To understand what an eCig merchant account is, we first need to clear up what a general merchant account is. In essence, it’s a bank account that allows a business to accept payment in methods other than cash- most importantly, credit and debit cards. However, while banks are happy to offer most businesses a merchant account at a low rate, the majority of them aren’t so generous toward eCig companies. Right now, the eCig and vaping industry operates in something of a gray area with regards to rules and regulations. What’s more, eCommerce eCig companies also tend to be more at risk of higher chargeback levels. Banks don’t like taking on unnecessary risks, and both of these factors make eCig companies an unattractive prospect to them. In their eyes, it’s better to simply not get involved at all- which obviously puts eCig companies at a pretty serious disadvantage. To solve this problem, eCig companies must turn to a specific type of “high-risk merchant account”.
That means your best bet is to provider that can set up a dedicated high-risk eCig merchant account. Most customers want to pay by card nowadays, so a merchant account is essential for your business. Fortunately, there are financial companies out there willing to provide you with such an account- namely, high risk credit and debit card processers. It’s important to note that as well as costing slightly more than a standard merchant account, there may also be a few extra regulations that apply to your eCig merchant account. For instance, there might be a delay in funding, or a cap on the number of credit card transactions that can be processed per month. Once you’ve proven that your business is running smoothly, though, most providers will remove these restrictions once you’ve had the account for three months.
Why can’t eCig businesses set up the same merchant accounts as everyone else?
The vast majority of payment processors are either owned by, or work closely with, sponsor banks. It’s not enough to just find a payment processor who can handle those credit card payments for you- the banks essentially have final say on who is approved and who isn’t. With all the negative publicity that the tobacco industry has received over the years, the big banks simply don’t want to be involved with anything linked to cigarettes. While eCigs are nowhere near as harmful as tobacco, banks are more worried about their public image than looking into things for themselves. Since they have no shortage of clients, they can afford to reject this whole industry, especially since we are only in the early days of eCigs. It’s only smaller banks that are willing to take on companies like yours, and even so, limit eCig companies to high risk merchant accounts only.
As well as worrying about their reputation, banks also don’t want to work with clients who pose a higher-than-average financial risk. That’s why businesses like collection agencies are also often classified as high-risk. In practice, a merchant account works almost like a continuous short-term loan. They give you back the money from each credit card payment before the payment is actually processed. It therefore only takes up to 48 hours for the business to receive their funds, but depending on the customer, the bank might not get their money back for a whole month. Naturally, that’s quite a risk for the bank to take on. In a month, you could take payments from a whole heap of stolen or overdrawn credit cards. The payments would then be refunded, and the bank would end up having to cover the cost. Alternatively, an eCommerce company could fail to deliver the goods, and the customers could then cancel the payment.
Whenever someone buys from your eCig store, they have a whole six months to file what’s known as a chargeback, where they contest the charge they paid to you. If you lose this chargeback, then you’ll have to give them their money back- and eCig companies are more at risk of chargebacks than other companies. This puts them in the “high risk” category, and a lot of banks decide that it’s simply not worth the hassle to take on these clients.
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