We have all seen the ads for various sales events offering high-dollar items for deep-pocket discounts. Such tactics are commonly used by merchants to kick-start sales. Offering such items for ‘auction’ online, provide similar incentives to internet customers. To achieve maximum success, Penny Auction merchants must be able to accept and process credit card payments online.
Penny Auction sales are popular among customers. In order to hold such events online, merchants must obtain a Penny Auction merchant account. Unfortunately, merchants who offer Penny Auction opportunities face difficulties in partnering with financial institutions. Penny Auction events are often dismissed as ‘high-risk’ by traditional banks and credit card payment processors.
Merchants seeking to offer Penny Auction opportunities to customers must partner with sympathetic financial institutions. SecureGlobalPay understands the challenges Penny Auction merchants face. SecureGlobalPay provides customized payment processing solutions and gateway tools for Penny Auction customers.
How Penny Auctions work
Penny Auctions are designed to operate like a lottery or sweepstakes. For this reason, they are often considered a form of online gambling as participants can lose more money in bids than the actual item’s retail value.
To participate in penny auctions, customers are required to pay non-refundable fees to buy bids. Such bids are for “pennies on the dollar” – usually around sixty cents. The merchant holding the auction receives payment for each bid, as well as the final price of the item purchased by the winner. For example, if the sale of an iPhone results in 10,000 bids at a fee of $0.60 each and the final cost of the phone was $750, the auctioneer gets paid $6,850 plus the final cost of the phone. If the auctioneer also charges for shipping and handling, the entirety of the profit goes to the merchant’s business.
Types of items sold on Penny Auctions
SecureGlobalPay approves merchant accounts for Penny Auction businesses selling:
- Gift cards
- Kitchen appliances
- Home decorations
- Designer clothing and shoes
Businesses seeking to engage in Penny Auctions should fill out SecureGlobalPay’s secure online payment application. SecureGlobalPay works with new and existing businesses, as well as merchants rejected or terminated by other online payment processors.
SecureGlobalPay also considers applications from businesses with a history of bad credit or excessive chargebacks.
Applying for a Penny Auction merchant account
The first step in obtaining an online Penny Auction merchant account is to fill out SecureGlobalPay’s application. Ensure that your website is secure and fully functional before applying and always be prepared to provide the following when applying for a merchant account:
- A valid, government-issued ID, such as a driver’s license
- A bank letter or a pre-printed voided check
- Three months of your most recent bank statements-if applicable
- Three months of your most recent processing statements-if applicable
- An SSN (Social Security Number) or EIN (Employer Identification Number)
Please note that your chargeback ratios must be under 2%
SecureGlobalPay applications can be approved in as little as 24 to 48 hours.
The underwriter’s review
An underwriter reviews account applications with a view to ensuring the applicant is operating a legitimate online business. The job of underwriter is to determine a merchant’s potential risk to credit card processors. Being labeled high-risk means your application can either be turned down or accepted conditionally, pending payment of additional penalties and fees.
Risk is assessed according to the following factors:
- A history of high chargeback ratios
- Negative bank account balances
- Poor credit card processing history
- Poor credit scores
- Unpaid bills and late payments
It is best to have the owner or principal with the best credit history apply for the account. Similarly, any outstanding debts should be cleared and merchant assets consolidated in savings. Eliminate any questionable processes or activities. This improves your business’ chance for success. It also increases the likelihood that your account will be enabled without restrictions. Some restrictions include caps on higher processing volumes or a mandatory rolling reserve.
Why Penny Auctions are considered risky businesses
Unfortunately, Penny Auction businesses are often likened to gambling sites by banks and so viewed as high-risk. A number of Penny Auction businesses have been shut down by the Federal Trade Commission when it was discovered that bidding on their sites was rigged. Using bots to cast anonymous bids, these sites were able to artificially inflate the price. Customers caught up in the bidding can end up spending far more than an item is worth. When this happens, both winners and losers often end up disputing credit card transactions, resulting in heavy chargebacks.
