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ASSESSING THE RISK
INVOLVED IN THE PAYMENT PROCESSING
INDUSTRY
The credit card
processing industry is ruled by two
major companies, the MasterCard and the
Visa credit card. The associations of
these companies make all the laws
regarding credit cards. Any bank that
wants to issue credit cards to it
customers must first become a member of
any one of these associations.
MasterCard and Visa
assess risk involved by relying on the
historical data. The largest component
of their risk assessment formulas is the
level of probability of getting charge
backs. A chargeback occurs when the card
holder does not agree that a transaction
is done by him. Therefore, he files for
a charge back with his credit card
issuer and once a report is generated by
the investigating agency the result of
the chargeback may be to with draw the
transaction from the user’s account
which is a very costly affair. The
merchant bank can ask the merchant for
some proof of the transaction. If any
proof is provided by the merchant then
the proof will travel up the chain till
the card holder and the dispute will be
resolved. The point to make here is that
whether the verdict will go in favour of
the merchant or the cardholder there is
considerable amount of effort involved
by various agencies which costs a lot of
money. Therefore, any business which has
a high level of chargeback is considered
very risky by the associations.
Very obviously, those
businesses where the card holder is
physically not present at the point of
sale will have high levels of chargeback
because of high probability of fraud.
Direct marketing and web based merchants
are the best examples. Next component
that increases the risk factor is the
size of the average ticket. Higher the
average ticket the higher the risk
involved is. New merchants are also
riskier because of the less processing
experience that they have. There are
many other factors to assess risk in the
industry. Several businesses become
unacceptable for the merchant services
in the United States because the risk
level, as assessed by the banks, is
unacceptably high. For example, gambling
and betting websites are exceedingly
risky because the card holders who have
lost money while playing may feel
cheated and file for a chargeback, even
though the website played according to
the rules. On the other hand, the adult
content websites are also considered
extremely high risk businesses due to
high level of chargeback’s. The
chargeback’s occur because the customers
refuse to accept that they have used the
services of the website, due to
humiliation and disrespect, and
therefore, apply for chargeback.
The Credit associations
of all the payment processors are
required to monitor the chargeback
levels of all their merchants. The
processing companies have to pay huge
penalties if the levels of chargeback’s
exceed a certain limit. The processors
will promptly pass on this cost to the
merchants who are directly responsible
for this penalty. If the merchants fail
to pay or the level of chargeback’s
continue to be high then the merchant’s
account will be terminated. |
