High-Risk Payment Processing: Multi-level Marketing 101
January 19, 2023
Multi-level marketing (MLM) or network marketing is a unique business model that became popular in recent decades. The MLM industry has a nearly $190 billion worldwide market value, with around 125 million people employed in direct selling or referral marketing and a projected CAGR of 8.3% through 2029. Numbers like this sound extremely attractive in terms of business opportunity, but as we will see, not all participants in the payment ecosystem find the MLM industry fully trustworthy.
What is Multi-level Marketing?
The basic premise of the multi-level marketing process is this: members are encouraged to recruit sales representatives and in return, they will receive a portion of the sales that the representative makes. Those reps in turn will recruit their own reps, essentially creating a pyramid of upline rewards where the member at the top has essentially built their own ever-expanding income stream.
Is an MLM a Pyramid Scheme?
This ever-expanding downline formation creates a triangular arrangement that has given rise to the name pyramid selling. Unfortunately, this sounds a bit like a pyramid scheme, although the two are not necessarily related.
A pyramid scheme or Ponzi scheme involves recruiting members into a party plan that has no real product to distribute. By contrast, the multi-level marketing strategy does have an actual product to distribute, whether it’s prepackaged foods that facilitate weight loss, nutritional supplements, financial products like life insurance and mutual funds, or Tupperware.
However, even though MLM marketing is not illegal or unethical like the similarity-shaped pyramid scheme, it does pose a number of challenges for payment processors. Multi-level marketing credit card processing is more often than not going to require a payment processing company that works with high-risk businesses, due to the following reasons:
Why MLM businesses Are High-risk Payment Processing:
- Lack of quality control
- Frequent chargebacks
- High turnover rate
- Potential lawsuits
- Unpredictable growth
- Poor Reputation
Let’s take a look at each of these reasons in greater detail and examine why multi-level marketing merchant processing ultimately overlaps with high-risk merchant processing.
Lack of Quality Control
To acquire new customers, MLM recruits are told to look within their own networks and engage in a sort of social selling. The most famous example of this is perhaps the Tupperware Party, where representatives are encouraged to host parties in their homes for the purpose of selling products—and perhaps to recruit new distributors who will in term host their own Tupperware parties…and so on, and so on.
These types of marketing efforts, as you can imagine, create an environment that is rife with quality control issues. A representative and their promoted products may promise the moon, but the products or services fail to deliver. This can create consumer frustration, which in turn can result in contested and disputed charges over products.
If the representative checks out of the picture to avoid their disgruntled customer, a chargeback can result from the consumer calling their bank or credit card company. This brings us to our next point…
Frequent Chargebacks
A good chargeback ratio is 0.65% and below, while 0.9% can start resulting in penalties from payment processors. If chargeback ratios hit 2%, some companies like Visa and Mastercard will penalize the company for thousands of dollars. At 3%, a business is no longer profitable for a payment processor to service.
While it’s difficult to pin down the chargeback ratio for the MLM industry as a whole, it’s safe to say it’s likely a space with a higher volume of chargebacks, as evidenced by the reluctance of payment processors to work with these companies.
Vague explanations of company policies, false claims, and an unwillingness to disclose pertinent details, are all sources of potential frustration (as outlined above) that can lead to chargebacks. Frustrated consumers may very well skip over dealing with the corporate nexus of the MLM business and go right to their bank or credit card company to reverse the charge and erase the frustrating experience they just endured.
High Turnover Rate
The MLM business model sounds promising, but there are other slides to the story. While social media is filled with success stories of people building a home-based business, not every independent distributor succeeds at customer acquisition.
The Consumer Awareness Institute found that 99% of participants actually lose money, despite promises that product distribution and the compensation plan will create a powerful stream of residual income. Similar studies showed that 50% of members quit after one year, a statistic that is particularly interesting in light of the fact that 20% of small businesses close after just one year. And perhaps most telling is the fact that 90% of participants are gone after five years.
All of this indicates an extremely high rate of turnover. And high turnover rates do not bode well in terms of risk management, especially if payment information is taken in person, like in door-to-door marketing campaigns.
This is because unscrupulous participants in the MLM arrangement may take credit card information if processed in person and use it for their own fraudulent purchases even after leaving the fold of the MLM business. With little to no managerial oversight in the sales process, there is a significant risk of identity or credit card theft, even without the turnover issue.
Potential Lawsuits
The MLM landscape is rife with potential and actualized lawsuits. MLM companies like Herbalife have faced recent lawsuits for everything from making unfounded promises about their products to shady stock dealings. Sometimes these lawsuits will even come from within the MLM pyramid.
One example includes a popular MLM jewelry Paparazzi. The $5 accessories claim to be lead and nickel free, however a class-action lawsuit was filed against the company that protested with lab results finding harmful levels of lead, nickel, arsenic, and cadmium.
As you can imagine though, payment processors want to stay away from these kinds of transactions, especially if there is any chance they will be held responsible, or if for whatever reason payments will need to be remanded. Payment processors are reluctant to work with industries that have just crossed the border of legality or present potential legal risks in the future, such as e-cigarettes. In many cases, MLM products are no different.
