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 . The Weekly Update news bulletin offer news and commentary regarding a number of issue which are of interest or concern to clients. Such topics may include offshore company formation, trusts, banking, investing, real estate, expatriate matters, residency & second passport matters, and other topics concerning the Dominican Republic & Panama. |
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Offshore Merchant Accounts (but did not know who to ask) . The ability to accept Visa or MasterCard payments from your customers is an integral part of operating your business, but where do you go for such a service? Certainly, US banks have been the previous leaders with regards to e-commerce and the facility to allow merchants to process credit card transactions online. Competition in this area has also meant that Merchant Account Companies located in the US, or US banks, have traditionally offered some of the lowest processing rates as well. But, what if there was some reason why you preferred not to conduct your banking or credit card processing in the US? What if it were possible to gain some taxation, privacy or other benefits from transacting your credit card processing some place else? . This really is the key point when we start discussing the idea of an offshore merchant account. That is to say, maybe your business is considered distasteful to a US bank or processor (adult entertainment or online gambling). Maybe the US bank or processor will not accept you because you have a new company or business. Maybe your business is very simple (such as selling music, toys, books, crafts, jewelry or even operating a travel agency) but you want to make sure your business remains secure and you want to take advantage of available taxation benefits someplace else. If this is the case, then perhaps looking for an offshore merchant account makes sense. But, the question then becomes what should you know about an offshore merchant account? . To start off, it should be understood that processing credit card transactions with an offshore bank or processor is no different than what is involved with a US or your current domestic bank. Stated another way, information is passed through to the offshore bank, and is processed, just as it is done anywhere else. It works the exact same way. The only thing that may be different is how you are treated and internal policies of the bank or processor involved. . For example, it may be the case that the US bank or processor will only accept a US incorporated company as a client (the application is in the name of an incorporated company). In addition, a large up front deposit may be required as well, especially if the company does not have an earnings or credit history. In this regard, you can certainly find offshore banks or processors which will gladly accept an offshore company as a client (Belize IBC, Panama Company, etc., etc.). Many will not require an up-front deposit as after all, the bank or processor has your money to start off (or will be collecting revenues from card transactions for your account, to be later forwarded on to you or your company). It can be said then that an offshore bank or processor might be somewhat fairer if you have a small or new company (or business). . What is also true, however, is the fact that because of this no deposit requirement, the processing rates might be higher or the hold back period longer. Let us look at these two points separately. First, with regards to rates, it is true that a US based processor will probably charge about 2.5% to 3.5% for processing your customer Visa or MasterCard transactions. An offshore processor might charge 6%, or much more. This is partly due to lack of intense competition, but also partly due to the fact that bank fees outside of the US are higher as well. Higher costs to process, due to the bank’s fee, translate into higher processing costs. In addition, higher risk businesses, or those with above average charge back ratios, may expect a higher processing rate to cover the risk. As an example, there are of course some banks or processors that will accept online casino, telemarketing or adult entertainment clients, but will also charge much higher processing rates accordingly. These businesses historically have had higher than normal problems with issues such as stolen credit cards, or cases whereby the client charges back (calls his or her credit card company and claims fraud or theft after the sale has taken place). Telemarketing firms tend to use high-pressure sales techniques, whereby the client quickly changes his mind later on, which only leads to a lost sale or charged back sale. In the case of online gambling, there are some people that do claim their card was lost or stolen after finding out that they lost the bet they charged at the virtual slot machine (or roulette, poker, etc.). No one ever claims their card was lost or stolen when they win. The point is, it may be possible to find an offshore bank to take on such risky business, but the merchant offering such a service will pay a higher than normal rate accordingly. . The issue of how quickly a bank credits the merchant is also directly related to charge back risk as well. The supposed policy of Visa & MasterCard is that they will not honor a charge back after six months, but they themselves have broken this rule often enough. The risk for the bank or processor is, the merchant is paid (probably to another bank in another country), and sometime later those credits