By Theodore F. Monroe
Attorney at Law
Offshore payment processing for high-risk card-not-present merchants has never been bigger. Why? Many U.S. merchants in hard to place verticals or with past processing problems find that they simply cannot find U.S. acquirers willing to take them and, instead, must turn offshore to place their transactions.
Visa and Mastercard rules label a wide range of business models as high risk. In addition to the obvious suspects including marijuana dispensaries, adult-oriented websites, escort services, gambling websites and Internet pharmacies, this designation also applies to travel-related businesses, jewelry stores, car rental agencies and even tobacco merchants.
Many of these merchants have difficulty obtaining processing because acquirers are concerned that the merchants present regulatory risk due to their marketing practices and because they have difficulty staying within the chargeback thresholds.
Processing offshore has advantages, but offshore processing is also rife with obstacles and risks. I'll first delve into the potential benefits. The biggest advantage is clear: offshore processors will take merchants who simply cannot use domestic processors, whether due to business model, excessive chargeback rates, termination by a prior processor and/or placement on MATCH (an acronym for Member Alert to Control High Risk, a database used by acquiring banks to identify terminated merchants).
Further, some of these merchants are either blatantly or borderline violating U.S. laws. For instance, many supplement and skincare merchants have a questionable level of disclosures to the consumer of the company's continuity program. And marijuana merchants are in a legal grey zone in the United States due to current Justice Department guidelines that can directly contradict some state laws.
Traditionally, high-chargeback merchants processing offshore also benefit from more lenient rules governing chargeback levels. For instance, Visa Inc. rules set a monthly chargeback limit of 1 percent, forcing many online and MO/TO merchants to expend extensive resources to minimize chargebacks. Although the international chargeback levels have changed, offshore processors are much more likely to go out of their way to allow merchants to stay in business despite those merchants operating at chargeback levels double or triple the U.S. threshold. This enables merchants to shift resources from chargeback management to other areas.
Many offshore jurisdictions also offer tax and other financial incentives to entice merchants' business away from U.S. banks. Many also have less-stringent obscenity laws, which offers certain businesses a comfort level they cannot achieve domestically.
Offshore processing has downsides. Plainly, the biggest disadvantage is the cost: offshore processors and aggregators frequently charge astronomical discount rates of more than 10 percent along with hefty transaction and chargeback fees.
In addition, Visa and Mastercard generally look upon offshore processing with disfavor. The rules strictly limit the conditions under which offshore processing can take place. Visa rules prohibit cross-border processing entirely, unless the enterprise actually conducts a portion of its business abroad.
Moreover, merchants who violate these rules face stiff fines, penalties and the possibility of being prohibited from processing at all. Resourceful merchants can circumvent these limitations without running afoul of card brand rules by incorporating, and employing at least some personnel, offshore.
Merchants who process offshore must also be wary of unscrupulous processors in countries that have strict privacy laws. Many offshore processors don't generally publicize (and often refuse to disclose) the identity of their acquiring banks. Thus, unsuspecting merchants may not learn of a processor's precarious position until it is too late.
Some offshore merchant agreements fail to identify not only the acquirer but also the individuals running the processor. This is because many offshore processors are unregistered and aggregating transactions in the name of another processing entity. Since risk is calculated based on an evaluation of a merchant's business model, aggregated accounts are extremely risky due to the potential for contamination by a single "bad" merchant.
Nevertheless, an otherwise vigilant business may discover too late that it is part of an aggregated portfolio and lose its ability to process when another merchant's transactions exceed the portfolio's chargeback limit and cause the entire account to collapse. Also, unscrupulous offshore processors are legendary for not returning reserves at the end of a relationship.
Businesses processing offshore sometimes encounter administrative delays. Merchants often receive chargeback reports in an untimely or inconsistent manner, which can prevent them from contesting chargebacks.
Such shoddy reporting practices can cripple a merchant's implementation of chargeback reduction measures, possibly resulting in a merchant's termination and placement on MATCH. In addition, while domestic processors generally offer merchants real-time online viewing and reporting, offshore processors often cannot do so. This makes it more difficult to monitor transactions and thereby sets the stage for belated discovery of problems.
Merchant agreements for offshore processing also frequently contain choice of law and venue provisions. These provisions dictate which country's laws will govern disputes pertaining to the contract and specify the country and court where disputes must be resolved.
A U.S. merchant entering an agreement containing such provisions may be prohibited from turning to U.S. courts for relief. Thus, it may be extremely difficult to enforce rights because of provisions that force the merchant to locate and retain counsel in the appropriate jurisdiction familiar with the applicable law. Obviously, the difficulties of trying to sue and collect from entities based in such places as Cyprus, Lebanon and Gibraltar are legion. Even initiating litigation can prove to be so costly and time-consuming that many merchants merely walk away.
Merchants need to approach offshore processing with wary eyes: in truth, it is best suited only for merchants who cannot get a domestic account, or for strong-stomached, calculating merchants who want to exploit card brand rules and live at the chargeback precipice.
In any case, merchants and merchant level salespeople should do business only with reputable processors and make sure they know the names of the individuals running the processor, as well as the identity of the acquirer handling the account. Finally, as always, a merchant must carefully review and make sure to understand the complete terms and conditions before entering any merchant agreement. 
The information contained in this article is for educational purposes only. Please consult an attorney before relying upon it for your specific legal needs. Theodore F. Monroe is an Attorney whose practice focuses on the electronic payment and direct marketing industries. For more information about this article or any other matter, e-mail him at monroe@tfmlaw.com or call him at 213-233-2273.
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