Credit card processing costs differ depending on the risks associated with the different kinds of credit card transactions, such as "card present" transactions versus "card not present" transactions. Online sales can also be problematic depending on the category of products or services offered. Each credit card processor has risk analysis protocols that they follow according to their underwriting guidelines for high-risk transactions. These guidelines are developed from years of experience and from analyzing the data from many thousands (perhaps millions) of transactions. Below
Refunds vs. Chargebacks
There is a distinction between a chargeback and a refund. A company may issue a refund at any time without penalty. A chargeback is a forced refund due to a legitimate customer complaint and a properly filed dispute of the charges. Merchants have some rights to fight against some chargebacks as not being legitimate requests. However, in the case of a stolen credit card, a chargeback is inevitable.
Reserve Deposit Accounts
If your company accepts high-risk transactions of the kind that are acceptable to the credit card processing company, the processing fees will be higher for these types of transactions because of the added work needed to deal with them. Moreover, to offset the potential losses from chargebacks, the credit card processing company may ask for a “rolling” reserve account deposit.
The amount of required deposit is calculated based on the estimated risks associated with a certain kind of transaction and the estimated monthly transaction volume. To get started with credit card processing of high-risk transactions, an upfront deposit is usually required by the credit card processing company. After that, a deduction is made from the credit card receivables if the deposit needs to be increased as the actual transactions come in. Typically the reserve requirement will be 5 to 10% of the transaction volume. This amount is held in a non-interest bearing trust account for 180 days.
The reserve amount is released progressively after each transaction is over 180 days old. If there are no chargebacks, the full amount is released. If there are chargebacks, the remaining balance after the chargebacks are deducted is released. It is important to note that the banks charge an administration processing fee on top of the transaction amount for a chargeback. Moreover, merchants who stray into the red alert area of having excessive chargebacks will pay even more. These are just general overview statements and your particular circumstances may be quite different, so check with ClearPayWI to learn the exact details that apply to your business.
Sales of certain products that are advertised online in deceptive ways are a major source of chargebacks. These problems can be avoided by having better marketing practices. Another thing that may cause significant chargebacks is selling to customers in certain countries. There are no requirements that force a merchant to sell products or services to a specific country. If there are excessive chargebacks that come from a specific country, the merchants can simply refuse those transactions to avoid those problems.
Check with ClearPayWI to find out if your high-risk transactions can be processed by them. Some high-risk transactions are easy to identify because of what is being sold. Other companies may be considered high-risk, even though it is not immediately obvious as to why. In those cases, it is the sheer volume of transactions that increases the risk of chargebacks.