Merchants who accept payment cards are probably aware that there are certain terms and restrictions associated with securing a merchant account and maintaining payment-processing capabilities.
Merchant accounts have definitely become a valuable asset for online merchants, and it’s important to make sure these assets are handled with care.
One element of payment processing that can either enhance or damage processing abilities is load balancing.
New Sales Opportunities Introduced New Challenges
The internet introduced a variety of elements that fundamentally changed the way consumers and businesses interact. One such change was payment-processing capabilities.
It used to be the case that a merchant would only maintain a relationship with one acquirer. However, modern e-commerce often necessitates merchants to have multiple processing agreements.
For example, merchant accounts might be restricted by sales regions, currencies, and payment type (recurring vs. non-recurring). Additionally, most processing agreements come with a maximum sales volume that can’t be exceeded.
In order to manage these varying and sometimes conflicting restrictions, merchants often choose to operate multiple accounts, each attached to a different Merchant ID (MID).
Today, the average merchant has at least two processor relationships, pushing us away from an "either-or" understanding of e-commerce and payments, and in the direction of a “both-and” approach.
This evolution has helped to forge greater advancements in the payment industry, but at the same time, the process grows increasingly complex.
What is Load Balancing?
Load balancing, in the context of the payments industry, refers to the shifting of payments between multiple MIDs and payment processors.
There are several reasons why a merchant might engage in load balancing. Some motives are intended to foster sustainable growth; others are unethical attempts to minimize liability.
Good Reasons to Load Balance
There are definite advantages to load balancing, and the process can greatly increase profitability when used properly.
- Each MID has a sales volume limit. If merchants are regularly exceeding the processors restrictions, they have two options. They can either stop all sales efforts for the remainder of the month or shift sales to another MID.
- Merchants may have different currency options on each MID. They can load balance by shifting cardholders from foreign issuers to the MID with the applicable currency. This promotes higher approval rates and offers greater earning potential.
- One MID may be approved for recurring transactions and the other is not. If the merchant sells both product types to one customer, the merchant may split the offers, each going to the applicable MID.
Bad Reasons to Load Balance
Unfortunately, there are some bad actors who attempt to use unsustainable techniques in an attempt to spread transactions across multiple merchant accounts as a way of hiding problems.
- Merchants spread their transaction base across multiple MIDs in an effort to reduce specific chargeback liabilities. If chargeback rates spike, networks will assess steep fines, account reserves will limit access to revenue, and acquirers will likely terminate processing agreements. In an effort to minimize the appearance of chargeback issues, merchants may attempt to allocate transactions to alternative MIDs to distribute risk.
- Merchants may use unapproved load balancing tactics to shift their refunds to a single MID in order to reduce the transparency of transaction or customer service issues.
- Merchants may attempt to isolate liability with certain MIDs by allocating decline salvage for subscription products in order to recapture lost authorizations.
The Place and Time for Load Balancing
Despite the potential for abuse, load balancing still has a definite value for merchants, and merchants cannot afford to stand still while the rest of the world is moving ahead.
As the digital age continues to expand, merchants who offer the most flexibility and foster a fluid transaction environment will be the ones who see the greatest success.
The potential for load balancing abuse is real, but if used wisely, the practice remains a strategic resource that can help merchants develop greater sustainability.
Photo by xedos4/FreeDigitalPhotos.net
Monica Eaton-Cardone is Co-founder and COO of Chargebacks911.com.