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The Reality of Merchant Accounts

So you think you want a merchant account and you are wondering about the reality of merchant accounts?

The thing is, banks don’t have to provide merchants with a merchant account. Just because it says “merchant” in the name doesn’t mean it’s something that all merchants are entitled to. The reality of merchant accounts is that they can be really hard to get. Some business owners think that they can demand a merchant account. Everyone seems to process credit cards, so getting the necessary merchant account to do so is basically a given, right? Wrong.

Maybe you could have asked and been virtually assured of receiving a merchant account ten years ago, but the economy has changed and banks have become much more cautious about extending the large amounts of credit that merchant accounts require.

See, when a bank decides to take on a new merchant account, it accepts certain types of risk in doing so. Getting a merchant account is kind of like getting a credit card; it isn’t something that you’re entitled to, and there are all sorts of things that can disqualify you, mainly based on the level of risk that you represent. The risks of merchant accounts can be divided into three main types: credit risk, fraud risk, and contingent liability risk.

One type of risk that banks assume is credit risk. When the bank issues payments to you as a result of credit card payments made, those payments are actually considered a type of credit because, for a certain period of time, there could still be a chargeback. That means that your credit rating is important in your ability to get a merchant account.  Also important is your general business reputation. If you are an established company with many years in business and previous processing history, that will help you immensely in you getting a merchant account. If you are very new business (startup), that may work against you unless you can show a checking account with a large reserve of capital. However, if you have a bad credit rating or are a new business, it is still possible to get a merchant account. Your rates will be higher, but that is something that can be lowered over time once you prove yourself to the bank – now if you are in a high risk industry and are a small business, you will probably need to contact a merchant account consultant such as Rapid Financial Solutions.

Another type of risk is fraud risk. Fraud risk is actually a bigger concern for banks than is credit risk. Fraud risk is the risk of accidentally processing credit card transactions that were not authorized by the actual credit card holder. Usually this occurs when one of two things happen:

  • The credit card or credit card number is stolen
  • The merchant is committing fraud and putting people’s card numbers through when they never purchased from them.

This is a risk that is more significantly associated with particular types of businesses, but also it is presumed that new businesses – or businesses new to credit card processing – have a higher fraud risk because they are less familiar with the detection and prevention of credit card fraud.

For banks, another risk of merchant accounts is called contingent liability risk. Contingent liability is the risk that comes with certain types of business models and marketing methods. For instance, any business that offers a lifetime service of any type has a high contingent liability risk. The problem is that if the company goes out of business, the customers could all demand refunds because the company failed to hold up its end of the agreement. Another type of contingent liability risk is associated with intangible services, such as online video games and pay-per-view videos online. The risk with these services is that it is often hard to prove that the goods were delivered. Those are just two examples – there are many other types of contingent liability risks. If you have a high contingent liability risk, it can be very difficult to get a new merchant account.

If you can’t get a merchant account because you are a new business or small business in a high risk industry – such as adult entertainment, travel, magazine subscriptions, credit restoration, PC tech support, or medical marijuana and supplies – there are other options. To learn more, contact Rapid Financial Solutions today.

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