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Deeming regulations make card payments difficult for online sellers

Written by || 7th October 2016 || Regulatory briefing |

 

credit-cards-philip-taylor-900x540Article contributed by Soar Payments

U.S. businesses selling e-cigarettes and other vaping products online can expect to be hard hit by new rules governing the processing of credit card payments.

Many small businesses could face a difficult and potentially costly tangle of red tape – or even the loss of their existing credit card arrangement.

These are among the likely outcomes of the Food and Drug Administration (FDA) deeming regulations, which came into force this summer.

The FDA historically has regulated the sale of combustible cigarettes over the Internet, requiring that retailers take several steps to ensure that they cannot be purchased online by minors.

E-cigarettes, by contrast, were not until this year subject to FDA oversight, so an online retailer could simply obtain a merchant account and accept credit card payments in the same way as any other e-commerce business.

The new regulations, however, mean that both existing and new U.S. online vaping businesses are likely, over the next few months, to receive updated requirements from their credit card company that they will need to comply with – or a termination notice withdrawing their credit card facility.

 

New requirements

 

Under the new requirements, for an online e-cigarette business to be able to accept credit cards it must:

  • Properly age-verify all transactions for any e-cigarette or vaping related product.
  • Register with Visa and Mastercard via the merchant’s credit card processor and pay an annual $1000 registration fee.
  • Obtain an attorney’s letter stating that they are operating within existing applicable law sufficient to satisfy their credit card processor.
  • Provide additional information, as requested by their credit card processor, to ensure they are operating within the new FDA regulations.

 

 

Unintended consquences

 

There are also additional unintended consequences of the new rules which an online e-cig retailer must deal with.

First, they will have to find a credit card processor willing to take on their business. This may not be as easy as it sounds, because the burden of ensuring that the business is complying with all applicable laws lies with the business’s credit card processor, not with Visa and Mastercard themselves.

But credit card processing is a low-margin, high-volume business, and any additional regulatory and registration responsibility makes all but the largest online retailers unprofitable clients.

As a result, many processors will almost certainly no longer offer merchant accounts to e-cig retailers, and many will terminate existing accounts. The exceptions will be a limited number of high-risk credit card processors who charge higher fees, and can do so as a result of decreased competition. This in turn will mean lower margins or higher prices for online retailers.

Credit card processors are also beginning to add additional underwriting requirements – such as requesting previous business tax returns, a letter by a qualified attorney stating that the company is complying with all applicable laws, a demonstrably functioning age-verification check, a secured Website, and so on – before a business can be accepted. These requirements lengthen the application process, sometimes by weeks, and discourage new entrants to the market.

Some high-risk credit card processors appear to be waiting to enact the stricter underwriting rules until legal challenges to the deeming regulations have been resolved. Online e-cig retailers may find it useful to consult with a high-risk merchant account provider that focuses on this area, such as Soar Payments, to discuss which processors are available during this transitional period.

 

Other payment options

 

The new credit card processing rules do not leave e-cig and vape retailers entirely without e-commerce options. Those alternatives, however, each have limitations.

eChecks are simply a payment method by which a customer can enter their bank account and create an “e-commerce check” which clears within 24 hours via the Automated Clearing House (ACH) network.

Many online businesses currently accept eChecks as an alternative payment option, primarily for customers without a credit card. The cost to the business of accepting payment in this form is also considerably lower because it excludes Visa and Mastercard and their associated costs from the transaction entirely.

The problem, in the vaping and e-cig context, is that eCheck processors also rely on U.S. bank sponsorship to process transactions, so the same FDA-initiated rules will eventually apply to eChecks as to credit cards.

 

PayPal

 

PayPal offers a convenient method of making an online payment without the need for the purchaser to have a credit card. From the seller’s perspective, however, accepting PayPal payments will generally mean more – not fewer – requirements than a traditional credit card processor over the long term. That is because PayPal acts as the merchant and must comply with the Visa and Mastercard rules itself as well as bearing a financial risk for merchants.

PayPal will probably be seen by many small e-commerce vaping and e-cig startups as a quick fix for the problem posed by the new FDA rules. Unfortunately, after processing a few thousand dollars they will likely have their PayPal account shut down for having not complied with the Visa and Mastercard rules.

 

What This Means: A small e-cigarette business currently accepting credit card payments for e-commerce transactions might be tempted to gamble that the new rules will be overturned before their credit card processor begins to enforce them. But the more prudent approach is to start discussing how to comply.

Photo: Philip Taylor