The Merchant Processing Guru Tip#17: High Risk – What is High Risk in the credit card processing industry
First of all, let’s explain why a business might be considered a “High Risk” to a processor. One of the most common misconceptions about the credit card processing industry is that people assume that there is no risk to the processor and that they should, without any question, be able to open a merchant account. Well, this is not always the case and I will attempt to cover some of the reasons why a business not only needs to qualify for a merchant account but also why they may not.
Qualifying for a merchant account is somewhat like qualifying for a bank loan or a line of credit. A merchant account is not very different, in as much as the processor is extending the funds that you have processed through your merchant account and may not themselves see that money for up to 30 or even 60 days in some cases. But even worse is the fact that they are liable for every dime that is processed through your account for up to 18 months. If a business were to go out of business and chargebacks (See my post about “Chargebacks”) started to occur the processor is obligated to Visa & MasterCard for that money and under Visa & MasterCard regulations they will have to refund any money that is disputed and cannot be proven to be a legitimate charge.
So when underwriting a new merchant a processor will look at the stability of the business and many other factors. If you are a retail store or restaurant then there is very low risk in most cases and any traditional processor will just look at the major areas of concern and approve your account 99 times out of 100 but if you are an online business or have any type of future delivery business model then they will look closer at the business and its owners to make sure that the risk is low before approving this type of account. They will also require more backup documentation about the business such as a few months of banking statements and perhaps a year or two of the businesses tax returns. This again is to determine the financial stability of the business that is applying for a merchant account.
In my next post I will go into some other reasons a business might be considered a high risk to a traditional credit card processor. Stay tuned!