In the last years, what most of us know as traditional auctions have branched out and evolved to create a vast variety of auctions, one of those being online penny auctions. In this article, we will go over the basics of how a penny auction and an auction merchant account function and highlight some of the best and the riskier things about them.
What Are Penny Auctions?
Penny auctions are different from the traditional auction you are probably used to hearing about. Unlike regular auctions, where there is only one winner, penny auctions are more of a lottery: whether the bidder wins or loses does not matter, they are still charged. This is why penny auctions tend to receive so much criticism.
There is a big chance that the bidder can lose significant amounts of money if they lose. Even if they do win, there is always the possibility of spending more than the retail value.
How Do Penny Auctions Work?
To even participate in the auction, bidders must pay non-refundable fees, which usually cost around $0.60 each. Whoever holds the auction receives the money from each fee and the winner’s final price to purchase their item. Not only this, but many auctions also include additional charges for things such as membership, shipping, and subscription fees.
What Do You Need To Apply For A Penny Auction Merchant Account?
Penny auction merchant accounts tend to be rather tricky to acquire. Still, if you are looking to get one, you could probably benefit from speaking with a high-risk industry expert who can help you in terms of your application and can be on the lookout for the best deals.
However, if you want to apply all on your own, you should know that to get an account, a business needs to fill out EMB’s online application and issue the following items to processors and underwriters:
- Any form of government-issued ID
- A bank letter or a pre-printed voided check
- The last three months of your bank statements
- The last three months of your processing statements
- An SSN (Social Security Number) or EIN (Employer Identification Number)
- Chargeback ratios under 2%
What Is The Underwriter’s Review Of A Penny Auction Merchant Account?
Because of penny auction merchants ‘tarnished reputation, they need to do everything they can to convince underwriters that they are running legal online enterprises. Underwriters are responsible for determining a merchant’s potential risk to credit card processors. This means that those classified as a higher risk have a bigger chance that processors and their sponsor banks will be held liable for any fees or refunds that penny auctions cannot pay.
If you are looking to get prepared for a review, you should probably learn about some of the thing’s underwriters are on the lookout for that they believe determines a business’ risk, which is listed below:
- A pattern of high chargeback ratios
- Bank statements, as well as unpaid or late payments.
- Credit card scores and processing history
- Negative bank account balances
The best possible way for you to prepare for a review is to have someone apply for the account with the best credit history in the business to avoid any unnecessary suspicion. Moreover, before the review, the business should be cleaning up anything that could look questionable to the underwriter, which means paying off any debts you may have and making sure you have some money in your account.
To add up, if you are looking to apply for a penny auction merchant account, you should consider getting all of your finances in order and making sure everything seems alright. This will almost guarantee to get you an account with a smaller amount of restrictions, like a lowering rolling reserve or caps on higher processing volumes.
What Are Some Of The Risks In Penny Auctions?
Penny auctions have a reputation for being hazardous, especially since there is always the possibility of walking away having lost way more than what you have earned. Several online auction sites have been sued and even forced to shut down after evidence was found on the events being rigged.
Not only this, but many of these sites were said to have very misleading and false language. Those in charge twist their words and use particular terms so that their clientele believe they are getting unique benefits when they are earning nothing in return.
For example, many of the terms and conditions used in these sites have unclear explanations as to how subscriptions and memberships truly work. Plus, there have also been numerous complaints about specific items bid away that were in a completely different condition than the promised one.
How Can You Prevent Excessive Chargeback Fraud?
You may also know this as “friendly fraud”, which happens when a customer has already received an item they purchased, but then demands a chargeback from the issuing bank. Most times, poor customer service, a lack of transparency and communication, and a flawed business model are the causes of chargeback fraud and lead to unnecessary disputes.
Excessive chargebacks are usually caused by mediocre customer service and a lack of communication and transparency. These should be avoided at all costs since they can significantly add to a merchant’s risk level. Some of the things that can be done in other to prevent these chargebacks are as follows:
- Offering full refunds (and saying so before a purchase)
- Establishing clear communication with the patrons
- Having a well-trained customer service team
- Ensure the safety of channels
- Details of every transaction must be recorded, archived, and easily retrievable.
- Make sure the exact date and time of the transaction, as well as the IP address of the computer from which the purchase was made, is known.
Although it does come with quite a few risks, now that you have everything you need to know about penny auctions and the auction merchant account, it is up to you to start taking chances and apply for an account to get started! Do not miss the opportunity!