Wednesday, February 4, 2009

Offshore Credit Card Processing Do's and Don'ts

Wouldbe offshore entrepreneurs are almost universally shocked by some of the hidden/unseen costs of operating offshore.

One of those big costs are the costs of processing credit cards. This is especially true for internet entrepreneurs who find themselves operating in industries with high charge back or fraud scores, and subsequently are forced to work through "high risk" merchant processors.

So Let's Talk About How to Setup an Offshore Credit Card Processor

While there is no shortage of merchant processors in the onshore world, you'll find that the offshore and high risk merchants are a little harder to find, much more expensive, and usually not nearly as stable or professional.

Harder to Find

For online entrepreneuers operating in the states it's a simple matter. In fact, for a time, google checkout was offering this service for free to build their client base. For the credit cards accepted offshore it's a different matter. Many many processors won't take your business if you do not run the deposits through a bank account located in the country they are located in. For offshore businesses with legitimate privacy concerns of its clientele this is simply not an option and leads to much higher costs.

More Expensive Processing Costs

While there is potentially a higher incidence of fraud in the offshore merchant processing game, you will find that some of the credit card fees are extremely aggressive/bordering on criminal.

While an onshore processor might charge between 1.5 and 3%, an offshore processor that classifies his client as high risk might charge as much as 8%-11%. In addition, the high risk merchant will be subjected to "hold backs" on payouts of as much as 6 months for a portion of his revenue. This can severely cramp an entrepreneur's cash flow as advertising and operations expenses have to be paid out of available cash and bank loans are typically not available.

Unstable or Unprofessional Merchant Processors

Since there is lower competition in this space and there are some risks for the processor as well, it invites a certain "wild west" speculative individual to the space, rather than your traditional, conservative banker-types.

Processors working multiple clients off of shared merchant ID's or MIDs chase algorithms bent on shutting down their clients' business in the online casino, poker, and sportsbook and gaming space. Online drugs have high chargebacks as well.

In the best case you'll find that these are smaller shops and their technical documentation, support, and before and after sales support is not what you are used to when operating onshore. In the worst of cases, you can have processors that shut down while still holding large amounts of clients' funds (by way of holdbacks lasting up to 6 months) and simply disappear into the night with their clients funds. This can be extremely dangerous to a small startup company.

Obviously, it is best to work with someone who is reputable and has been vetted by people you know and trust in this case...and even then due your due diligence.

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