Posts filed under 'International'
Forewarning, This is one of the few posts on this blog that is going to contain some self promotion, but just a little.
We recently began taking the steps to move into Canada to provide services to Canadian businesses. We will be one of the first independent ISOs in Canada, and treading this new path is very exciting. I have learned a lot about the differences between the way merchant services work in Canada and the US, and it looks to me like Canada is moving in a much more positive direction compared to the US. Both for providers, and for businesses.
US vs. Canada
The biggest difference in consumer card use in Canada, is that PIN debit takes up a majority of transactions. In the US, PIN debit is only a percentage of total credit and debit transactions. It is growing in acceptance and popularity, but it still has a long way to go. This PIN debit use is one of the shaping factors in the entire Canadian system.
The positives in Canada: The best thing I have seen regarding the Canadian processing scene, is the interchange fee structure. In the US there are literally hundreds of interchange fees and levels, and the entire setup is extremely confusing. Canada is completely opposite. There are about 10 interchange levels, and that's it. Retail, MOTO / Ecommerce, ARU, Corporate and a few levels based on processing volume and nothing else. What is also great is that there is no transaction fee for Canadian processing. There is a processing percentage, and we're done. No transaction fee, no other surcharge fee, just a processing percentage.
Oh yeah, there are no downgrade charges in Canada!
The negatives: The processing equipment situation in Canada is at best, very ugly. In the US you can go online and buy processing equipment at near cost, from a variety of online retailers. I know this because the primary online function of my company's website is equipment sales. In Canada, the situation is again, completely opposite. In Canada you must purchase pre-encrypted equipment from the bank you are going to process through. To purchase a terminal that would cost about $300 in the US, you will pay at least $1200 in Canada, and most likely $2000. Equipment from the US in not compatible in Canada either (I learned this one the hard way). Leasing and renting are most common and offer a somewhat reasonable monthly cost, but compared to the US, it is far more expensive for equipment. Leases and rentals in Canada start at about $50 per month for basic equipment and go up to about $100+ per month for higher-end and wireless equipment. Ouch!!
Unfortunately, there's no way to get around it that we have found. The banks control the encryption, and businesses must have encrypted equipment to process or they lose more than half their customers. Hopefully the equipment conundrum will change in the next few years, but for now businesses are stuck dealing with the bank's nasty equipment pricing.
Now the self promotion:
Since we don't yet have a significant presence in Canada we are looking for businesses, websites, and people in Canada that are interested in becoming merchant account sales agents there. You will be able to offer businesses rates starting at about 2% for retail businesses, and about 2.5% for online and MOTO businesses. These rates should beat most any bank's quoted rate in Canada. We are looking for friendly, honest people that are not wanting to rip off a bunch of businesses, because that's not how we do business. Check out our Canadian Agent Program for more information if you are interested.
And Finally:
It's very exciting to see Canada open it's doors to an ISO structure. I'm not sure how soon, or even how probable it will be for the banks there to ease up on their equipment monopoly, but the fee structure is looking good enough to almost completely offset it.
Canada has a very simple and efficient system, and that is not something that I would like to see change. The last thing Canada needs is an interchange table with three hundred different levels on it, and thousands of confused and angry business owners that have no idea how to understand it.
February 9th, 2007
So the problem is that you are looking to accept credit cards from your customers but your business in not located in the United States. This is a very common issue for small business owners around the world, and unfortunately there is rarely an easy answer that meets the small business's needs.
I'm briefly going to give a little comparison on how the merchant services industry works in the US compared to other countries. This explains why processing rates are so much lower in the US than other countries.
In America, businesses have several different option for who to accept credit cards with. There are independent merchant service providers (ISO's and MSP's), there are standard business banks, and there are sales agents that resell for ISO's and banks. While each of these groups are associated with each other, and sometimes resell for the same companies, they also compete against each other.
In just about every other country in the world, banks have exclusive control over the credit card processing in that country. For many, it is often a single bank that controls the credit card processing for that entire country. A number of years ago, processing in America operated on a similar system. Banks eventually opened the door to allow independent service providers to exist. This in turn led to more and more competition, and eventually the credit card processing industry in America transformed to price driven instead of the former value driven industry. Coincidentally, Visa and Mastercard make a higher percentage for each transaction from businesses in America than any other country, but businesses in the US pay less to process than businesses in any other country. What outwardly appears to be an industry crammed with middle-men, actually has facilitated lowering the cost to process credit cards by over 50%.
Non-American countries are subject to very high fees for processing credit cards because the banks have a monopoly on the credit card processing. There are no independent companies providing merchant services which results in very little competition, so the banks set their prices at whatever they want. They know that their customers will pay anything they ask to accept credit cards, because the service is so valuable to businesses.
Until banks in other countries allow independent companies to resell merchant services, there is likely to be a continuing high cost to process credit cards. Unfortunately, there hasn't been any major pushes in other countries to adapt the Bank / ISO relationship that exists in the US. Mexico, Canada, and Australia, are probably the most likely countries to move to a similar system, but no push has been made yet. As far as banks are concerned, there isn't any reason for them to move to a different system. The banks are making millions of dollars a year in pure profit, they have 100% control over a very strong industry, they have no competition, and they have no reason to give it all up.
What are a business's options?
Non-American businesses have a few options for processing credit cards. The can go to their local or regional bank to accept credit cards, they can use a 3rd party processor, and they can use an offshore merchant account provider.
Processing with a local bank and an offshore merchant service provider will likely be very similar. The offshore provider will be less restrictive in business type and volume, but both will have a processing fee starting around 5%. This fee will go up based on the size, volume, history, and the type of products that a business sells. If the business type itself could be considered high risk, then the business will definitely want to go with an offshore provider. The biggest drawback with both banks and offshore providers is that there is almost always a substantial setup fee. Depending on the situation, this fee can be in the thousands of dollars. Another major drawback that businesses experience with banks is that the bank will normally require them to use that bank for their business's bank account. The bank has their own requirements for opening a business bank account, and this often comes with high minimum balances, and additional fees just for using their required services.
3rd party processors are companies like Paypal, 2checkout.com, and worldpay. These companies process credit card for another business in the name of the 3rd party processor. For normal businesses, this practice called factoring, is strictly prohibited by Visa and Mastercard. 3rd party processing companies also draw a lot of negative attention because they undermine a customer's ability to make a chargeback. There are countless horror stories from consumers unable to get a refund, or even make a chargeback for what turned out to be a scam or a fraudulent company. 3rd party processors are also notorious for holding, and never returning, a business's money if there is any sign of trouble. However, 3rd party processors are often the only cost effective solution for start-up businesses. Their fees can vary from about 3% up to about 10%, but they normally lack the high start-up cost of offshore providers or banks.
3rd party processors are restricted in the fact that they can normally only be used for online purchases. They lack the ability to integrate with a credit card machine, and do not normally include a virtual terminal. There are also restrictions on what countries can use their services. A lot of African, Eastern European, and South Asian countries are prohibited. In this case, an offshore merchant provider may be the only available service.
For retail businesses, a bank or offshore merchant account provider is probably going to be the only method they can use to accept credit cards.
For a new business, I would recommend trying to find a 3rd party processor online. Check out various discussion forums, and ask around. For existing businesses or businesses that know they need an offshore merchant account, start searching online or call up your local bank. With some research, you should be able to find the best solution for your business. As with any merchant services company, if an offer sounds too good to be true, it probably is.
One last thing…
There are companies out there that will claim to be able to setup an American bank account and forwarding address for your business so that you can get a domestic merchant account. All processing banks in the US require you to have a 'physical' business presence in the US. That combined with the patriot act's stringent requirements for opening a US bank account make it pretty much impossible to go down this rout. It is probably possible to pull it off, but it is most likely illegal, and definitely expensive. If you get caught processing illegally this way, expect major repercussions from your processor, and possibly the government. Just a warning…
August 3rd, 2006
Often businesses run into the problem of being labeled as a high risk business for processing electronic payments and are forced into unconventional processing agreements. Many business owners have no idea that their industry falls into a high risk category.
Shades of Grey and Red:
High Risk businesses fall into either the gray area between a normal business and a definitive high risk business, or fall into the red zone for truly high risk businesses.
What determines if a business is high risk?
There are several factors that determine if a business is to be considered high risk for credit card processing. The main reason that a business is considered high risk, is the type of business that it is. Risk is based on the merchants probability of chargebacks, returns, the businesses history, and the planned method to accept credit cards. Yes, returns are a large factor in determining the risk of a certain business type. Processors assume that if there is a lot of returned merchandise, then the merchant isn't doing something right.
I believe the exact opposite of this, as merchants who accept returns are doing what is required, to keep their customers happy. To me this equates a lower risk business.
Certain business types are considered high risk no matter what the individual businesses history is. These businesses are in the red zone. They must find an international method to help them accept credit cards. Businesses that land in the gray area, are either high risk due to their own processing history or their business is determined to be high risk on a case by case basis.
Businesses that fall into the gray area that have good processing and financial history can usually find an American provider to help them accept credit cards, while new businesses or businesses with poor history are more likely to be considered high risk.
Common High Risk Businesses (Red Zone):
Travel and Advanced Booking
Products requiring a long term commitment (magazines, subscriptions, etc.)
Adult Products
Online Pharmacies and Supplement Websites
Telemarketing
Debt Collection
Gaming, Gambling, and Sports Booking
International Businesses
Common High Risk Businesses (Gray Area):
Electronics
Custom Products
Inbound Telemarketing
Ecommerce & Card-Not-Present (in general)
Short Term Businesses
If a business lands in the gray area, the businesses history is going to play a large roll in what types of credit card processing is going to be available to them. New businesses are always at a disadvantage, especially for card-not-present businesses. Fraud on the internet has created close scrutiny of all potential online businesses.
The most unfortunate incidence for an existing business is for their business type to be changed to high risk even though they are currently processing and have a successful, honest history. While rare, this does happen from time to time and is generally applied for all businesses within a certain industry.
If you are high risk:
If you are a high risk business, your options are a third party processor or using an offshore merchant service provider. Either way, make sure that you shop around to find the best possible solution for your business. If you business is in the gray area and you are having trouble at one place, check all of your domestic options before moving onto an offshore provider. The most expensive domestic provider is generally cheaper than the cheapest offshore provider.
September 6th, 2005
