DirectPayNet

Category: MERCHANT PRICING

  • FAQ Fridays: Your Merchant Category Code Can Increase Your Sales

    FAQ Fridays: Your Merchant Category Code Can Increase Your Sales

    A regular query I get from prospects and new clients, like this one from Paul K., who runs a supplement shop that’s been scaling considerably in the last few months:

    “Maria, I’ve signed up with a new payment processor – and they asked me what Merchant Category Code (MCC) my business is. What’s this all about, is it important?”

    Short answer: Yes! 

    The Merchant Category Code – I’ll refer to it by the acronym MCC for the rest of this explanation – is important for your business.

    You need to make sure you are in the right MCC classification to keep your costs and decline rates down.

    Here’s some more detail:

    Most recently, the question about MCC came from Paul K., a merchant selling supplements on a subscription model – 

    His products included a range of nutraceuticals, a protein powder, and also some e-books on fitness and health topics as upsells.

    Paul never even knew the MCC existed until they switched accounts and the new payment processor asked them about it.

    What he noticed – 20% of his transactions declining on the front-end.

    And Here’s What I Told Paul:

    “Dear Paul,

    The merchant category code that your payment processor assigns to your business has several impacts on your transaction fees and approval rates.

    If you’re a nutraceutical merchant selling supplements on a monthly subscription, you may be categorized differently depending on the processor you work with – 

    • One processor may decide to place you in the MCC 5968 for Direct Response businesses offering a subscription model.
    • Another processor might make the case that you are in MCC 5499 because you sell supplements, protein powders and other food type items. 
    • If you sell a lot of e-books or info products, MCC 5999 (miscellaneous retail) might apply…
    • And for digital media sellers – MCC 5815 could be the best option.

    Important things to note:

    • Your merchant account fees will vary depending on MCC
    • Your approval rate can also vary – that’s because your customers’ bank may have restrictions placed on certain MCCs
    • Credit card rewards, debit cards and prepaid cards all carry a different cost mainly because of the benefits offered to the consumer
    • American Express typically charges the most as they offer a lot of benefits to their members

    If you have more questions and want my input on the best MCC selection for your business – let’s schedule a call to discuss it further.

    Maria Sparagis”

    Of course, I was trying to keep things simple so the email didn’t confuse Paul and his team too much…

    As always with payments, there are several more layers of detail and complexity.

    Let me explain…

    Your Merchant Account Fees, & Discount Rates

    First – a definition:

    Interchange is the fee that the card networks like Visa and Mastercard charge for processing a transaction.  

    Some payment processors charge an interchange plus fee (also called a cost plus fee) for your merchant account.  

    The cost of interchange varies depending on your MCC and the card type your customers are using.  

    For example: 

    For a debit card transaction, selling a supplement subscription using MCC 5968 (direct response merchants) will have a much lower fee than MCC 5499 (supplements, protein powders and other food type items) for that same debit card.

    Interchange fees are ALSO what allow Visa, Mastercard, Discover and American Express to offer high credit card rewards.

    The credit card companies fund the rewards to their customers from the fees a merchant pays for processing that credit card.

    Some payment processors charge a flat fee – for example, payment providers such as PayPal or Stripe have flat fee pricing with an additional fee for foreign or corporate cards. This means interchange fees are not important for merchants on these platforms.

    Other payment processors charge a 3 tiered discount rate – this means they categorize the cards your customers pay with into 3 ‘buckets’, and charge a specific price depending on which ‘bucket’ the customer’s card is in. Again, in this case, interchange fees are less important for your business.

    Overall, selecting interchange-plus/cost-plus pricing is the best option because you will know how much you are paying per card and what the markup is for your processor. 

    Typically, interchange-plus/cost-plus saves you money on your merchant account fees. 

    Most merchants prefer the lower fees for interchange-plus/cost-plus, but some merchants need the certainty of a flat fee so they can easily reconcile and forecast merchant account fees at the end of the month – and they are prepared to pay what are usually higher fees for a ‘sure thing’.

    (The choice is similar to a variable rate vs a fixed rate mortgage loan. Variable almost always comes back as the lower cost option – but some people prefer the certainty of a fixed rate so they can make a repayment plan without worrying about interest rates)

    So Why Not Just Choose The MCC With The Lowest Interchange Fees? 

    It’s not that simple. 

    Your merchant services provider cannot just assign you any merchant category code you choose…

    They have their own compliance procedures, and your MCC needs to make logical sense depending on the type of product or service you’re selling. 

