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Payment Gateway Risks Coaching Businesses Face (with Denis Lunev)

Payment Gateway Risks Coaching Businesses Face (with Denis Lunev)

Learn about the risks of payment gateways, how your coaching business would change if you can’t accept payments, and how to avoid those risks in this presentation recording from the Great to Elite Online Summit for Coaching Businesses with Denis Lunev, CEO of the payment and billing platform for coaching businesses DepositFix.

What are payment gateways?

Payment gateways are software systems that allow businesses to move money from customers' credit cards or bank accounts to their own bank account.

Most used payment gateways

They involve various subsystems, such as merchant accounts, acquirers, banks, and payment processors like Visa and MasterCard. Some of the most popular payment gateways are PayPal, Stripe, and others.

Risks of payment gateways

1. Audit Risks

Like any software system, payment gateways may not work sometimes due to errors or server downtime. If a single provider is used, businesses cannot process payments during such periods, and there is nothing they can do but wait until the gateway is back up. The result of these outages is coaching businesses losing profit.

Dates when payment gateways outages have occurred

2. Geographic restrictions

If a business sells products or services internationally, it may encounter issues related to currency conversions, conversion rates, and other factors. Different countries have different currencies and preferred payment methods. 

So you might think if you charge in US dollars, even outside it, doesn't apply in your case, but yes, it does apply in your case. So for example, if somebody is using a credit card from bank outside of United States, but you charge in USD first, the processor need to convert the product price to foreign to foreign currency. Then they charge that amount and convert the funds back to your currency, USD, and send to your bank account. So it's a complicated process. And, as a result of that, first of all, you are not getting the best conversion rates by the banks.

Limited geographic reach of different currencies and regulations

Second, you are getting charged at least 1% on top of the standard pricing fee when you do international transactions.

Then, there's such thing as acceptance rate, or approval rate. It's how many credit cards are approved for payments. And if there's not strong international presence of a gateway in a country where you charge your customers, then it can drop. So for example, it can drop by 10% or 20% comparing to to local credit cards.

3. Payment method limitations and compliance

There is a vast range of payment methods available, including PayPal, direct debit, credit cards, and others. However, some countries have their own rules for their local banks. For example, SCA is a popular thing in Europe. It stands for Strong Customer Authentication, which means that the customer needs to receive a text message from their bank to approve the transaction.

Example of multiple reasons for restricted payment options

If your payment gateway does not implement SCA, you may not be able to accept payments in specific countries. Another thing to consider is local payment methods. Different regions have their own preferences, and credit cards may not be as popular as we think. 

For example, there are local systems like iDEAL in the Netherlands, SOFORT in Germany, or local banks in the UK. These are standard payment methods, and people expect to pay using those methods. If you do not accept these, you may miss out on sales and face the risk of losing customers.

4. Gateway account termination

This is the most dangerous risk for businesses. If a gateway account is terminated, the business cannot use it anymore, and the termination is permanent. This could happen due to various reasons, including non-compliance with regulations, fraud, or excessive chargebacks.

When a payment account is deactivated and closed, it can be a disaster for a business. Usually, this is a permanent decision, and it's rarely reversed. So, most likely, you'll need to create a new account with another provider because the existing one will not approve you anymore.

In many cases, there is no warning notice, just a sudden email saying, 'Hey, your account is suspended.' You cannot use your money anymore, and it's put on hold intentionally. If there is any illegal activity within your account, you cannot move the money around.

Example of people’s reactions to gateways account terminations

Another thing to keep in mind is that the funds you have in your balance with the processor will be put on hold. You might eventually get those funds, but it could take six to twelve months or longer. In some cases, you may even owe money due to penalties imposed by MasterCard, Visa, or banks. In that case, you will not get your money back because it will be used to pay those penalties.

5. The risk of MATCH

And then there's MATCH. I hope you never have to hear that term in relation to your payment process because it's a very dangerous situation to be in. MATCH stands for Member Alert to Control High-Risk Merchants, and it's a blacklist controlled by MasterCard.

