Many UK businesses choose to base their merchant accounts offshore. The three major motivations are the potential tax advantages; that for certain high risk merchants obtaining an offshore merchant account can be easier than getting one based in the UK; and the potential cost savings of “local” credit card processing fees.
What Are Offshore Merchant Accounts?
The primary difference between an offshore merchant account and one based in the UK is that with an offshore account the acquiring bank or acquirer is registered overseas. For example, a UK business might have a business banking account with a UK bank, but choose to set up a merchant account in Malta.
Credit card processing is carried out either by the merchant account provider in Malta or its chosen acquiring Maltese bank, and is settled in the business’s UK bank account. Of course the UK business could also choose to open a business bank account overseas to accept the funds, but doing so can be difficult and the business might not enjoy the same level of protection as they would with a UK account.
Who Needs An Offshore Merchant Account?
The majority of businesses that operate offshore merchant accounts are those that are able to benefit from favourable taxation rules in that jurisdiction, businesses that work in high risk industries (generally referred to as high risk merchants) and companies specialising in specific overseas markets such as China.
Tax Benefits Of Offshore Merchant Accounts
Setting up an offshore merchant account in itself doesn’t confer any tax advantages as the funds are settled in the UK. But by also incorporating a company in that jurisdiction businesses can enjoy considerable tax benefits. For instance many gambling organisations and bookmakers that serve UK clients have incorporated their businesses in places such as Gibraltar and Malta to avoid the gambling taxes imposed by the UK government. Rather than paying 15% tax to HMRC, they need pay just 1% to the Maltese government. While the EU is attempting to close that particular loophole, others remain.
Merchant Accounts For High Risk Merchants
Merchant risk is assessed by merchant account providers based on several factors including trading history, credit worthiness, market sector, and business model. Merchants that work in sectors such as subscription services, travel, and adult entertainment can find obtaining a merchant account in the UK very difficult, expensive, and highly restrictive.
Obtaining an overseas merchant account can be considerably easier. Offshore acquirers are less restrictive and have a more flexible approach to the kinds of goods and services for which they process payments. Certain overseas providers specialise in working in the very markets that UK based providers shun.
Lower Cost Local Card Processing charges
When selling in an overseas market, the customer pays using a credit card issued by bank in that country and the transaction is processed by a UK card processor as an international transaction. This means that the merchant will be charged higher fees than they would for a UK based transaction. But this can be avoided by setting up a merchant account in that country. In that case all credit card transactions made in that country would be processed as local rather than international transactions.
How Much Do Offshore Merchant Accounts Cost?
An offshore merchant account does not necessarily cost more than a UK merchant account. For certain businesses operating in high risk sectors they can be less expensive that UK merchant accounts. Also as indicated previously, companies with high volume sales in specific countries can benefit from lower credit card processing charges by having a merchant account in that specific country.
However, compared to a normal UK merchant account they are generally more expensive. Card processing fees are higher and settlement periods are generally longer. Fees are negotiated on an individual basis and are based on the risk of the business category, trading volumes, and business history. Discount rates are typically anything from 3% to 7.5% though.
The Pros And Cons Of Offshore Merchant Accounts
For many businesses offshore merchant accounts offer numerous advantages. They are easy to set up, they are less regulated than UK merchant accounts, and they can have financial benefits in terms of tax savings and lower credit card processing charges for targeted countries. For high risk merchants operating in certain business sectors they are the only realistic options.
While there are no direct tax advantages, when combined with overseas banking and company incorporation, currently they allow business to provide services such as online gambling to UK customers at beneficial tax rates.
There are disadvantages too. They are generally less regulated than UK merchant accounts and so offer lower levels of protection. Potential problems are extended settlement periods and high chargeback fees. Should there be a dispute, the merchant would be in a difficult position and might find it impossible to achieve a satisfactory resolution.
Using overseas accounts are a perfectly legitimate way of doing business. While beneficial to many merchants, generally there has to be a good reason for choosing an overseas merchant account over one in the UK; look carefully at the costs and the terms and conditions.