    That being said – your business may fit into several MCCs.

    At first glance, the obvious choice seems to be – choose the Merchant Category Code(MCC) with the lowest interchange cost!

    Not so fast…

    If you’re in a high-risk industry, you may be better served by a MCC that is not considered high-risk – even if the fees are higher. 

    Some Direct Marketing merchants accept higher interchange rates to get a MCC that is lower-risk to try and get better approval rates.

    There’s also the credit card companies procedures – Visa and Mastercard come up with different operating rules for specific MCCs – and your payment processor must comply with them.

    The many and varied rules and policies between credit card companies and different payment processors can impact your business in unexpected ways…

    And if your business model changes, you may need to change your MCC, and also change the way you charge your customers.

    For example, Visa added new rules to MCC 5968 for free trial or discounted subscription merchants in April 2020 (implementation delayed due to COVID-19).  

    These new rules govern merchants’ abilities to charge a subscription fee without the customer’s explicit consent [LINK – Details Here]

    Working with a specialist payment processing consultant can save your company a lot of time, money and headaches.

    Contact the DirectPayNet team to review the merchant fees you’re paying – and find out if you can get a more cost-effective credit card processing system for your e-commerce business.

    We specialize in helping high-risk businesses overcome the obstacles of higher than required merchant fees.

    Your Transaction Approval Ratios May Be Higher With A Different MCC

    Some issuing banks have limitations or “scrubbing” set up for merchants of a particular MCC. 

    The reason for this is because some merchant category codes generate more chargebacks and fraud than others.

    So for example, your customers’ bank may have a limit on the amount a transaction can be if it comes from a MCC 5968 merchant.

    So there are some ‘tricks of the trade’ to help reduce these problems:

    Testing different price points with the different merchant accounts is very important to understand how you can maximize your conversions. Many direct marketing merchants increase checkout conversion rates substantially by lowering their AOV to under $100.

    Another option is to operate 2 payment gateways, with each account registered under a different MCC – so you can capture any declines that come back as an issuing bank decline, and then try run them through the second gateway with a different MCC.

    Many issuer bank declines are masked MCC code declines, simply because the customer’s bank doesn’t want to take the risk.

    For example, an MCC 5967 purchase means the customer is buying adult entertainment. That doesn’t fit the risk profile for many financial institutions.

    Some payment gateways and SaaS companies offer merchants an option to ‘cascade’ front-end transactions to different merchant accounts to try to capture the sale. 

    This ‘cascade’ feature checks multiple merchant accounts in real time to see which one will process the transaction – and is totally invisible to the buyer/customer – adding significant sales dollars to your front-end funnel.

    Couple that feature with multiple merchant accounts in different MCCs and you can significantly reduce decline rates.

    One word of warning though – select a PCI compliant payment gateway or software to reduce the risk of data breaches when passing customer data from one merchant account to another.

    Contact DirectPayNet to learn about payment gateway options that offer conversion boosting features for your funnel and subscriptions.

    Your MCC Can Affect Your Chargeback Ratio

    Your customer’s credit card statement will tell your customer what kind of purchase was made by providing a brief description, such as ‘SUBSCRIPTION PRODUCT’.  

    American Express makes it very obvious on the statement – 

    If a customer sees ‘SUBSCRIPTION PRODUCT’ and is running low on funds, they may choose to cancel or even send you a chargeback. 

    VISA and Mastercard also have different rules for how a customer can chargeback a transaction –

    Some merchant category codes allow issuing banks to chargeback a transaction more easily than others – a grocery store purchase will be a lot harder to chargeback than a nutraceutical product on a monthly subscription.

    Credit card companies’ rules are there to protect customers against what they decide are “shadier” businesses or products. 

    Drug stores, government services and other mainstream retailers like clothing stores typically benefit from lower interchange fees as well as lower potential chargeback ratios due to their MCC.

    Paying attention to the MCC you’re assigned when you start working with a new merchant services provider is very important – it can impact your merchant fees as well as your transaction approval rate. 

    To understand more about merchant category codes and how they impact your conversions, talk to the experts at DirectPayNet. 

    We can guide you in selecting a MCC, and walk you through ways to improve your conversion ratio and lower your merchant fees.  Contact DirectPayNet today.

     

  • Latin American Merchants, Boost US Sales In 30 Days With This Definitive Guide – Pt. 1

    Latin American Merchants, Boost US Sales In 30 Days With This Definitive Guide – Pt. 1

    Are you a Latin American merchants with a BIG need for processing? Having trouble getting sales from the US and Canada approved?

