Applying For a Merchant Account

When it comes to merchant accounts and credit card processing knowledge and tools translate directly to valuable money saved. Take the time to educate yourself about different rates and fees, work with prospective providers and ask questions.

A merchant account is essentially an open line of credit that is issued to a merchant by an acquiring bank. Like a credit line, a merchant account has limits, variable rates, and other provisions that govern its use. Third-party processors (commonly referred to as "credit card processors") are really the middlemen in the processing equation. They only keep a small portion of the merchant account fees. The bulk of the charges are paid to the issuing bank and to the card originator like VISA and MasterCard. This puts processors and the acquiring banks in a precarious position.

When a merchant runs a credit card transaction, funds are removed from a customer's credit account at their issuing bank and are deposited in to the merchant's bank account under the assumption that the merchant has delivered the products or services that they said they did. If a customer issues a chargeback the processor must remove the funds from the merchant's bank account and reapply the funds to the customer's credit account at their issuing bank.

If there are not enough funds in the merchant's bank account to cover the chargeback and associated fees, the processor or acquiring bank must reimburse the customer out of their own pocket and then recoup the fund from the merchant. Will the processor be able to get their money back? Hence, personal credit of the business owner or principal becomes an issue. Our example uses a single instance of a chargeback. Some instances of fraud can leave a processor or acquiring bank holding the bill for hundreds or even thousands of dollars. These are the basic reasons why banks review a business owner's personal credit standing when considering their merchant account application.

How Good Does Your Credit Have to Be?
Applying for a merchant account is not like applying for a mortgage. An inquiry from a processing bank on your credit report does not look bad and it will not adversely affect your credit rating. Your credit does not have to be perfect to get a merchant account. How strong your credit needs to be depends on the type of merchant account that you are applying for, the amount of processing volume you are requesting, and the average ticket amount that you are declaring.

The banks will take into account all of these factors when making a final decision. Even if your credit is not perfect there are a few things that a processor can do to get your account approved. We will talk about these things later in this section. The following circumstances involving personal credit will cause most banks to deny a merchant account application.

Bankruptcy - If you are in active bankruptcy a processor will likely decline your application. If you've had a bankruptcy that has discharged you should be able to obtain a merchant account assuming that you have re-established your credit since the bankruptcy has been discharged.

Collection Accounts - If you have debt that has gone to collections a processor will likely deny your application for a merchant account. You should be able to get an account after the collection reports are reconciled and the notifications have fallen off of your credit.

Lack of Credit History - A processing bank does not need to see multiple satisfactory lines of credit or a ten-year credit history to approve a merchant account application. However, they do need something on which to base credit-worthiness. If you don't have any credit history whatsoever a processor will likely deny your application for a merchant account.

If you fall into one of the categories above, don't give up. Some providers specialize in helping merchants with less than perfect credit. The most important thing is to be honest about your credit standing with providers up front. This will save time and energy in the long run because you won't waste time working with providers that can't get you approved.

Failing to declare the correct processing volume, average ticket amount, and transaction percentages on your merchant processing agreement can cause significant headaches and may result in your merchant account being terminated or worse. Even if you guessed at these numbers there's no need to worry. When providers offer you merchant account quotes you can work with them to figure out the proper figures.

Processing Volume - Processing volume is the amount of funds that the processor will allow you to charge in Visa and MasterCard sales in a monthly period. We had made a comparison to a merchant account being an open line of credit in the previous section. Think of the processing volume as the limit on the line of credit. If you exceed your declared processing volume the processor may impose surcharges, penalties, or they may take action to stop the violation.

While moderately exceeding declared processing volume may not lead to any recourse from the processing bank, grossly exceeding processing volumes can be a serious issue. On the bright side, it's not difficult to declare the correct processing volume and providers are usually very helpful. The first important point to make is that there are no penalties for not meeting the processing volume that you declare on your merchant processing agreement. This means that you can declare a processing volume of $5,000 a month, not process a single penny, and you will not be penalized. Granted, this wouldn't be good for cash flow, but you would not face penalties or rate changes from the processor. This does not mean that you should grossly overestimate you processing volume, but it's in your best interest to pad the numbers within reason to protect against overages.

It's easy for an established business to figure out their monthly processing volume by looking at their past merchant account statements. It's not that easy to figure the processing volume for a brand new business.

The best way to figure out the processing limit to declare for a new business is to start by making an educated guess at what the business's gross sales will be each month throughout the year (excluding holidays). Take into account any seasonal swings that the business will have. For instance, the highest grossing month for a craft business will probably be in the summer time when craft fairs are frequently held. Once you've figured out the highest grossing month and have an idea what the gross sales will be, figure out what percentage of that number will be Visa and MasterCard sales.

For retail merchant accounts assume 30-40% of gross sales will be Visa and MasterCard sales. For an online or mail order business assume that 90-100% of gross sales will be Visa and MasterCard sales. Take the appropriate percentage of gross sales, depending on the business type, and round the final figure up to the nearest $500 increment.