are reversed by Visa or MasterCard. To address this, some banks will credit the merchant within 48 hours of the sale, but only to an internal bank account (that the merchant has with the same bank). In this situation, the money is not leaving the bank and they still have some control with regards to potential charge backs. In other cases, it may be the policy where the bank or processor pays out every 30-days, or some variation (weekly, bimonthly). Again, this is to allow at least some time to pass for assurance that there are not any charge backs coming in, and not for any other reason. . Is this a common problem? For most merchants, the answer is no. The acceptable ratio or charge-backs for Visa or MasterCard (which is in turn the same ratio imposed by the bank to the merchant) is about 1%. In truth, some merchants never have any charge backs. That is to say, customers never complain or contact their credit card company to claim a false or fraudulent charge. If the merchant delivers the product in a timely manner, and the product is in good condition or is what the customer in fact ordered, charge backs are a rare occurrence. However, in all fairness, just as there are bad merchants (online marketers that don’t deliver on time, etc.), there are also bad customers as well (who do receive the product and try to get out of paying). . The issue of charge backs is really the only concern any bank or processor really has when dealing with any merchant. Most offshore banks or card processors do not care about the type of business you have or what you are selling, providing you are using ethical sales or business practices. This is truly one major difference between offshore banks and US banks. Many US banks have taken the position of going beyond due diligence or looking at a potential client with regards to business. As an example of this, we have heard of a European Cheese Company that lost its US merchant account after five years because of their name. You are probably thinking, that is ridiculous. It is ridiculous, but true. What was the name of the innocent cheese company selling a good product via mail order & online? Hardon, which the US bank suddenly decided after five years, was in fact connected to an adult entertainment business (or maybe they thought something more sinister, such as products designed for male sexuality). In any event, the cheese company lost its US bank merchant account, and so it goes with the people running US banks today. . Investigating the idea of an offshore merchant account, or offshore banking relationship, goes far beyond those businesses which may have difficulty, such as a new business, an company incorporated offshore, or a so called sin related business. It also is a matter of protection and privacy. Even if you have what may be deemed a clean and honest business, and your customers are very happy, you could still find yourself involved with a lawsuit or government tax audit. The modus operandi in the US seems to freeze the bank accounts & seize the assets first, then ask questions later. So, having your credit card transactions processed and held somewhere else means that at least the company’s accounts are no so easy to get a hold of. There are of course two sides to this point or method of doing business. We can argue for example, that some companies may have fraud or other things on their mind (and perhaps the customer funds are out of reach). However, I tend to think that the vast majority of people that operate any business want to stay in business. That is to say they want to do what is correct, or conduct themselves so customers are happy and the business grows as a result. . Looking at this from some real life examples of someone who is honest and was almost ruined due to an IRS tax audit, we know of one businessman that had his accounts frozen for 18 months. Even after he visited the IRS offices with his accountant, and after the IRS admitted they were wrong (and found all of his books and tax documents to be correct), it took him 18 months of fighting with the government to get his business & personal accounts unfrozen. The point to all of this is, you could have the situation whereby your life and business is disrupted even though you are innocent of any wrong doing. Protecting your business and your business operations (ability to stay in business) is something to consider quite seriously. . Some Commonly Asked Questions About Offshore Merchant Accounts: . . Apart from any differences is processing fees, What are the other advantages of processing offshore? . One of the benefits that many merchants do not think of, is the possibility of accepting even more types of credit cards which they might not be able to accept with a US bank. For example, aside from accepting Visa & MasterCard, it could be the case your offshore bank or processor can allow you to accept Maestro or many of the European Bank Debit Cards. This is an important point, especially if you are marketing to customers in Europe. . Again, focusing on Europe, it may also be the case your offshore bank can accept card processing in foreign currencies, and offer a disbursement to the merchant (to you) in a foreign currency also. This might not seem like such an advantage, but let us assume you are accepting orders from customers paying in US Dollars, German Marks and French Francs (via their credit cards). Let us also assume that your base currency is British Pounds, or that you prefer all proceeds be sent to your bank in British Pounds (or Swiss Francs, etc.). The