Beware the Offshore Merchant Account!

Search the Internet for merchant account providers and you’ll run across companies that promise “lowest rates” to “bad credit merchants” and “high risk merchants” that are “having difficulty placing a merchant account domestically.” Typically, these operations are offshore merchant account providers; that is, they don’t operate within the United States and aren’t subject to any of the rules that protect businesses in this country. Not surprisingly, they’re probably not your best source for a merchant account for a variety of reasons.

Merchants who can’t get a merchant account elsewhere often turn to offshore (or international) merchant account providers as a last resort. Oftentimes they’ve been turned down for a merchant account because the products or services that they deal in are considered high risk by reputable merchant account providers. The high risk category includes (but is certainly not limited to) travel, online gaming, online pharmacies, adult websites, outbound telemarketing, escort services and online dating sites, timeshares, and subscription or membership clubs. Other reasons for being declined for a merchant account include being a start-up operation with a poor credit history or an existing business that has a less-than-stellar credit card processing history.

If your business falls into any of these high risk categories, the promises made by offshore merchant account providers may be enticing. Unfortunately, you find yourself in a very difficult situation if you sign on with one of them. All too often, these are scam operations.

Some of the red flags you should be aware of when dealing with an offshore merchant account provider include:

• Offers that sound too good to be true. This includes unbelievably low processing rates (which may not include hidden or junk fees, or they’re teaser rates) or service and product claims that just don’t hold up to scrutiny.
• Fast approvals. When dealing with a high risk business, merchant account providers must be thorough when checking out their qualifications. While a quick approval is what every merchant wants, it would be inappropriate under these circumstances. The offshore provider may be just trying to trap you.
• Claims of low or no fraud risk/chargebacks. Reputable merchant account providers acknowledge that there’s always a risk of fraud, and they make a point of stating what they do to lower that risk and reduce chargebacks (charges disputed by the cardholder or bank). Offshore merchant accounts often experience an above average number of chargebacks, which generate chargeback fees the merchant must pay.
• Standing on shaky legal ground. Unless your business is located in the same country as your merchant account provider, you may have no legal standing to settle any disputes that arise. For example, offshore merchant account providers may freeze your account for little or no reason, and you may have no legal recourse.
• Trust issues. Merchants and their merchant account providers deal in sensitive personal and financial data as part of the credit card transaction process. When the provider is located offshore and not subject to U.S. laws, you may be putting yourself and your customers at increased risk of fraud and identity theft.
• Customer service and support questions. Is it likely that an offshore merchant account provider will be able (or motivated) to provide the level of customer service and support that high-tech credit card processing requires?  Can you expect to get state-of-the-art products and services from them?

Before you turn to an offshore merchant account provider as a last resort, search for a domestic option. Many U.S.-based providers will establish merchant accounts for high-risk merchants, although the processing fees may be higher than for lower-risk merchants. In the long run, you’ll be paying for superior technology, service and peace of mind.