Load Balancing

We’ve all heard the advice to never put all your eggs in one basket. If your eggs are credit card transactions and your basket is a merchant account, it might seem like a good idea to spread out your transactions among multiple accounts—that way, you can switch accounts when your chargeback rate starts going up and avoid exceeding the threshold.

This practice is called merchant account load balancing, and while it might sound good on paper, it can actually put your merchant accounts in even greater danger. Why is merchant account load balancing so risky, and what are some better ways to keep your chargeback rate down?

You can’t process credit card transactions without a merchant account—by definition, it’s the account your credit card sales revenue gets put into once transactions are settled. But it’s not enough just to have a merchant account, you need to protect it too.

The credit card networks and issuing banks have a vested interest in keeping the payment card ecosystem safe and secure for consumers, so they don’t have a lot of patience for merchants who tolerate high levels of fraud and chargebacks. Exceeding the maximum thresholds that they set can cause you to lose your merchant account, and you can even get put on an industry blacklist that prevents you from opening new ones.

Your business can take a big hit if you lose your merchant account. Your only choice at that point is to give up on accepting credit cards or pay through the nose for “high risk” payment processing services. Neither of these are good options, so it’s very important to keep an eye on your fraud and chargeback ratios.

The threshold is typically set around 1%. Exceed it, and you can get put in a costly remediation program—and if the problem doesn’t improve, your acquirer may have no choice but to terminate your merchant account.

This is a serious consequence for any retailer, and that’s why some merchants try to manage their fraud and chargeback rates by engaging in merchant account load balancing.

What Is Merchant Account Load Balancing?

When merchants open up multiple accounts with different payment processors and acquiring banks, they can choose which ones to use when processing transactions. Merchant account load balancing refers to the practice of spreading transactions out across multiple accounts in order to reduce the number of fraudulent transactions or chargebacks that are hitting any single account.

For example, let’s say that a merchant has two accounts. One gets 300 transactions in a month and receives two chargebacks, for a ratio of 0.66%. The other account gets 700 transactions that same month and receives five chargebacks, putting its ratio at just over 0.7%. Both accounts are below the 1% threshold, but if they were all combined into one account, the chargeback ratio would be almost 1.4%, well over the threshold. 

Why Do Some Merchants Engage in Merchant Account Load Balancing?

The main benefit of merchant account load balancing is that it keeps merchants’ apparent chargeback ratio down without requiring them to engage in a serious effort to analyze, prevent, and fight fraud and chargebacks.

As long as each merchant account provider is operating independently, they won’t necessarily be aware of the fraud and chargebacks hitting your other accounts, and won’t feel obligated to report to the card networks that the merchant is exceeding their maximum thresholds.

Load balancing is also used by merchants who have to use high-risk merchant accounts because of their particular market (such as gaming or adult sites) or due to previous account termination. High-risk merchant accounts often have amount or volume caps, and load balancing is one way that these merchants can circumvent those caps.

Why Is Merchant Account Load Balancing a Bad Idea?

The problem with merchant account load balancing is that it’s a way to conceal or misrepresent your fraud and chargeback ratios—it doesn’t actually reduce them at all. Card networks, banks, and processors are aware of this, and they understand that it defeats the purpose of having thresholds in the first place.

If they find out that a merchant is engaging in load balancing (and there are services that monitor this for them), they’re likely to terminate your merchant account and put you on industry blacklists like the MATCH list. Merchants can even face penalties and legal action from the Federal Trade Commission.

What Should Merchants Do Instead?

Some merchants may feel that they need multiple merchant accounts because they operate more than one brand or storefront. This is a valid reason, but the ethical and above-board way to go about it is to obtain multiple merchant accounts from the same provider. You can then use channel segmentation tools to automatically route transactions to the appropriate account.

For merchants who feel that merchant account load balancing is the answer to a swiftly rising chargeback rate, you must understand that this only serves to hide the problem—and once you get caught, the penalties are swifter and more severe than they are for exceeding the threshold.

The only truly effective way to bring your chargeback rate down and keep it down is to implement a comprehensive, data-driven strategy to mitigate fraud and disputes.

The first and most important step is to analyze your transaction data to determine where your chargebacks are coming from. Once you’ve identified the root causes, you can start taking effective action to prevent avoidable chargebacks and fight illegitimate ones. This will lead to a real and lasting decline in your fraud and chargeback rates, and you won’t have to worry about getting in trouble with the companies that make it possible for you to accept credit card payments.

 Conclusion

Like many quick fixes, merchant account load balancing doesn’t solve your fraud and chargeback problems at all—it just sweeps them under the rug for a while. Nevertheless, it still appeals to merchants because of the time and labor involved in devising and executing an effective chargeback prevention strategy.

Remember that when chargeback management starts to feel overwhelming, there are always experts you can reach out to for help.

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