offshore bank or offshore processor might be able to do this where as the US bank could not (or would not). . There are many programs advertised on the Internet. How do I know which one is good? . Just as with any other product or service, how can you compare two products or companies with different pricing schedules or fees? This might come down to getting what you are paying for (or not), or it might just be a case of competition. It is difficult to paint each program with the same broad brush, but the true answer is to find a bank or program that provides what you want. If a merchant account program is free, but you have problems getting your settlement or consistently have customer service problems, such a program may not be a bargain at any price. . For example, there are many companies marketing merchant accounts online, whereby the sign up (and set up) process is inexpensive and all done online. Some clients have been pleased with such programs, while others have complained about not getting their proceeds (settlement) on time or have complained about customer service problems. Certainly, it may be the case that such a company is working off of quantity, not quality. That is to say, they would rather sign up as many merchants as possible, and not worry about being able to service all of them properly. . There also may exist some banks, or providers, which may have higher processing fees or charge a set up fee. However, perhaps it is the case that you are assigned an account officer to work with, or that you are given some extra services (or attention) that might not be available elsewhere. Each bank or merchant account provider has its own strengths and weaknesses, so find one that suits you best. . Why is it that some banks or merchant account firms have said they have no problem with a high charge back rate, yet others have been very strict in this regard? . Keep in mind that it is Visa or MasterCard, which issues a license agreement or approval to a bank for processing of their credit cards. It is also Visa or MasterCard which puts pressure on the bank to use proper procedures to keep its overall charge back ratios at 1% or less. It is not necessarily true that the bank or the merchant account processor is trying to give you a hard time, but the issues starts at the top (Visa or MasterCard) and roll downhill (the bank doing the processing, and ultimately you, the merchant). . How is it possible that some banks or processors can take a high-risk client and get around this? In most cases, they are probably pooling the high-risk client together with all of the low risk clients (those clients with a 1% or less charge back ratio). We can illustrate this with an example. If the bank has $ 100 Million dollars in monthly processing of low risk clients (less than 1% charge backs), and they add on an additional $ 1 Million in monthly volume for a high risk client (let us say 20% charge back ratio), the net average is still below 1%. Remember that in reality, the bank is the direct client of Visa or MasterCard and you the merchant are the direct client of the bank. Visa and MasterCard leave it up to the bank to implement whatever internal policies or controls, provided that the end result is, the issue of stolen credit cards and charge backs is controlled. So, it is not the case whereby one bank or Merchant Account Company has a special arrangement or better deal with Visa or MasterCard than another. However, it could the case, that one may have enough volume and internal controls in place to accept higher risk business and still remain in compliance with the credit card companies (Visa or MasterCard). . Why are there different policies regarding up front deposits and hold back of processing money generated by credit card sales? . What we are talking about here is risk, specifically charge back risk. Some banks or processors may agree to pay out 100% of your proceeds right away, but only if you agree to an up front security deposit equal to one months volume, or whatever their formula is. Others may not ask for a large up front security deposit at all, but may instead hold back a portion of your proceeds as security. Often this involves what is known as a rolling reserve. Simply stated, this involves the withholding of perhaps 5%, 10% or more of your monthly processing volume. In most cases, the bank or merchant account processor will release these funds to you over time, usually every six months. So, with this type of arrangement, you may obtain 90% (as an example) of your credit card proceeds every month for the first six months. Beginning with month number six, you obtain 90% of your processing volume for that current month, plus the 10% with held from month number one. In month number seven, 90% of the processing volume from month number 7 plus the 10% reserve from month number two, and so on. . For the small business with limited cash flow, obtaining a merchant account which does not require a large up front security deposit certainly makes things easier. However, the flip side of this involves the bank or processor holding back some of the proceeds as a reserve against possible charge backs. . The real risk for any bank or processor is ultimately a case whereby they pay out all of the credit card proceeds to the merchant, and then get stuck with reversals of those credits later on (charge backs from Visa or MasterCard). For this reason, the bank or processor is always concerned that some of the merchant’s funds are reserved or secured to cover such occurrences. |
