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Requirements for Getting a Merchant Account
There
are many requirements and restrictions associated with both getting and
keeping a merchant account. This section will help you to better
understand what these requirements and restrictions are and why they
exist. This section covers the following topics:
Understanding Credit Card Risks
Your
merchant account is a financial agreement between you and the bank that
issued the merchant account. Just as a bank will impose rules on a
checking account or savings account, rules are imposed on merchant
accounts. Almost always, these rules are in place to achieve one
objective: to avoid risk. There are three types of risks associated
with merchant accounts:
Credit risk:
Credit risk is the risk the bank takes with respect to the amounts you,
as a merchant, may owe the bank. Many people are surprised to learn
that this is not the most important factor when it comes to accepting
(or rejecting) a merchant account application, especially for new,
startup businesses with small monthly charge volumes (less than about
$5,000 per month). This is because fraud and contingent liability risks
are much more important factors when underwriting a merchant account
application. Merchant accounts are routinely issued to individuals who
have no credit or poor credit histories. It is also not unusual for a
bank to decline the leasing application for equipment (based on
insufficient or poor credit) but grant the applicant the merchant
account.
Your credit rating
becomes more important the longer you are in business and especially as
your monthly charge volume grows. Few business owners can succeed and
remain in business beyond just a few years unless they build a good
credit rating.
Fraud risk:
Fraud risk is the risk of inadvertently processing credit card
transactions that have not been authorized by the credit card holder.
Credit card fraud typically occurs as the result of stolen cards or
card numbers. While all merchants are susceptible to credit card fraud
being perpetrated via their Web site, new merchants are at great risk
since they are not as familiar with the methods of detecting and
preventing suspicious credit card transactions. In addition, some types
of businesses and certain products are subject to higher fraud risk.
Contingent liability risk:
This is the greatest risk associated with the merchant account. It not
only includes the risks associated with fraud but also all the
unforeseeable risks associated with different types of businesses and
marketing methods.
To better
understand contingent liability, consider the following real-world
example. A couple of years ago, a new startup company was offering
lifetime Internet dial-up accounts for a one-time, flat fee. Many
subscribers took advantage of this offer by using their credit card to
pay the fee. Recently, this company declared that it was discontinuing
its business because this marketing model simply was not viable. Since
the company could not fulfill its promise of a lifetime account,
subscribers demanded, and were entitled to, a refund of their fee
payment.
The above is an
example of contingent liability. In this case the liability was the
growing amount of all potential refunds. Payment of these refunds was
contingent on the ISP remaining in business and offering the service
for the lifetime of the customer. Lifetime services or products
represent the worst-case scenario when it comes to contingent
liability. The liability just grows and grows with each new sale and to
truly understand the financial risks requires the application of
actuarial tables similar to those used by the insurance industry to
forecast costs associated with life insurance policies. If you offer a
lifetime service or product for a single, flat fee, don't expect to get
a merchant account.
Contingent
liability will be a factor any time that a payment is made for
something that is contingent on the merchant providing a service or
product at some future date, as opposed to immediately delivering the
product or service. In general, a merchant account will not be approved
for any product or service that is delivered more than 90 days after
payment.
Another form of
contingent liability is associated with intangible services. An example
of a high-risk, intangible service would be the sale of an online,
pay-per-view video delivered over the Internet. In general, the more
fleeting the service along with the higher cost of this one-time
service, the greater the risk. The risks associated with this type of
service are due to the fact that it is extremely difficult or
impossible for the merchant to provide proof of delivery.
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High-Risk Businesses
You
will find it difficult, if not impossible, to obtain a merchant account
for any of the following products, services, or businesses. Access
Finance in most cases can approve also high- risk businesses.
| Unacceptable Merchants |
| Audiotext |
Employment agencies |
Mortgage brokers |
| Airlines |
Freight forwarding |
Mortgage reduction services |
| Card registration organizations |
Gambling |
Outbound telemarketing |
| Check cashing establishments |
Hair restoration or surgical services |
Precious metal/stamp collections |
| Collection agencies |
Hotel reservation services, third-party |
Prepaid phone cards |
| Companies promoting lotteries or raffles |
Illegal products |
Pyramid sales programs |
| Computers (MOTO and Internet; complete systems, not components and accessories) |
Import/Export |
Telephone consultation services |
| Credit restoration or repair agencies |
Investment opportunities |
Timeshare organizations |
| Drug paraphernalia of any form |
Magazine subscriptions |
Travel certificates |
|
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Reserve Requirements
High-risk
businesses may be required to pay higher setup and/or transaction fees.
In addition, a reserve may be required. The actual total amount of the
reserve and how the reserve is established will vary from bank to bank
and from business to business depending on the extent of risk exposure.
Although merchants sometimes view reserve requirements as a negative
requirement, they can act as a safety net for businesses that are
exposed to higher risk of chargebacks.
Reserves
are usually specified as a percentage of the monthly charge volume and
are created by withholding a percentage of each transaction. As an
example, consider a monthly charge volume of $10,000 with a 50% reserve
requirement and a 5% withholding amount. In this example, the total
required reserve would be $5,000 (10,000 x 0.5). This reserve would be
built by withholding 5% of each transaction or sale, or about $500 per
month. So, the reserve would take about 10 months to be built.
Reserve
amounts belong to the merchant. They are held in escrow by the bank in
the event they are needed to offset unexpected chargebacks.
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Geographic Requirements
The
United States is currently the world leader when it comes to e-commerce
technology. In addition, the US has always enjoyed lower costs for both
computer hardware and software. It is not unusual for a software
application sold in the US to cost up to twice as much in other
countries. Because of these two factors, the general consensus among
industry consultants is that if you are going to do e-commerce, do it
in the US. Although the virtual nature of the Internet may make it
viable for a large company to establish a presence in the US, most
small- and medium-sized businesses may find this difficult or
cost-prohibitive. Compounding the problem is the fact that most US
banks will not establish a merchant account to businesses outside the
US.
The following are minimum requirements for establishing a merchant account with all US merchant banks:
-
A
business checking account with a US bank. This requirement means that
all of your transactions must be conducted in US dollars. It should
also be noted that most (but not all) banks require the business to be
located within the US to open a checking account.
-
A US postal mailing address which must also be used as the mailing address for your business checking account.
-
Your Web site's server must be located within the US
The
above requirements apply to all businesses applying for a merchant
account. Obviously, these requirements are easily met for persons
living in the US. However, these are also the requirements for most
merchant account providers that offer "International" merchant accounts
to businesses located outside the US. Most providers will assist you
(for a fee) in establishing these requirements.
The
following are additional requirements imposed by most (but not all)
banks if your principal company is located outside the US:
-
A US Corporation (Note that this is NOT a requirement for businesses located within the US!)
-
A personal guarantor who has a US Social Security Number and good credit.
-
Your product must be warehoused and shipped from within the US
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