What is a Merchant Account
So, you’ve made the decision to accept credit cards, and now you’re ready to start shopping for a payment processor to provide you with a merchant account.
There are hundreds of providers and resellers to choose from – the local sales reps, Merchant Service Providers, Silicon Valley start-ups, and international banks are all options. The services they all offer vary widely, and so do their pricing and sales practices. The bottom line is that you’re now faced with a difficult and complex decision that has real consequences for your business, so it’s important that you educate yourself.
What Does Applying for a Merchant Account Mean?
When you sign up for a merchant account, you are asking the payment processor to take a risk on behalf of your business. When the processor approves your account, they are confirming that they trust your business to honor the transactions that you process. If a business cannot honor their transactions, then the processor becomes liable for the loss.
When processing transactions, there is a risk that the customer might dispute the amount charged. This is referred to as a chargeback, and when this happens, it’s usually the business that is responsible for refunding the money to the customer. But what if the business is unable to provide the refund? In this case, it’s the payment processor who is now responsible for refunding the money. The chance that a business may become insolvent or unable to meet their financial obligations is the risk that payment processors take in offering their service.
How to Sign Up and Why Underwriting Applies to Credit Card Processing
Much like a loan approval, processors look at several factors before approving a new merchant account. These factors include:
- The specific industry your business is in
- The volume of credit card purchases
- The average size of transactions
- The delay between customer purchase and product received
Personal credit checks or business financial statements are often required when you’re signing up for a new merchant account to ensure that the business and its owners are able to financially support any chargebacks or refunds that might occur.
When you sign up for an account you may be asked for this information, so the payment processor can evaluate the level of risk that allowing you to accept payments will expose their business to. There are some businesses that do not fall easily into a category of risk that would be deemed acceptable by most processors, and for those businesses, they may need to enlist the services of a high-risk payment processor.
Once the payment processor receives your business’s information, they will review the documents and if anything is missing then they will typically reach out to let you know. Once all the required documents have been submitted, they will be sent to the underwriting department. Once underwriting has completed their review of your documents, your account can be approved.
Some processors offer quicker approval processes, which sometimes allow merchants to start processing immediately after signing up. These “fast-onboarding” arrangements are typically offset by stricter processing limits initially, and slower deposit speeds or higher-fees.
The difference between these two underwriting approaches can be seen as a more proactive versus a more reactive approach, and both approaches offer pros and cons to merchants and processors. Regardless of approach, processors usually employ similar underwriting requirements and reviews to manage their risk when accepting new businesses. We cover the financial risks of accepting and processing credit cards in a later section of this guide.