Unpredictable Growth
MLM companies have been known to use recessionary periods to expand their footprint. During the Great Recession of 2008, for instance, the number of participants in the U.S. rose from 15 million to 18 million. Celebrity endorsements frequently help, as does catering to disenfranchised demographics.
For instance, a number of MLM companies amped up marketing attempts to recruit women in the wake of the pandemic, who were especially hard-hit by the closure of service industry jobs. But if the past is any indicator of the present, many of these so-called mompreneurs will exit the MLM industry after finding that they’ve spent more money and time than they wanted to while attempting to grow their pyramid.
Detractors have pointed out that MLM growth of 2% has lagged behind the retail industry as a whole, which grew 2.8% in the same period, suggesting that all the hype is…just that. The entire premise of MLM marketing is to create lead generation through an organic process without the typical team building and training overhead costs—that’s because entry into the business is often predicated on representatives using the products themselves.
Unfortunately, this business model has ended up being somewhat unpredictable over time. While companies like Mary Kay, Avon, Tupperware, and Amway have been in business for decades, the failure rate for MLM companies is estimated to be in the high nineties—a statistic that strangely mirrors the 99% of representatives who don’t make money selling products.
Poor Reputation
MLM products sometimes have a poor consumer reputation. They are often confused with an illegal pyramid scheme. Although this is technically not true, it can sometimes come close enough to the truth when unscrupulous or unethical business practices are part of the business.
Representatives have said they felt pressured to spend money on products, attend seminars, and dedicate their lives to the business. And the people they are pitching to have certainly felt the heat turn up: around 33% percent of polled Americans regret buying an MLM product, while 25% say an MLM has ruined a friendship, and 20% say it has strained a family relationship.
Interestingly, despite these sentiments, nearly two-thirds said they would consider buying an MLM product for the holiday season. In any case, payment processing companies do not like to work with businesses that have a poor reputation, especially when that reputation may involve pressure-filled, unscrupulous business practices.
Is Affiliate Marketing the Same as MLM Marketing?
Affiliate marketing programs are not the same as MLM marketing. An affiliate product is usually sold on the internet because anyone wishing to profit from the sales of this product can use clickable links to promote it. Any time a consumer clicks the link to purchase the product, the disseminator of the link will get a percentage of the sale.
Affiliate marketers will place these links in their blogs or promote products or experiences on their social media pages. Although the business model is different in that affiliate marketers do not need to assemble an ever-growing team, there is still a significant amount of risk from the payment processing end.
One reason is that many businesses make dubious claims through different types of affiliate marketing about products or services. There has been a proliferation of online gurus within the past few years, creating a whirlwind of spurious activity with often dubious results. Just as it does with tangible, MLM-marketed products, these digital products create a landscape of consumer frustration and disputed charges.
Additionally, as affiliate marketing is pretty much exclusively an internet activity with little oversight, it can result in a significant amount of card-not-present transactions and fraud. So in the end, while affiliate marketing is not MLM marketing, it often presents the same risks to payment processors.
How Can MLM Reps Collect Payments?
Most MLM reps will never have to worry about how to collect payment. That’s because there is a significant amount of scaffolding around the MLM process. In many cases, there will be some cloud-based MLM software that representatives can access (even from their phones) to process payments, learn about the products, and develop sales strategies.
Standard process multi-level marketing will often involve creating a uniform, cookie-cutter experience that reps can implement again and again as they attempt to improve their conversion rates, expand the pyramid, and attract new revenue streams. You will never find one sales rep directing customers to pay via one payment gateway, while another rep leverages a different payment gateway.
Payment Processing in the MLM Industry
Despite our earlier assessment of potentially poor quality control in the MLM industry, at least the payment processing experience can be potentially uniform. But there will be an onus on the corporation at the apex of the MLM pyramid to secure a working relationship with a payment processor.
Certainly, we have outlined an extensive list of why payment processors would be averse to working with a multi-level marketing company. In fact, payment processors like Square, Stripe, Venmo, and PayPal won’t even work with them at all. Multi-level marketing merchant accounts are usually those that are also considered high-risk merchant accounts.
High-risk merchant accounts typically work with companies that have been red-flagged for a variety of reasons: they may have a bad credit history, they may not be established as a business, they may have an excessive amount of chargebacks, or they may be in an industry that is inherently risky in terms of potential fraud or regulatory issues—like gambling, alcohol, firearms, and tobacco.
Although an MLM pyramid may not involve peddling any of these products or experiences, due to the reasons outlined above it is still a very high-risk industry in terms of payment processing. Still, there is a wide marketplace of payment processors, like ECS, who will work with a company despite these risks.
An MLM business in search of a payment processor for an MLM merchant account needs to just take a look at the variety of fees, rates, and terms being offered for credit card processing for multi-level marketing and decide what would be in the best interest of expanding the pyramid.
To contact sales, click HERE. And to learn more about ECS High-Risk Payment Processing visit High-Risk.
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Charles Hannah
Financial Writer
MA, University of Oregon.
