do not provide credit-card processing for Internet sales, only for sales that come in to the toll-free line. Questions to ask before committing to a fulfillment house:
How important is my return policy?
Most merchant banks will require your business to establish a return policy, which should be made conveniently available to customers before a purchase, and should also be provided to the merchant account provider. Many businesses print return or refund policies on their sales slips to avoid misunderstandings. Clearly communicating your return policy to customers before a sale can help prevent chargebacks and reinforce your case if a dispute does occur. It's also good customer service! In the case of an Internet merchant account, consider requiring the customer to check a box on the order form indicating that he or she has read the return policy. Whether or not customers actually read it is up to them, but you've made a good-faith effort to make it available. A good refund policy will answer these questions:
Chargeback management is often a matter of being honest and considerate with customers. Keep your return policies generous, respond to customer problems promptly, and -- in the case of a catalog or online account -- describe your products completely and accurately.
What is a merchant account charge-back threshold?
If a merchant account takes too many chargebacks, it's a higher risk for the merchant bank, and often indicates that the merchant has a problem with quality or customer service. You should be responding promptly to all customer disputes and other factors that could cause chargebacks, but you should also be aware that your merchant bank can cancel your account if you hit the chargeback threshold. If the chargeback threshold is 2.5 percent, your bank may sever its relationship with you when chargebacks reach 2.5 percent of your sales for a given period.
As you shop for a credit card merchant account, take the threshold section of a bank's chargeback rules into account in your calculations. No merchant can expect to avoid chargebacks entirely, but knowing your threshold can help you take steps to keep them under control. Also pay attention to whether your merchant bank has a chargeback management staff available to help you deal with customer disputes. This can be a useful service that protects you as well as the bank.
What is a hold-back?
A holdback is a percentage of the receipts of a credit card merchant account which the merchant bank retains to cover possible chargebacks. After a predetermined time, the holdback is returned to the merchant. Merchant banks almost never pay interest on this money, and it's not available for your business to use during the holdback period. So it's a good idea to investigate a company's policy on holdbacks before you sign up for a merchant account. Pay attention to the chargeback policy and chargeback process as outlined in the company's terms of service, and ask questions before you sign up. If your business is considered high-risk, you may have to have a reserve -- a percentage of monthly charges which the merchant bank holds back in escrow in case of disputes or chargebacks. Particularly if you are doing most or all of your business online, ask questions about whether your business would be considered a high risk merchant account, and what that would mean in terms of holdbacks or reserves, before you sign with a merchant account provider.
Does it matter if I have bad credit, can I still get a merchant account?
If you have a poor credit history, you might suspect that you would have trouble obtaining a credit card merchant account, particularly for a high-risk merchant account such as an online store. One solution is a secured account. With such accounts, you put up a certain amount of money or a certain percentage of your sales to serve as security for the merchant bank. Once you have proven your creditworthiness over a period of time, you may be able to upgrade to a standard merchant account.
Describe what a charge-back is?
A chargeback is a reversal of a credit-card transaction -- not because the product was returned or because the sale was never completed, but because there was some problem processing the transaction. Often, a chargeback means the merchant ended up providing a product or service for free -- and had to pay the merchant bank for the privilege. Common reasons for chargebacks on credit card merchant accounts include:
Merchants, of course, hate chargebacks. When you shop for a credit card merchant account, pay attention to the merchant bank's chargeback rules. A good merchant bank will take chargeback management seriously and provide chargeback protection for its customers. Here are some other ways you can help prevent chargebacks: