Tuesday, April 23, 2013

Online Business Risk Mitigation

First, let's look at what makes a business risky and unattractive to merchant account underwriters.

  • No financial and processing history
  • Stored value sales and accounts
  • Open ended time of use
  • Long Settlement Lag Times
  • High (over $500) ticket sales
  • High risk industries (travel, gaming, adult, liquor, online dating, debt consolidation, credit repair, and bankruptcy attorney)
  • Annual Billing, Lifetime Memberships, retainers and aggregation


Now, let's look at an example, Groupon.  Groupon's business model as explained in Groupon’s site: “Each day, Groupon emails its members one unbeatable offer on something great to do in your city. We offer consumers great values by guaranteeing businesses a minimum number of customers. If a certain number of people sign up, then everyone gets the Groupon offer. If that minimum isn’t reached, then no one gets it.”

Here's what the merchant account underwriter gleaned from Groupon's own business model explanation:

  1. Groupon is selling other businesses' products and services that are easily contacted by the consumers who can then negotiate a better deal than Groupon can offer.  
  2. Groupon has a lot of competition from other online companies like Amazon.com, Expedia and Priceline.
  3.  Groupon sells mostly discretionary products and services that are more difficult to market and sell.

Groupon has little bargaining power with providers and a low barrier of entry from competitors which makes its business model unsustainable and unattractive.

Merchant Account Assessment

Since merchant account providers are ultimately financially liable for merchant losses, their underwriting and risk management team carefully assess each merchant account.

Merchant account providers would be financially liable if a merchant sold a lifetime membership but then went out of business within a few months.

Merchant Account Providers can mitigate risk by several means:

  • Reserving a percentage of sales for a specified period of time in an FDIC insured bank account, during which time the merchant proves their credit worthiness
  • Requiring an upfront reserve deposit
  • Requiring a personal guarantee

Online Merchants Risk Mitigation

Online businesses can make improve their attractiveness by:

  • Adopting a viable business model
  • Building a processing track record of low number of charge backs
  • Providing better user experience than their competitors with innovation/better technology and customer care
  • Selling high quality products and services with satisfaction guarantees
  • Clearly communicating terms and conditions
  • Fast and efficient problem resolution processes




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  1. What great information! I have been to the SIS Breakfast Open House and a few other "meet-ups" for my new business. I really enjoyed reading your information. Thanks so much for this great article.

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