    Let’s face it – it can often be hard to find a good payment provider in places like in Mexico and Chile. It can also be expensive. If you operate a business in these markets, you know that Latin American payment processing is a complex issue. It is even more so for high-risk merchants in Central America, South America and even Caribbean countries.

    Firstly, diverse economies operate in this part of the world. Take a country like Chile for example. The GDP rivals that of North American countries. But, there are also LatAm countries like Columbia where the GDP is poor.

    Secondly, the region has a population of over 386 million people. It is on the verge of an e-commerce boom, despite currency and economic issues. This is in part due to the 73% internet penetration rate across LatAm. Smartphone adoption is increasing, and with it, the expansion of e-commerce. This also means that consumers want more convenient and secure online payment options.

    And that’s the purpose behind this blog article.

    We will look at the problems of Latin American merchants accepting e-commerce. We will also touch on how this affects the expansion of your business, and the solution to this problem.

     

    High-Risk merchant accounts are better for Latin American merchants

    You operate a high-risk business in LatAm and you want to increase revenues. You’re earning $75,000 per month. But you know it could be more. If only you could just improve payment acceptance, especially from North American consumers.

    Here’s the main reason why you should read this post. You’re facing challenges in securing credit card processing services. So, you can’t attract online payments, especially from foreign customers. You need a solution to this problem.

    If you haven’t considered expanding to the North American market yet, this is a good read to help you see why you should and how to make sure your customers can pay you easily and securely.

    Offering simple payment processing in Latin America is hard

    Latin American payment processing is difficult, especially for high-risk merchants. It is even more challenging selling from this region to foreign consumers in the US or Canada.
    Card payments are standard for buyers in Canada, the US, and Europe. For countries like Mexico, Guatemala, Belize, or Brazil, this isn’t the case. Debit and credit cards are not as widely used and many banks in the region don’t have the technology or speed to be able to accommodate high-risk payments especially if they are from regions outside of Latin America.

    Here are some reasons why.

    Access to and use of the financial sector

    As you’re probably aware a large percentage of the LatAm population do not use formal financial services. So, you face the issue of providing payment solutions for a large part of the population that does not use the formal banking system.

    Now, a few solutions were developed in LatAm for this reason. But they aren’t universally accepted across countries. Or work the same way. For example, Rappi is a popular on-demand delivery service that is popular in several LatAm countries. Unfortunately, Rappi in Columbia, Mexico, Brazil and Peru do not all accept the same payment methods.

     

    Technological challenges for Latin American merchants

    There have been plenty of advances in the financial sector. Yet, there are still some challenges. Some of these include outdated or clunking payment platforms. One example is Transbank in Chile which is described by many merchants as “clunky, slow, and incompatible with many cards.”

    Transbank is one of the many payment services across Latin America. But, most of the systems are incompatible across borders. So, like Rappi, what works in one Latin American country will not work the same in another, if it works at all.

     

    Acceptance of international payment methods

    Real-time payment processing is necessary if you want to expand your business. However, international credit card processing in most LatAm countries is a challenge. Most consumers don’t have an international credit card. Plus, when you operate in the LatAm market, it is easier to get credit card payments approved with domestic cards with local currency.
    The next issue is that most internationally recognized services aren’t available in Latin America. Or where they are available, you have to go through another processor or an aggregator to use them. This can cost you quite a bit in fees. In addition, your North American consumers might have difficulty in getting transactions approved if your bank is unable to accommodate USD or if the platform is too slow and times out transactions.

     

    A preference for cash

    Another problem is the preference for cash payment. This is tied to the low use of formal financial systems. This preference for cash payment has led to the growth of the voucher payment system. It is widely accepted and there are many local solutions to help customers pay using vouchers.
    But, while local customers prefer payment by vouchers, your international market will not.
    So, if you can’t accept international cards in Latin America, then that’s another obstacle to market expansion.

     

    High Processing Fees

    The local processors that may help you to accept international cards charge a lot. Their processing fees can even be up to 10% in some cases. This eats into your profit.

     

    Low Acceptance of High-Risk Latin American Merchants

    This is a universal problem and not at all unique to Latin America. Low-risk payment processors do not readily accept high-risk businesses. Plus, only a few acquirers will accept high-risk businesses due to concerns about risk.

    Now consider getting a processor that accepts high-risk businesses and international credit cards.

     

    It’s time to take your high-risk business to the next level!

    You want an offshore account in the US or Canada to grow your business and be able to successfully expand. If you’re tired of processing problems and need help with implementing solutions, contact us today.