Denis Lunev’s quote about ending on the match list

Red flags and identifying account risks

While payment account deactivation does not happen without reason, there are several red flags that coaching businesses should look out for to identify potential risks. 

1. Excessive chargebacks

First of all, excessive chargebacks are a problem. Chargebacks occur when a customer requests to cancel a specific transaction from their credit card to the bank. It's a simple process; customers can click a button that says, 'I don't recognize this transaction. Please revert it.'

Example of excessive chargeback issues and how to fix them

These chargebacks cost everyone in the payments infrastructure. The bank is responsible for it, so they revert the transaction and pay for it. Then Visa, MasterCard, payment gateways, and everyone in the hierarchy of payment is affected by these chargebacks.

2. Unusual activity

Another red flag is unusual activity, such as a sudden jump in sales. For example, if your business has been running for two years, and your usual revenue is $100,000 a month, and then out of nowhere, you have $2 million worth of transactions. That's a huge red flag because it's not expected, and it means that something is going wrong. Perhaps your credit cards were stolen, or you're doing something illegal.

3. Policy violations

Then there are policy violations or VI (Visa) violations. For example, a customer is selling copyrighted content, and you might not even know that you're violating a policy until it's flagged by the processor.

4. High-risk industries

There are some industries that are red flags and rejected by default, such as gambling, companies providing loans, or adult content. There are gateways that work specifically with high-risk merchants.

List of risky businesses when using payment gateways

So, if you fall into categories like that, or if you teach something like courses remotely related to traveling, gambling, or adult content, it's sometimes better to use those gateways that are specifically created for high-risk merchants.

5. Fraud activity

Here, fraud activity means that you may be attacked by hackers or carders, not that you commit fraud. Fraud attacks are a huge problem, with the majority of payment fraud happening online. 76% of all payments are made online because it's easier than paying in-store with a stolen credit card. 

This is a massive industry with $28 billion in annual losses, and it increases every year. Hackers steal credit cards in batches by hacking into banks, kick-out systems, stores, and more. They sell those credit cards to carders who use them to benefit. Before they can use the credit cards, they need to know which ones are good and which ones are expired, so they test them. That's where you can fall victim to card testing attacks.

Statistics and schemes about fraud attacks

Carders create programs to test thousands of credit cards at once by going through online forms and seeing if they can charge them. Our experience has shown us that this happens frequently to our clients. In 2021, we had an incident where almost 60,000 cards were involved and they were attempting to charge $1 each. We were able to block all of those transactions, and the customers didn't even know it had happened.

Chart of how depostifix protected $58,000

Mitigating payment gateway risks

Coaching businesses can take several steps to mitigate payment gateway risks. For instance, they can:

  • Use multiple payment gateways - Using multiple payment gateways can reduce the risks of payment failure. If one payment gateway goes down or is terminated, businesses can switch to another one without any significant impact.
  • Use your own account - Use your own account so that you have your own relationship with the banks and payment processors. In that case, it would be easier to communicate and fix any of those problems.
  • Monitor chargebacks - Make sure that you don't cross that line of 0,75%.
  • Have fraud protection - Something like Stripe radar or DepositFix system
  • Regular payouts - Don't hold your money in the payment processor. Just transfer it to your bank account as soon as possible. This way, in case your account is blocked, you won't lose the funds that are already in there.

Key takeaways from this presentation

Payment gateway risks can pose a significant threat to businesses' financial health, and it is crucial to take measures to mitigate these risks. 

Using multiple payment gateways, understanding the audience's preferences, complying with regulations, and monitoring payment transactions are some steps businesses can take to reduce the risks of payment failure. 

Payment account deactivation can be a disaster for businesses, resulting in loss of funds and business operations. 

Therefore, it is essential to be vigilant and look out for red flags such as excessive chargebacks, policy violations, and unusual activity to identify potential risks. 

By implementing measures to prevent chargebacks and complying with policies, businesses can protect their payment accounts and ensure smooth financial transactions.

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