In my free time I am a guest lecturer at the local community college, teaching art history, architecture, world mythology, and literature.
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Multi-Level Marketing Payment Processing FAQs
There are several options for processing payments in an MLM business. One option is to use a traditional payment processor, such as PayPal or Stripe. These processors allow you to accept credit cards and other types of electronic payments from your customers.
Another option is to use a specialized MLM payment processor that is specifically designed to handle the unique needs of an MLM business. These processors often offer features such as genealogy tracking, commission calculations, and automatic payments to members of your downline.
However, we recommend processing with a payment processor, like ECS, who is knowledgeable in handling high-risk industries. High-risk payment processors will have a more successful application acceptance for businesses in the MLM realm.
Most MLM software is designed to be compatible with a wide range of payment processors. However, it is important to check with the software provider to make sure that the payment processors you want to use are supported.
Some payment processors that are often compatible with MLM software include ECS, PayPal, Stripe, Authorize.net, and First Data. Additionally, ECS partners with Authorize.net and First Data for a more well-rounded, inclusive merchant service support experience.
If you have members or customers in other countries, you will need to consider how to handle international payments in your MLM business. One option is to use a payment processor that supports multiple currencies and can handle conversions and other international transactions.
You may also need to consider local laws and regulations, such as tax laws and cross-border payment restrictions. It is important to research these issues carefully and consult with a legal or financial expert if necessary to ensure that you are complying with all relevant laws and regulations.
A payment gateway is a service that connects your MLM business to the payment processing network. In order to set up a payment gateway, you will need to sign up with a payment processor and obtain the necessary technical integration information, such as API keys and integration instructions.
Once you have this information, you can use it to set up your payment gateway through your MLM software or your payment processor's website. To manage your payment gateway, you will need to monitor and track transactions, resolve any issues that arise, and ensure that your gateway is properly configured and secure.
Chargebacks and disputes can occur when a customer disputes a charge on their credit card or requests a refund for a product or service. In the case of an MLM business, it is important to have a clear and transparent refund policy in place to minimize the risk of chargebacks and disputes.
It is also a good idea to keep detailed records of all transactions and communication with customers to help resolve any issues that may arise. If a chargeback or dispute does occur, it is important to respond promptly and professionally to resolve the issue and minimize the risk of negative consequences for your business.
The Payment Card Industry Data Security Standard (PCI DSS) are industry-wide standards created by the PCI DSS counsel for the handling of secure payment information. If you accept credit card payments in your MLM business, you must comply with PCI DSS. Failure to comply with these standards may have resulting fees, fines, legal action, and damage to your reputation.
To comply with PCI DSS, you will need to implement certain security measures, such as encrypting credit card data, regularly updating software and systems, and conducting security assessments. It is important to consult with a compliance expert or your payment processor to ensure that you are meeting all relevant regulations. Luckily ECS makes PCI compliance easy with our security metrics partnership and client success team to help walk you through the process.
Integrating your MLM payment processing with other business systems, such as your accounting software, can help you streamline your operations and reduce errors. Many MLM software and payment processors offer integration options with popular accounting software, such as QuickBooks and Xero.
To integrate your systems, you will typically need to follow the instructions provided by your software and payment processor. This may involve setting up API keys or other technical integrations. It is important to test the integration carefully to ensure that it is working correctly and to address any issues that arise.
There are several steps you can take to protect yourself and your customers from fraud in MLM payment processing:
- Use a secure payment gateway that encrypts sensitive data and uses other security measures to protect against fraud.
- Verify the identity of your customers before processing payments.
- Use fraud detection tools and services to identify suspicious activity.
- Implement strong password policies and use two-factor authentication to secure your accounts.
- Stay up-to-date on the latest security best practices and technologies.
The fees and charges associated with MLM payment processing can vary depending on the payment processor you use and the type of payments you accept. Some common fees and charges that you may encounter include:
Transaction fees: These are fees that are charged for each payment that you process. The rate for these fees may vary depending on the type of payment, such as a credit card or electronic check.
Setup fees: Some payment processors charge a one-time fee to set up your account and configure your payment gateway.
Monthly fees: Some payment processors charge a monthly fee for their services.
Chargeback fees: If you receive a chargeback, you may be charged a fee by your payment processor to help facilitate the dispute.
Currency conversion fees: If you accept payments in multiple currencies, you may be charged a fee for converting those payments into your local currency.
There are several factors to consider when choosing a payment processing solution for your MLM business:
Compatibility with your MLM software: Make sure that the payment processor you choose is compatible with your MLM software.
Fees and charges: Compare the fees and charges of different payment processors to find the most cost-effective solution for your business.
Security: Choose a payment processor that offers robust security measures to protect your business and your customers from fraud.
Features: Look for a payment processor that offers features that are relevant to your business, such as genealogy tracking and automatic payments to members of your downline.
Ease of use: Consider the user experience of the payment processor and whether it is easy for you and your customers to use.
If you are curious if ECS payment processing is right for you, contact us today and one of our knowledgeable account executives will be happy to discuss your options.