In an industry where many acquirers shun high-risk merchant accounts, Michael Foy seeks them out.
For the past 15 years, Foy has run International Merchant Processing Solutions, a company he set up in Belize for the sole purpose of providing processing services to the kinds of online merchants that most U.S. banks wont touch. The businesses in his portfolio run the gamut from adult content and gaming sites to timeshare properties and nutritional supplements.
The stakes are high for Foy and other acquirers of high-risk merchants. Bankruptcy, fraud, litigation, high chargeback rates and data security breaches rank among their chief concerns. But for acquirers who are willing to take their chances, the profits are astronomical compared to what they would make from a restaurant or boutique. Many businesses rack up $500,000 to $1 million in volume each month, Foy says.
It would take 1,000 pizza shops to get to the level of even one high-risk merchant, he says.
This line of work isnt something most high-risk acquirers initially seek out. Instead, its usually something they stumble upon while working with more usual merchants. Then more business comes in by word of mouth.
I didnt wake up one day and say, Im going to be in high risk. It usually starts because something comes through your office that you cant place in the U.S., Foy says.
When he discovered the high-risk segment, he was the national ISO director for American Spirit Processing and servicing cab companies in Boston. One of the taxi company owners approached him to find help getting a processor for a business he knew in the online adult entertainment industry.
Not knowing much about it, I did the research and found a bank that would do it, Foy says.
The U.S.-based bank started processing the business right away, and his earnings immediately shot up. In one week, my residuals literally multiplied 100 times. That really piqued my interest, he says.
A few months after Foy set up the processing arrangement, the bank shut it down, so the business needed another home for its processing. Thats when Foy started looking into the offshore banking community and started International Merchant Processing Solutions in Belize.
From there, Foys client base expanded significantly. Primarily through word of mouth, he built up a portfolio with a mix of high-risk merchants and more traditional businesses. About 99% of Foys clients are e-commerce merchants.
Foy spends most of his time traveling to sign merchant agreements with banks around the world to obtain processing for businesses that domestic banks avoid. Thats where Foy sees himself filling a niche--and why he conducts business outside of the U.S.
Mention offshore to someone, and theyll say, Oh, are they hiding money somewhere like Belize or the Cayman Islands? No, theyre the only ones who will give these people a merchant account, Foy says.
For acquirers who are willing to brave the myriad hazards that come with the territory, boarding high-risk merchants can become a lucrative proposition.
Whereas ISOs typically make about 10 basis points on the average merchant transaction, they can make 1% to 3% on a high-risk merchant because they are offering a hard-to-find service, Foy says. Simply 1% of $1 million is $10,000 in residuals each month--from one account, he says.
Foy can charge high-risk merchants more for processing because its a lot harder for them to get. Typically, the merchant pays 2.5% or even 3.5% more in fees than in the U.S., he says.
The acquirer should also manage chargebacks, says Paul Rianda, an Irvine, Calif.-based payments attorney. Lots of chargebacks can provide a source of revenue for the acquirer, which gets to cash in on the $25 chargeback fee placed on every transaction. But from a risk perspective, the ISO doesnt want to rack up so many chargebacks that the Federal Trade Commission gets involved.
Youve got your desire to make money pulling you one way and the desire to avoid risk pulling you another. Its a question of which one wins out, Rianda says.
Banks generally evaluate merchants based on two types of risk: reputational risk, and financial risk, Rianda notes. Taking on a controversial merchant can damage a banks reputation.
But financial risk tends to pose an even greater threat to banks and acquirers, they say. The acquirer is taking on merchants that might produce excessive chargebacks or attract fraudulent activity. The ISO either takes all of the liability for the merchant, or shares that liability with the bank.