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Education

Know the risks before much more likely to go out of their way to allow merchants
to stay in business despite those merchants operating at
processing overseas chargeback levels double or triple the U.S. threshold. This
enables merchants to shift resources from chargeback
management to other areas.
By Theodore F. Monroe Many offshore jurisdictions also offer tax and other
Attorney at Law financial incentives to entice merchants' business away
from U.S. banks. Many also have less-stringent obscenity
ffshore payment processing for high-risk card- laws, which offers certain businesses a comfort level they
not-present merchants has never been bigger. cannot achieve domestically.
Why? Many U.S. merchants in hard to place
O verticals or with past processing problems Buyer beware
find that they simply cannot find U.S. acquirers willing to
take them and, instead, must turn offshore to place their Offshore processing has downsides. Plainly, the biggest
transactions. disadvantage is the cost: offshore processors and
aggregators frequently charge astronomical discount rates
Visa and Mastercard rules label a wide range of business of more than 10 percent along with hefty transaction and
models as high risk. In addition to the obvious suspects chargeback fees.
including marijuana dispensaries, adult-oriented
websites, escort services, gambling websites and Internet In addition, Visa and Mastercard generally look upon
pharmacies, this designation also applies to travel-related offshore processing with disfavor. The rules strictly limit
businesses, jewelry stores, car rental agencies and even the conditions under which offshore processing can take
tobacco merchants. place. Visa rules prohibit cross-border processing entirely,
unless the enterprise actually conducts a portion of its
Many of these merchants have difficulty obtaining business abroad.
processing because acquirers are concerned that the
merchants present regulatory risk due to their marketing Moreover, merchants who violate these rules face stiff
practices and because they have difficulty staying within fines, penalties and the possibility of being prohibited
the chargeback thresholds. from processing at all. Resourceful merchants can
circumvent these limitations without running afoul of
The offshore allure card brand rules by incorporating, and employing at least
some personnel, offshore.
Processing offshore has advantages, but offshore
processing is also rife with obstacles and risks. I'll first Who's behind the magic curtain?
delve into the potential benefits. The biggest advantage is
clear: offshore processors will take merchants who simply Merchants who process offshore must also be wary of un-
cannot use domestic processors, whether due to business scrupulous processors in countries that have strict privacy
model, excessive chargeback rates, termination by a prior laws. Many offshore processors don't generally publicize
processor and/or placement on MATCH (an acronym for (and often refuse to disclose) the identity of their acquir-
Member Alert to Control High Risk, a database used by ing banks. Thus, unsuspecting merchants may not learn
acquiring banks to identify terminated merchants). of a processor's precarious position until it is too late.

Further, some of these merchants are either blatantly Some offshore merchant agreements fail to identify not
or borderline violating U.S. laws. For instance, many only the acquirer but also the individuals running the
supplement and skincare merchants have a questionable processor. This is because many offshore processors are
level of disclosures to the consumer of the company's unregistered and aggregating transactions in the name of
continuity program. And marijuana merchants are in a another processing entity. Since risk is calculated based on
legal grey zone in the United States due to current Justice an evaluation of a merchant's business model, aggregated
Department guidelines that can directly contradict some accounts are extremely risky due to the potential for con-
state laws. tamination by a single "bad" merchant.

Traditionally, high-chargeback merchants processing Nevertheless, an otherwise vigilant business may discov-
offshore also benefit from more lenient rules governing er too late that it is part of an aggregated portfolio and
chargeback levels. For instance, Visa Inc. rules set a lose its ability to process when another merchant's trans-
monthly chargeback limit of 1 percent, forcing many online actions exceed the portfolio's chargeback limit and cause
and MO/TO merchants to expend extensive resources the entire account to collapse. Also, unscrupulous offshore
to minimize chargebacks. Although the international processors are legendary for not returning reserves at the
chargeback levels have changed, offshore processors are end of a relationship.

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