3-3 Merchant Accounts & Risk

Merchant Accounts & Risk

Merchant processing, like any other financial service, is based almost totally on the assessment of risk. When you charge a customer's credit card, the acquiring bank is going to deposit funds into your bank account, assuming that you have delivered the product or service that you said you would.

The processing or acquiring bank gives you money based almost solely on your word. That sounds pretty risky to us. Credit card processors have to be very careful about who they issue merchant accounts to and how the issued accounts are being used. The following is a scenario of a credit card processor's worst nightmare:

Let's say that processor "A" issues a merchant account to John Doe for his new online business and allows John Doe a $20,000 processing limit. In the first month of business, John Doe has a phenomenal month of sales totaling $15,000, but he never ships a single product. At the end of the month, all of his customers are demanding their money back, but John Doe has already closed his bank account and skipped town. In a case like this, the processing/acquiring would be stuck refunding $15,000 back to John Doe's customers.

Most well-intentioned business people do not think like this, but it is the basic reason why merchant accounts are so scrutinized by processors/acquirers. Personal credit status of the business owner, the business type, processing volume, and other variables are all considered by the processor/acquirer when you apply for a merchant account. These variables and their impact will all be discussed in more detail later in this guide.

Additional information about high risk merchant accounts and what types of businesses classify as high-risk can be found here.

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