The nutraceutical industry in the U.S is growing. In 2020, the nutraceutical market is projected to hit $91 billion, up from $58 billion just five years ago. By 2025, the market is expected to exceed $133 billion.
Despite the incredible growth potential, nutraceutical businesses are still treated as high-risk merchants by banks and payment processors. Businesses selling dietary supplements, weight loss preparations, anti-aging formulas, and sports nutrition products find it difficult to find payment processing solutions because of their high-risk merchant designation.
Part of the problem is the subscription billing model. According to data published by Mastercard and Visa, about 15% of all recurring credit card payments are declined, with some industries having a decline rate approaching 30%. Even worse, merchants have a 5% success rate in obtaining updated credit card information after payment is declined.
That said, the subscription model is still extremely attractive for nutraceutical businesses. There is immense potential to make a lot of money early on, with the promise of reliable, predictable income to follow. The subscription formula has worked extremely well for businesses such as Dollar Shave Club, Blue Apron, and Birchbox.
The problem for nutraceutical companies, however, is that many use a free-trial model to attract new customers. Customers offer up credit card information to obtain the free sample, and the merchant sets up automatic, recurring payments. In many cases, the customer forgets about the recurring payment or fails to cancel during the trial period and is automatically charged for a subscription. In order to stop their subscriptions and get a refund, some customers will contact the bank to initiate a chargeback. The high chargeback ratio plays a major role in the nutraceutical high-risk merchant designation.
The practice of offering products free or at a nominal cost in exchange for credit card information and recurring payments (unless the customer cancels) is known as the “negative option.” Fairly or not, the negative option is often perceived as a deceptive business practice by credit card issuers and users alike.
Mastercard, for example, received so many complaints about negative-option businesses that it issued new regulations covering the practice earlier this year. The regulations place new burdens on merchants and payment processors and include an automatic high-risk merchant designation for any businesses that use the practice.
The nutraceutical industry is essentially unregulated, which means the market is susceptible to unethical distributors who make questionable and unsubstantiated claims about their products. Although many nutraceutical companies run legitimate businesses with products that are rigorously tested and safe for use, the lack of regulation in the industry means it can be difficult to separate good merchants from bad ones. This reputation puts all nutraceutical merchants at risk for chargebacks and, potentially, lawsuits. For these reasons, banks are hesitant to approve nutraceutical merchant applications.
If you depend on the negative option to grow your business, the new Mastercard protocols are a good model to follow:
● Inform the customer before you process the first payment of the subscription.
● Time the start of the free trial period with the date the customer receives the product, not places the order.
● Provide a cancellation link on the same page of your website where the customer signed up for the trial.
You should make it easy for customers to cancel their subscriptions so that they do not go to their bank to initiate a chargeback. Additionally, you will want to make sure that your return and refund policy is clear and easy to access. If a customer is confused about how to cancel their subscription or get a legitimate refund for a product they will be more likely to circumvent your customer service channels and go to the bank.
In addition, to minimize the impact of chargebacks, partner with a payment processor that offers chargeback protection. Take steps to keep your chargeback ratio low by committing to meticulous recordkeeping, robust customer service, and hassle-free refund policy and keep your transaction counts high.
It’s especially important for nutraceutical businesses to keep their merchant accounts in good standing by keeping a consistently high sales volume and disputing chargebacks with solid documentation. Note that some payment processors may not approve you if you sell pharmaceuticals on its banned list or offer “free plus shipping and handling” deals. Some may require minimum monthly processing to get approved.
Getting approved for a high risk merchant account isn’t easy, but Limitless Payment Solutions has relationships with dozens of payment processors who work with high-risk industries. We can help you find the high risk merchant account you need to grow your business.