Average Ticket - The term average ticket is used to refer to the dollar amount of an average MasterCard or Visa sale.

When applying for a merchant account some merchant service providers ask that you declare an average ticket limit instead of an average ticket amount. This means that instead of declaring your mid-range sale amount, you should declare the highest sale amount that you expect. Some providers will even ask for both of these pieces of information. In this situation you will be asked to declare your average ticket amount and also the highest overall ticket amount that you expect to process. This is usually done to accommodate businesses that have a relatively low average ticket but process a large sale every now and then.

Processors pay close attention to the average ticket amount. If you process a transaction that is in gross excess of the declared average ticket amount you may be subject to penalties such as having the funds from the transaction held for as long as 6 months, having your account closed, or both.

It's not difficult for a business to calculate their average ticket. The products or services that a business sells will dictate the average ticket amount. Use your business plan or make an educated guess at what you think the lowest and highest possible transaction amounts will be. Use these two figures to find the average sale amount. Once you find the average ticket amount pad the number a little bit within reason. Again, you do not want to raise your average ticket to an unreasonable amount, but you should increase it a little bit to be safe. You will not be subject to any penalties if you over estimate your average ticket.

Declaring an Incorrect Average Ticket or Processing Limit - Don't forget about these two figures once you start accepting credit cards. If after you begin processing you realize that you underestimated one or both of these figures, contact your provider as soon as possible to discuss your options. Providers can often have the limits on your account raised, or they can take others actions to avoid any service delays or penalties.

Increasing Your Average Ticket and Processing Limit - For most businesses the average ticket amount will not change over time because the business continues to sell the same products and services. However, the processing limit usually needs to be raised as a business grows and sales increase. Most processors will allow the processing limit to increase naturally over time. Processors understand that as a business grows the gross sales will increase and credit card sales will increase as well.

Doubling or tripling processing volume in the first six months of business is not considered natural growth. If you expect rapid business growth, when considering different providers, ask each one how sensitive they are to overages and limit increases. Some providers will not increase processing limits regardless of business growth or age; instead, they will require you to request an increase when needed. Be aware of your provider's procedure for limit increases, if they will naturally increase your limit naturally, or if it's something that you need to request.

Contact your provider to request an increase in your processing limit. Depending on the amount of the increase that you're requesting, getting your processing limit increased may be as simple as filling out a quick change form. In some cases the provider may suggest that you open a new merchant account.

Processor need to know how you will be transacting your credit card sales. They use this information to assess the risk associated with the transactions that you will be running.

Some processors will get very specific on their applications by asking you to break your transaction percentages down into many different categories like retail, key-entered, telephone, Internet, and so forth. Other processors will keep this section of the application pretty general and simply ask you for the percentage of keyed in and swiped transactions that you will be processing. Each processor has a percentage tolerance for the different merchant accounts that they provide and they require merchants to stay within certain processing percentages in order to qualify for the different types of accounts that they offer. For example, it's pretty typical for most processors to require at least an 80% swipe of card-present rate in order for a merchant to qualify for a retail merchant account. In this scenario, a merchant set up with a retail account that doesn't transact at least 80% of their Visa and MasterCard sales by swiping the customer's credit card could be found in violation of their merchant agreement and may be subject to account closure or other action from the processor.

It's a good idea to declare whatever processing method percentages that will afford you the most flexibility with your merchant account. This is especially important if you think that you will be processing a somewhat diverse array of transaction types. For example, it may be fine for a retail store to declare a 90% swipe rate and a 10% key-entered rate, but a pizza restaurant would run into problems if they were to declare the same percentages. The pizza restaurant may have to declare 50% swiped transactions, and 50% key-entered transactions, making them ineligible for a retail merchant account.

The merchant processing Agreement (MPA) that you sign when opening a merchant account is a legal document that gives the processor many rights over your processing relationship.

Almost every business person has heard at least one story about a credit card processing nightmare. Truth be told, processors aren't the monsters that they are made out to be in the majority of these cases. Most of the time the processor is well within the guidelines set forth in the MPA and it's the merchant's fault for violating these regulations.

It's absolutely crucial to know the boundaries and regulations described in your processor's MPA and to take them very seriously. If you choose not to learn and follow these guidelines you are opening yourself up to liability. Violation of processing limits, average tickets, and general misuse of merchant processing abilities are the most common reasons why processors are made to take one or more of the following actions to protect themselves. All of these circumstances can be avoided by reading your MPA and asking your provider to clarify anything that you're unsure of.

Held Funds - When you sign a Merchant Processing Agreement (MPA) you are granting the processor full access to your business bank account so that they can deposit funds from credit card sales and debit processing fees or chargebacks. You are also giving the processor legal rights to any funds resulting from credit card sales.

