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Tax Engineering

Offshore payment gateway

An offshore payment gateway with associated merchant account number can be defined as a financial instrument used to accept online payments made by credit or debit bank cards outside the country of your tax residence.

Currently in many countries, card payments are surpassing traditional payment methods such as cash and there is an upward trend in usage of online payment gateways. The main beneficiaries of accepting this type of payment are high-tax countries where the government considerably reduced tax evasion and money laundering thanks to the fact that all card payments pass through the bank account and therefore get recorded. Due to this rapid growth and positive practice such countries like Denmark want to eradicate cash and limit themselves to using only payment systems based on credit and debit cards.

However, offshore and onshore payment gateways also present several problems and when applying for a payment gateway offshore companies face one of them. The problem is that a lot of financial entities do not always approve this payment system when requested by an offshore company. The reasons for that are very different: the company doesn’t have a banking history in the entity or has a recent date of constitution, nature of the business doesn’t fit into the portfolio of the bank, range of very high monthly sales, the company has a very high average ticket and restriction by countries where it operates. It is not unusual for a business as licit as a travel agency to be rejected by the bank when applying for an offshore payment gateway due to the high rate of fraud.

Payment gateways can be classified into two groups by the location of the merchant account and by the risk of fraud that it presents to the entity. At the same time we can also classify them by the location of the commerce: offshore and onshore. The offshore payment gateways, as we have defined above, are those that are outside of the country of residence of the final beneficiary, individual or company. Normally the financial entities grant these gateways a greater risk and higher fees. The other type would be the onshore payment gateways. This type of gateways can be defined as a financial instrument used to accept payments made by credit or debit cards in the same country where the business is registered. The main advantage of these gateways is that banks approve them quickly, they have low fees but at the same time they are the most monitored ones. If the financial institution observes that the nature of client´s business presents a high risk for the bank, it won’t grant this type of payment gateway.

Types of offshore payment gateways according to the risk of fraud

Depending on the level of fraud risk, the payment gateways can be classified into two types: high risk gateways and low risk gateways.

High risk payment gateway

Many entrepreneurs think that those who apply for a high-risk offshore payment gateway are involved in illegal businesses but this thinking is totally wrong. The main brands of credit and debit cards such as Visa, MasterCard, Amex, Diners Club or Discover do not accept businesses related to money laundering. In fact, if the providers of offshore payment gateway detect any type of illicit activity they will indefinitely stop its service and will include the company number in a blacklist so it wont be able to access payment systems by card anymore.

The nature of business classified as a high risk for offshore payment gateways are those with high probability of frauds and chargebacks, for example: casinos, bingos, poker rooms, auctions, agencies of travel, sale of electronic products, grow shop, Bitcoin, legal services, online marketing, sale of alcohol, electronic cigars, tarot, sale of software, programming cabinets, erotic content, jewelry, sale of insurance, health and beauty, Forex and financial services. Depending on the types of businesses described above and its nature, it is possible that the financial institution requests a special license in order to allow the company to accept online payments through its system. In this case the financial entity will comply with anti-money laundering protocols imposed by the payment system brands.

Low risk payment gateway

The low risk payment gateways are those that do not present the risk of fraud for the financial entity. These gateways have relatively lower fees and get approved easily. The examples of online businesses that apply for low risk gateways are: florists, shoe stores, leather goods, cheap electronic products, blogs, sports, cheap jewelry, DIY, motor, fashion.

Everyone willing to apply for offshore payment gateway has to take into account the nature of its business and if he wants to develop the commercial activity in his country of residence (onshore) or abroad (offshore) because if the client has a low risk start up with small number of sales an offshore payment gateway might be too expensive for him. However, if a business considered being high risk and has a very high percentage of sales than the client might be undoubtedly interested in applying for an offshore payment gateway.

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