Merchants who process credit card transactions are given an unlimited line of credit by the bank or credit card processor who opens an account for them and effective risk management is required. That is, for every batch of credit card transactions they make, a deposit is made into their account on the following day and may be withdrawn. The assumption is that these are valid sales and that the merchant provided, or will provide, the services or products that the cardholder has authorized and that no chargeback will ensue. The merchant is responsible for the customer's satisfaction.

If the service or product is not delivered, or is less than the cardholder was led to believe, then the merchant is contractually bound to make the appropriate adjustment or return the cardholder's money. This is accomplished through the chargeback process by which the card issuing bank demands that the credit card processor send back the amount of the purchase. If the merchant is unable or unwilling to reverse the charge, the merchant's bank becomes liable for the chargeback.

Sometimes the merchant has gone out of business for financial reasons, and in other cases has processed cards fraudulently, knowing that no service or product would be provided and that chargebacks will result. The ripoff can be catastrophic for a processor (bank or Independent Sales Organization) if the merchant has processed hundreds of thousands, or perhaps millions of dollars fraudulently and closes its doors.

Failed or fraud merchants cost the card processing industry several hundred million dollars in losses annually. Often these losses are caused by the people and the ripoff companies they set up who have done the same thing over and over. This is particularly true of merchants who claim to be selling things such as travel packages, nutritional products, wealth building programs, credit repair, buyers clubs, and questionable investment opportunities. The telemarketing industry has been sullied by those in it who market low value products in order to obtain credit card numbers to process. It is rare that prosecution is pursued due to the limited resources of law enforcement.

Therefore, it is up to Independent Sales Organizations and merchant credit card processors to conduct due diligence and risk management themselves by carefully underwriting applicants for merchant accounts.

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