Is an Offshore Merchant Account Your Best Option?

Or should you go for a domestic one, that is if you could get it? Well, this is an issue we’ve often grappled with, but to which we have never quite dedicated the time it truly deserves. Moreover, it is a question that often comes up during our initial communications with merchants, long before we’ve even established whether or not we would end up going forward with any kind of an application process.

Somewhat curiously, whereas, as you might expect, there are plenty of merchants who are interested in exhausting all domestic options, before exploring the usually less favorable offshore ones, there are quite a few others who tell us that they prefer offshore ones, even if they could qualify for a U.S.-based solution. Now, while most of the time the merchants which fall into the latter category ask for what they do for all the wrong reasons, in some instances there is a solid case to be made for electing to go offshore, even if you can find a domestic processor.

For a high risk business, this a big issue, which could easily have serious consequences for the merchant’s long-term credit card processing prospects. To begin with, choosing to go offshore when you can stay at home would lead to paying much more in processing fees, which no one enjoys doing. Yet, staying domestically and enjoying all of the resulting benefits could easily prove a transient feeling — it could only last for as long as your processor could tolerate the risk level associated with your industry. And the reality is that U.S.-based acquirers, as a group, have much lower risk tolerance than the type of offshore ones we use for our high risk merchant account solutions. So making the choice at issue involves a real trade-off and the decision is best made after all available information is carefully evaluated. In this article I will offer some basic guidance.

Calculating Risk

One of the biggest issues with payment risk classification is that merchants — usually, though not always, ones that are just starting out — are unaware that such a thing even exists. “After all”, a merchant would argue, “I am not asking for a line of credit and my processor would simply be handling my money, so should anything go wrong, they would simply hold on to my money to cover potential losses, in case sales need to be reversed and transactions — credited back to my customers”. Disbelief promptly follows when the processor calmly explains that a merchant account is indeed a form of credit, because — to make the argument in its simplest form — should things go wrong and the merchant goes under, chargebacks can keep coming for up to six months hence. And if the merchant no longer exists, it is the underwriter who is on the hook for all those losses. Believe it or not, such things happen in the real world all the time.

But it gets even more interesting than that. See, the bigger the merchant’s credit card processing volume, the greater the underwriter’s risk exposure. And all high risk payment processors that I know of, UniBul very much included, have set a lower limit on the processing volumes of the merchants they would consider working with. This limit is high enough to exclude all but the well-established businesses, ones usually with years of experience. Why do we do that? Well, for purely selfish reasons, I have to admit — a big share of the inexperienced high risk merchants end up being unable to keep chargebacks under control and are shut down within months of getting their merchant account up and running and that not only negates all the hard word we’d done during the application review, but may easily cost us money during the cleanup following the termination (paying for chargebacks, fraud, etc.). So, to avoid such unpleasant eventualities, we’ve erected a qualifying threshold in the shape of a high processing volume.

But how does all that bear on a high risk merchant’s choice of a payment processor? Well, let’s see.

Offshore or a Domestic Merchant Account

As the preceding paragraphs indicate, there are two distinct groups of merchant account applicants, from a high-risk processor’s perspective: new businesses and ones with experience and, critically, volume. If your business falls into the second category, chances are that by now you’ve gone through your share of processors and have managed to determine your risk category with a fair degree of accuracy. Furthermore, you have by now realized the huge importance of keeping your chargeback and decline rates as low as possible. If these are kept under control, and as long as your business is not classified as “unqualified” by Visa’s and MasterCard’s U.S. operations, your best option would be a U.S. placement and you should be able to find a processor relatively easily. If, on the other hand, you find yourself into the “unqualified” group, going offshore would be your only option.

But what if your business is brand new? Well, as we’ve already noted, in that case an offshore set-up would not be an option for you — your payment processing inexperience and lack of existing volume would disqualify you on the spot — regardless of anything else that might work in your favor. So a U.S. placement would be the only possibility — that is, if you can get one. There are a number of industries which domestic processors would not touch and some of the most prominent ones can be found here.

If, on the other hand, your line of business is not black-listed, you should be able to find a payment processor who is able and willing to work with you. The application process would not be all that dissimilar to what garden-variety low risk businesses go through, with some minor additions like requests for financial statements and tax returns. If your documentation is in order, you will get your merchant account. However, this may not be the end of the process, as your new processor may soon determine that your business is too high risk, after all, and serve you a termination notice. But the silver lining is that you’ve had the opportunity to gain experience and build a track record, which would then expand your options.

Now, be advised that not all U.S.-based processors share the same risk tolerance — some of them, like UniBul, are much less risk-averse than others and these are the ones you would want to be processing your payments. The trick, however, is to be able to identify these processors and here you would need to be very careful, as many processors would tell you exactly what you want to hear. So make sure you carefully go through your due diligence and research, before contacting anyone. And when you do find a solid, reliable high risk processor, stick with it, even if they charge more than others say they do — by now you should have learned that, in our industry, you should not be making decisions based on some numbers you see on a website or hear in sales pitches — more often than not, these turn out to be meaningless.

There are many credit card processors, both U.S.-based and offshore ones, which bring great value to their merchants and selecting one for your business should be determined primarily by your specific circumstances. Yet, as a rule of thumb, a U.S.-based processor should be your primary choice, if you can get one. However, if your domestic merchant accounts cannot last for much longer than a few months at a time, and your money continually gets held for several months following each termination, you should take that as a clear sign that offshore is where you should go.

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