If the processor feels that any one of your transactions are suspect, it's within their power to hold all or a portion of the un-deposited funds for a period of time that they see fit in order to investigate the transaction. This period of time can be as long as 6 months. The most common reasons why a processor will hold funds are:

• Processing in excess of the declared monthly volume
• Processing in excess of the declared average ticket amount
• Excessive chargeback ratio
• Using the merchant account to sell products or services that were not declared on the original merchant account application
• Using the merchant account to sell products or services that are declared unacceptable by the processor

Terminated account - A credit card processor can terminate a merchant account at any time with or without notice. Although it's inconvenient to have your merchant account closed, it's the most lenient recourse that a processor will take against any misuse. Not all account closures are permanent. Some processors will suspend a merchant account if the violation is not severe. The most common reasons why a processor will close or suspend a merchant account are:

• Excessive ACH rejects (does not usually result in a permanent closure)
• Processing in excess of the declared monthly volume (usually results in a permanent closure)
• Processing in excess of the declared average ticket amount (usually results in a permanent closure)
• Maintaining an excessive chargeback ratio (usually results in a permanent closure)
• Using the merchant account to sell products or services that were not declared on the original merchant account application (depending on products, does not usually result in a permanent closure)
• Using the merchant account to sell products or services that are declared unacceptable by the processor (usually results in a permanent closure)

Terminated Merchant File (TMF) - The TMF is a database of merchants that have had their merchant accounts closed by a processor. The TMF is a community that processors collectively reference and maintain. Usually only gross violations of merchant processing privileges will land you a place on the TMF, but once you're on it's difficult to get another merchant account. A processor can place your name and details on the TMF for any of the reasons listed above, but they usually only do this for gross or blatant misuse of an account. Before a merchant account is approved the processor will check to make sure that the merchant does not appear on the TMF. Only the processor that adds a merchant to the TMF can remove them. In most cases merchants on the TMF need to rectify anything with the posting processor to have their information removed from the TMF before they will be able to get another merchant account.

Fines - Processors can impose fines for the misuse of a merchant account but the most dangerous fines come directly from VISA and MasterCard for failing to observe proper security measures, or for improper handling of card-holder information. Mail order and Internet business should be especially weary of these fines and all businesses should make sure that they are handling card-holder information properly and securely. Many fines can be pretty hefty, but the good news is that they can be easily avoided by learning about processing regulations. The best place to start reading about this important information is at the Operations & Risk Management section of VISA's website.

Overage Charges - An overage charge is assessed to merchants that process in excess of their declared monthly processing volume. Not all processors have an overage charge. Providers are required to disclose their overage fee on the quotes that they offer. An overage charge is a percentage applied to the amount in excess of the declared monthly processing limit. The overage percentage can be 3% or higher. For example, if you declare a monthly processing limit of $5,000 and your actual processing volume is $8,000, the processor can charge you an overage percentage on $3,000. If the overage charge is 5%, the total overage charge for the month would be $150.

Criminal & Civil Charges - You would have to do something pretty serious to face criminal or civil charges for misusing a merchant account, but a processor can bring you to court or press criminal charges if they think it's necessary. Most people don't have to worry about facing criminal charges from a processor or the card associations (VISA & MasterCard). People that do need to worry about such things are usually well aware of the fact that they're putting themselves at risk by misusing their processing abilities.

Civil action is something that most merchants don't think about but it's a very real tool that processors can use. Merchant service providers and associated banks stand to lose money when a merchant account is misused. If the loss is substantial enough they can try to recoup losses through a civil suit.

As we've said, civil and criminal charges do not usually result from the misuse of a merchant account because violations is seldom severe enough or are not pre-mediated to the point where a criminal or civil court would find fault. However, be aware that this is a possibility and the more you know about how to properly use your account and the regulations that govern it, the less you will have to worry about facing such situations.

Penalties that can be imposed by a processor or the card association (VISA and MasterCard) can be scary. More often than not these penalties are brought against merchants who are unaware of the regulations or limitations on their merchant account. Protecting yourself against these penalties is not difficult and the pointers below will help you to do just that.

Remember your processing limit and track your sales. Never forget your processing limit and make that sure you are within your limit by tracking credit card sales each month. A good suggestion is to display your processing limit in a place where it is easily visible like on the credit card machine, cash register, or your computer. This will remind you to keep track of your sales volume and will help you to avoid the headaches that come with processing too much.

Remember you average ticket amount. Just like the processing limit, your average ticket amount can cause headaches if you excessively break it. Write down the average ticket amount that you declared on your merchant processing agreement and display it along with your processing limit as a reminder for yourself.

Read the important notes section on your merchant account statement every month. Each month your processor will tell you about important changes to your merchant account. They will note these changes on your merchant account statement in an "Important Bulletins" section usually located on the front of the statement. It's very important for you to read these notices each month and follow any instructions set forth.

Read you merchant processing agreement (MPA). Your provider will give you an MPA when you open your merchant account. If you are already processing and do not have your MPA, you should request a copy from your provider. Read the MPA and ask your provider about anything that you don't understand. The MPA will dictate how to properly use your merchant account.