     

    Handling local payment challenges

    Young adults are spearheading online payment processing in Latin America. They want convenience of online commerce. But security matters too. They also want certainty that the systems they are using to pay are secure.

    As an e-commerce store owner in Latin America, you’re already tapping into that market using your local payment solutions. This would include solutions like neobanks. They are some of the fastest growing options in the FinTech industry in Latin America.

    Plus, there have been growing investments in mobile credit card companies. These include Argentina’s Uala and Mexico’s Cuenca, and Albo. Brazil, one of the area’s largest economy, has Nubank, which has over 15 million users.

    Now, these are a positive step towards transforming financial services in Latin America. But if your target is North America, then these won’t help you to tap into the international market. Nor do they work for most online businesses.

     

    High-risk products and low-risk payment platforms do not mix

    There are multiple other local electronic payment and payment processing solutions. They are designed to be similar to those available to consumers in Latin America. Some of the popular ones include Brazil’s StoneCo and Pagseguro, and Mexican Clip (formerly PayClip). Again, they do not allow for international payment processing.

    Alternative payment processors like Stripe have now entered the LatAm market starting with Mexico. But it only processes local payments. It requires you to set up a business in the US to be able to access international payments. And while we do recommend that in some instances, it is better to set up a high-risk merchant account if you plan to go that route especially if you need your funds to stay within Latin America.

    These and other payment solutions do not readily support high-risk businesses. Like in North America, Square, PayPal and Stripe all support low-risk business categories. If you operate apparel, food and beverage businesses, it can make it simpler than if you are selling nutraceutical supplements or operate an adult website.
    But most Latin American payment processors do not have a large appetite for high-risk offers. Corporate ticket events or luxury goods are in this category. These high-ticket items can go as high as $10,000 per transaction. Therefore, if you offer mastermind conferences, you need high-risk merchant accounts instead. The same is true if you sell nootropics, diet or fitness subscriptions.

     

    Latin American merchants should consider the US and Canada

    Despite all the issues of accepting international payments, Latin American merchants should consider expanding to outward markets.

    • Better Delivery Systems: If you sell physical items – like supplements – then you know you need a reliable delivery system. This is one of the issues faced by local merchants. It is also why many consumers prefer cash on delivery. You have options for better delivery systems in North American markets.
    • More Acceptable Payment Options: The LatAm online banking and payment processing infrastructure is not as advanced as the US and Canada. This is rapidly changing as internet and smartphone penetration increases. But even so, it’s important to convince consumers of the security of your payment processing methods.
      As such, most merchants opt for services like Stripe and PayPal, which have a strong reputation worldwide. But, you run a high-risk business. These won’t last because they prefer to work with low-risk businesses.
    • Increased revenues: Most of all, with the expansion outwards, you have access to higher revenues. North America is a consumer market. Get in on the action.

     

    Best processing options for Latin American merchants

    Talk to any high-risk merchant based in Latin America and you will hear horror stories! One example is entrepreneurs who operate Forex sites. Another example is adult webcam or similar adult entertainment networks. Even better Paleo or Keto supplement sellers. They will reveal the challenges they faced getting a payment solution.
    But all is not lost.

    You can generate more foreign revenue for your online business, even if your headquarters are in Columbia or Argentina. The process isn’t easy. But it is well worth it in the end.

    Want to know what it is? Get an offshore merchant account. Offshore processing is a WIN for high-risk merchants in Latin America

    North American merchants entering the Latin American market must offer the preferred local payment options. These include accepting:

    • cash/voucher payments;
    • enabling bank transfers; and
    • processing domestic debit and credit cards.

    Latin American merchants wanting more US sales need a merchant account that can accommodate sales in those regions. Offshore processing will take time to set up. But, payments will run much more smoothly.

    You will need to offer the preferred payment methods for North Americans. This means an offshore payment option for Latin American merchants can help you overcome local banking hurdles.

     

    This is the end of part 1, but there’s more tips and advice ahead

    Our next post in this series will dive deep into why going offshore is the best solution and how you can do it.

    We have seen how doing this has worked wonders for our Latin American clients. They established offshore accounts and quickly increased their revenues as well as being able to sell in the US, Canada and several European markets. You can do the same. If you’re ready to expand beyond your borders, then we should talk.

    No one knows offshore merchant accounts better than DirectPayNet. We are experts at helping you grow with the right payment solution.

    Contact DirectPayNet to start increasing your US and European sales!