Recent studies indicate that 80% of all Americans use dietary supplements. By category, 98% use vitamin/mineral supplements, 46% use special supplements, 44% use herbals/botanicals, 30% use supplements for sports nutrition, and 19% use them for weight management. The global nutraceutical market reached $289.8 billion in 2021, and is expected to reach $438.9 billion by 2026. Despite being a massive and growing industry, traditional banks and payment processors tend to be reluctant to provide merchant accounts and related services to such businesses. To address that problem, we first need to ask: Why are nutraceutical merchant accounts high risk?
The problem begins with the categorization of nutraceutical products. Many people don’t understand the difference between pharmaceuticals and nutraceuticals, or even know that there is a difference. In general, though, pharmaceuticals are chemicals and combinations of chemicals are created through a process of research and development and undergo a series of clinical trials. In most cases, they are intended to be used to treat specific diseases.
On the other hand, nutraceuticals are food-based substances, meaning that they consist of one or more naturally occurring substance, with herbs being the most well-known. Whereas pharmaceuticals are almost always used for the treatment of diseases, nutraceuticals are used for the prevention and treatment of diseases, as well as to improve the health of individuals who aren’t suffering from any particular disease.
One implication of this is that nutraceuticals include a wide variety of substances with a wide variety of legal standing. Because pharmaceuticals tend to be more clearly defined, pharmacies are usually regulated by state pharmacy boards. The regulatory authority for nutraceuticals, however, is rather unclear. The wide range of products ultimately means that a single nutraceuticals merchant may have to deal with multiple agencies, sets of laws and regulations, and other requirements.
Because nutraceutical products affect the human body, there are various health and safety risks involved in their sale and distribution. That brings additional regulatory issues into the picture, as well as the risk of liability for physical harm, or in the worst-case scenario, death. The unclear legal standing of nutraceuticals makes liability in such cases difficult to predict as well.
Because of this, there are more angles from which the merchant can be hit with legal issues. That increases the risk of financial problems, bankruptcy, and other problems that cause financial loss to banks providing merchant accounts.
A variety of factors result in a high chargeback rate in the nutraceutical industry. One is the unclear definition and categorization of nutraceuticals mentioned above. On one hand, if the merchant makes very specific claims about a product, and a customer believes that the product did not live up to those claims, that dissatisfaction could motivate the customer to initiate a chargeback. Less honest customers could even use an excessively strict interpretation of the merchant’s claim to say that the product was not as promised.
On the other hand, if the merchant makes only very general claims about the product, there is more room for customers to expect unrealistic results or to use the product for something outside its intended use. In either case, the customer will believe that the product failed to do what it was supposed to do and demand a refund. In this case as well, dishonest customers could use the ambiguity to make fraudulent claims.
One of the best ways to minimize this risk is for merchants to manage the customer’s expectations. That means making it clear what you claim about the product and what you do not claim. Unlike a mechanical device, it is impossible to predict exactly what effect herbs and nutritional substances, etc., will have on a specific individual in a specific situation. This is true even of pharmaceutical products that have undergone extensive clinical testing.
Making what customers should not expect particularly clear may discourage some customers from buying the product, but those customers are more likely to initiate chargebacks and cost the merchant more than the loss of the sale, so it may be the wisest course of action to begin with.
Brick-and-mortar stores must deal with the risk of fraud, of course, but it’s more of an issue for online merchants. There is a higher degree of anonymity, and it is easier to use credit card information that was obtained illegally. Unauthorized use of credit cards is much more difficult to detect online than when the physical card is presented in a face-to-face transaction.
Along with the risk of chargebacks for legitimate reasons, there is a risk of chargeback fraud. In some cases, it is a planned and intentional act of fraud, but in other cases it may be something like “friendly fraud.” Nutraceutical merchants that are doing well have a high volume of sales, which naturally creates more opportunities for chargebacks, fraud, and other problems to occur. That means more risk, to your business and to the bank providing the merchant account.
In some cases, nutraceutical product merchants utilize a subscription billing model. It has been reported that Visa and MasterCard have indicated that the average decline rate for in-person transactions with the physical card present is only 1.4%. On the other hand, the average decline rate when the same customer uses the same card for an online purchase, including recurring credit card payments, is about 15%. In some cases, the rate is twice that. In most cases, the business is not able to get new credit card information from the customer after a card has been declined.
For these and other reasons, subscription merchant accounts are considered by traditional banks and payment processors to be high risk. When all the above factors are taken into consideration, it isn’t really that surprising that nutraceutical businesses and merchant accounts are viewed as high risk.
So, what can you do to make it possible to get a merchant account for your nutraceutical business? What can you do to keep that merchant account after you have opened it?
First, there are a variety of things that can be done to lower chargeback rates, regardless of the industry. You can read about some of them here. There are also measures to prevent or at least minimize the risk of fraud. Reducing chargebacks alone will likely go a long way toward making it easier to get and keep a merchant account.
There are also things that are more specific to the nutraceuticals industry, the foremost of which is accreditation and certification.
The main certification organization for nutraceuticals and other areas of the healthcare market is LegitScript. LegitScript certifies merchants and providers in the healthcare market, and informs “businesses, governments, and the public about which commercial entities are legitimate, legal, and trustworthy — and which are not.” Acquiring LegitScript’s stamp of approval is a significant step toward reassuring banks and payment processors that your business is less of a risk.
Although more directly related to pharmaceuticals, Digital Pharmacy Accreditation (DCA; formerly Verified Internet Pharmacy Practice Sites (VIPPS)) is another accreditation organization that may be helpful to your business, depending on the specific areas of nutraceuticals you sell. Operated by the National Association of Boards of Pharmacy (NABP), DCA identifies online pharmacy sites that are properly licensed and operating legitimately on the Internet. This makes it possible to identify websites that sell counterfeit and dangerous medicine, etc., as well.
DCA involves rigorous reviews of policies and procedures and an on-site inspection. Nearly half of the states in the U.S. require DCA certification, but whether the states in which you operate your business require it or not, it is a sign to your customers and to banks that you pose less of a risk. Having both LegitScript and DCA accreditation (if applicable) makes your case even stronger. Even aside from the importance of accreditation, the requirements and guidelines of both organizations can be very helpful in making your business stronger.
Even if a traditional bank is willing to provide you with a merchant account, the fact that it considers your business to be high risk does not change. The requirements for keeping the account will be more stringent and the maximum chargeback rate will be lower than for other, lower-risk businesses. Because of that, your business might benefit from using a high-risk payment processor from the start.
Even aside from matters related to nutraceutical business, a high-risk payment processor such as Zen Payments specializes in payment processing for high-risk industries, so it knows those industries better than a traditional banker would, and could be exactly what you need, not only to get a merchant account, but also to get your high-risk business operating smoothly and effectively.
One of the biggest worries of high-risk businesses in relation to merchant accounts is that something such as a slight increase in chargeback rate could result in the account being closed, suddenly and without warning. That leaves your business without a way to take credit card payments, which usually means that your revenue stops. Zen Payments can help you get multiple merchant accounts, reducing the risk that you will be left without a way to accept payments.
When choosing a high-risk payment processor, be sure to ask as many questions as necessary until you’re satisfied with the responses and clear on what you can expect and what will be expected of you. Our team at Zen Payments would be happy to speak with you and find ways to help your business prosper, so please don’t hesitate to contact us.