Understanding the Risks
Each entity in the credit card processing industry that is involved in a credit card transaction is exposed to unique risks.
Understanding where the risks lies can help you reduce your exposure and better understand your role in protecting yourself and your business.
Risks for Issuing Banks
When banks issue credit cards to their customers, they are essentially extending credit. They cannot be sure that each cardholder will be able to repay their credit card balance. If a cardholder is unable to pay their credit card balance and defaults on their debt, the issuing bank will be taking a loss on that account and the balance owed. Issuing banks will mitigate their risk by doing personal credit checks on credit card applicants and setting appropriate card balance limits to define the amount of credit that a consumer is able to access based on their individual circumstances.
Risks for Acquiring Banks / Processors
Credit card processors bear the risks of merchants that are insolvent and are unable to repay chargebacks or penalties imposed by the card networks. To mitigate risks, processors use several techniques to reduce the likelihood that they have approved a merchant account for someone who will be unable to repay these penalties or who might be at risk of having high volumes of chargebacks or penalties. These techniques include credit checks on merchant applicants and monitoring transactions, throttling settlements speeds, and placing holds on funds. The nature of some businesses or industries is such that chargebacks may be more likely, and this is something that processors consider when approving a merchant account and determining processing rates.
Risks for Merchants
As a merchant, you are at risk for chargebacks and carry the financial responsibility of the potential reversals for transactions that you process. To mitigate this risk, you should monitor your transactions for suspicious activity and beware of fraudulent activity.
Cardholder Protections and Risk For Your Business
Cardholders are provided certain protections against the abusive or fraudulent use of their credit card. For example, if their credit card is stolen and used at merchant locations, they can call their issuing bank and have the charges reversed. They can also dispute charges for purchases that were never shipped, or where the goods or services received were not as described. The advantages of these cardholder protections are that they promote the use of credit cards and give customers the confidence to make purchases at locations they might otherwise not know or trust - essentially, promoting the easy flow of commerce.
However, as a merchant you need to understand that by accepting credit cards as a form of payment, you're putting yourself and your business on the other end of these cardholder protections. If a stolen credit card is used at your location, or a shipment fails to reach your customer, then you are liable for refunding the original transaction. This is known as a chargeback, and it's where the financial risk of credit card processing comes from. The single most important thing for you to remember is that you, as the merchant, are ultimately responsible for potential chargebacks. If a merchant is careless or ignores warning signs, they may ultimately pay the price as transactions can be reversed, and the merchant stands to lose both the original transaction funds and the goods provided.