Offshore Merchant Accounts and Ecommerce – Q&A

What Is Ecommerce?

Webster defines ecommerce as "commerce conducted via the Internet," which is nice and simple, so we'll stick to that.

What Is a Merchant?

That's you, if you are one who engages in ecommerce. By selling goods or services online, you are a merchant.

What Is a Merchant Account?

A merchant account is bank account with a bank. It is not a regular bank account that you use for deposits, withdrawals, savings, and investments. In fact, the merchant has very little control over the merchant account. Instead, a merchant account is an account into which a merchant can accept card payments.

Banks that offer merchant accounts are usually called acquiring banks or acquirers. Not only banks are acquirers. Non-bank entities can be acquirers. This comes from the role they play in a card purchase. They acquire the card information and pass them on to the issuer.

The issuer in many cases refers to a bank, namely the bank that issued the customer's card. However, issuers can be non-bank entities, such as financial services companies or just any regular company that has been licensed by a card scheme to issue cards.

What Is a Card Scheme?

This originally referred to Visa and MasterCard only, but nowadays also includes other brands, such as American Express (AmEx), JCB, China Unionpay, Diners Club, Discover, and various localized cards.

The card schemes either issue their own cards or license issuers, such as banks or credit card companies, to issue cards with their brand.

Offshore Merchant Account

This can mean one of two things: either a merchant account with an offshore bank (acquirer) or a merchant account with an onshore bank held by an offshore entity.

The most common is the former. The latter is not quite as common, since onshore banks prefer to deal with merchants in more reputable jurisdictions than the jurisdictions where offshore companies are mostly registered, such as Seychelles, Belize, British Virgin Islands, and so on.

There is a common misconception that an offshore merchant account is automatically high-risk. This is not the case. However, merchants who seek offshore processing are usually doing it because offshore acquirers are far more lenient when it comes to issuing merchant accounts and what type of goods and services can be sold, due to more relaxed laws and requirements on the merchant. This is one of the greatest advantages of having an offshore merchant account. You may also be subject to stricter banking secrecy with an offshore bank than you would otherwise.

The main disadvantage of offshore merchant accounts is that they cost a lot more. You typically pay up to double, if not more, per transaction with an offshore acquirer, and there are usually monthly fees on top of that.

Whether it's worth the extra cost is up to you as a merchant to decide. I often find in the long-term it costs less to register a company in a low-tax but reputable jurisdiction (Malta, Gibraltar, Ireland) and get a merchant account with an onshore acquirer. The lower processing fees make up for costs of accounting and taxation quite quickly.

What Is a Chargeback?

A chargeback is a dispute of a card payment. Chargebacks are raised by the cardholder in case of card fraud (stolen or skimmed card), non-delivery of goods, or when an unknown transaction appears on the credit card statement or bank statement. The latter is called friendly chargeback. This occurs when the cardholder authorized the transaction (meaning no fraud took place) but does not recognize it on the card statement. For example, this can happen if your company is called Example Trading LLC but your website is and the customer sees Example Trading LLC on their monthly statement; this is called the billing descriptor.

High-Risk Merchant Account

Acquirers classify merchants into risk categories, usually just low-risk or high-risk. The risk profile a merchant gets is predominantly based on the goods and services sold. These are sectors that have an innate high-risk for chargebacks, be it due to stolen cards, non-delivery of goods, unsatisfactory goods, or unclear billing descriptor.

The following are examples of high-risk merchants:

  • Airline, travel, hotel bookings
  • Gambling (casino, poker, sports betting, bingo)
  • E-cigarettes
  • Tobacco
  • Pharmaceuticals
  • Adult entertainment
  • Subscriptions

Streber works as a consultant and director for a wide range of companies and has broad experience in offshore banking, offshore incorporation (formation and maintenance of offshore companies), taxation, privacy, ecommerce, merchant accounts, online payments, and all other things the privacy-minded entrepreneur might find interesting. You can read Streber's blog on offshore incorporation and offshore banking here.

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