Similarly, receipt of items that are damaged or not as advertised as well as items that ship late lead to chargebacks.
Penny Auction sites have also been accused of using misleading language. Often, terms and conditions are not clearly stated on the website. Ongoing subscription, membership and shipping fees are often not mentioned and so end up being a surprise to the customer. A failure to disclose these fees or to be clear about per-bid cost only reinforces banks’ views of these sites as high-risk.
Chargebacks ratios: the price to processors
Excessive chargeback ratios can hurt credit card processors. Processors can be left on the hook for funds that Penny Auction businesses with excessive chargebacks cannot cover.
Processors can also find their relationships with sponsor banks and credit card companies harmed by excessive chargebacks. Credit card merchants can charge processors fees in the thousands of dollars for each merchant with excessive chargeback ratios.
Prevent excessive chargebacks
Fortunately, businesses can take active steps to prevent excessive chargebacks.
Communication is key to this process. Providing good customer service, offering full refunds in response to complaints and communicating with patrons can help a business keep its chargeback ratio below 2% and its merchant account open.
Once a company’s chargeback ratio reaches 3%, credit card processors will often terminate the account to avoid penalties. These accounts, once terminated, can be very difficult to get approved again in the future.
Having a sound data infrastructure can also help Penny Auction merchants. Maintaining a site with secure channels and accurately recording every transaction is essential to record keeping. Recording exact dates and times, as well as the IP address from which the purchase is made, can be used to fight a dispute.
Many chargebacks are the result of customers’ failure to understand the terms and conditions of engagement with the bidding process. Ensure that your website displays clear, easy-to-understand shipping, subscription, membership and refund policies.
Similar clarity should be practiced in the billing cycle. Clearly displaying business names and contact information on all emails, websites, promotional materials, and receipts will reduce the likelihood of chargebacks by preparing clients for what they will see on their credit card statements.
Certain websites that charge recurring monthly fees do well to send customers electronic notifications of the upcoming transaction. This can also be a good way to generate repeat business while reducing the risk of disputes.
Clip chargeback ratios with a mitigation system
Whether a dispute is won or lost, merchants feel the financial pinch of chargebacks. Those that fail to maintain ratios below 2% can have their merchant accounts terminated by processors.
SecureGlobalPay’s chargeback mitigation system can help. Created specifically for high-risk merchants, SGP’s alert and prevention system can cut chargeback ratios by up to 25%.
SecureGlobalPay has partnered with Verifi’s Cardholder Dispute Resolution Network (CDRN) and Ethoca’s alert system to provide a system for resolving credit card transaction disputes directly. Working directly with banks and card issuers, CDRN allows merchants to achieve the highest rate of chargeback resolutions.
Penny Auction merchant account categories
Four-digit numeric codes known as Standard Industrial Classification (SIC) codes are common in the United States and many other countries for identifying businesses and their primary purposes.
Penny Auction merchants fall into these categories:
- 4541: Electronic Shopping and Mail-Order Houses
- 7389: Business Services, Not Elsewhere Classified
A similar classification system known as NAICS (the Northern American Classification System) is a list of six-digit codes used by federal statistical agencies to classify business establishments. The classification system aims to gather, analyze, and publish statistical information about similar types of businesses and their impacts on the U.S. economy.
Penny Auction merchants use the following NAICS codes:
- 454111: Electronic Shopping
- 454112: Electronic Auctions
- 561990: All Other Support Services
Visit the United States Census Bureau to view the complete NAICS code list.
We Approve Penny Auction Businesses
SecureGlobalPay has experience providing processing services to high-risk or start-up businesses.
We can provide the perfect, high volume merchant account for your Penny Auction website. If your chargeback rate is below 3%, we can set you up with a merchant account in as little as 3 days.
- No Application Fees
- Competitive rates
- No VISA/MasterCard Required
- Multiple Secure Payment Gateway Options
- LOW Rates and Fees
- No extensive credit checks