Getting a merchant account should be easy. If only that was the case. In this article we’re going to tell you exactly how to ensure your merchant account application is approved, and what to do if you’re declined.
Since the payment industry and the jargon used can be fairly complicated, we’re first going to define some commonly used terms: merchant accounts, payment gateways, and payment processors. We’re also going to cover why payment processors do their due diligence before approving your application.
- What’s a Merchant Account?
- What’s a Payment Gateway?
- What’s a Payment Processor?
- Why do I Have to Apply to get a Merchant Account?
- How to Get Approved for a Merchant Account Application
- What if My Merchant Account Application is Declined?
What’s a Merchant Account?
A merchant account is a special kind of bank account that exists for the sole purpose of holding funds captured from debit and credit card sales. Have you ever used your card and actually wondered where the funds just disappeared to? They went into a merchant account. From there, they are transferred to a normal business bank account, typically on a daily or weekly basis.
If you want to accept credit card payments online, you need one of two options. Option 1 – A merchant account provider (Example: DigiPay Solutions) that issues merchant accounts to businesses. Option 2 – you can use the services of an aggregator (Example: Skrill) a company that processes transactions through their own merchant account on behalf of other companies.
It’s also worth mentioning that a Merchant Account is a legal binding agreement between you and the Merchant Provider. You’ll be given terms and conditions and an agreement to sign. Here are some things to watch out for before signing a Merchant Account Agreement.
What’s a Payment Gateway?
When a credit card transaction is processed, information needs to be sent somewhere to see if the cardholder has the sufficient funds to pay for the sale. The POS System / Payment Gateway connects to Visa or MasterCard, and ultimately down the line to the customers card issuing bank to see if they have sufficient funds. If they have sufficient funds, the transaction is authorized and the funds are transferred from the cardholder into the merchant account. Here’s a little more detail on the flow of the POS Systems vs the Online Payment Gateways:
- In a brick and mortar transaction, it’s actually the POS (point of sale) machine which takes the cardholder data, formats it and sends it to Visa or MasterCard to see if the customer has sufficient funds.
- In an eCommerce transaction, the service takes place online via a payment gateway. The payment gateway receives transaction requests that are sent online by software.
Often, but not always, a merchant account and payment gateway are set up in one process through the same company.
What’s a Payment Processor?
When discussing payments, the phrase “payment processor” has a tendency to be used arbitrarily and mostly incorrectly. It’s frequently utilized by business owners interchangeably in reference to the merchant account provider, the gateway, or both (especially because the merchant account and gateway are often provided together). In technical terminology, this is an incorrect usage of the phrase. Infact, it’s used this way so commonly and freely that there is in fact a street/layperson definition and a technical industry definition which is quite different.
In industry terms, the payment processor is the services that a payment gateway sends transaction requests to. The payment processor then:
- Handles the transaction request.
- Sends the authorization and settlement files from Visa and MasterCard.
- Distributes them across the network to the various payment gateways and merchant account providers.
The payment processor also handles other aspects of the transaction sometimes such as the handling of chargeback requests and settlement. In layman’s terms: A payment processor is a generalized term to refer to a company that processes Visa and MasterCard payments.
So…What is the Difference Between a Payment Gateway and Processor?
As mentioned above, the terms Payment Processor and Payment Gateway are used interchangeably, and for a layperson most often mean the same thing. Use case example: a processor is a company that facilitates the processing of payments on behalf of a merchant.
Why do I Have to Apply to get a Merchant Account?
Establishing a merchant account to process payments is the first step in enabling commerce. Broken down to it’s core, the reason you must apply and be approved in order to get a Merchant Account is because they have the potential to lose money every time a credit card transaction is processed on behalf of your business.
There are very clear and strict policies that Visa and MasterCard enforce when a cardholder pays for a good or a service:
The cardholder is entitled to receive the promised good or service. If such good or service is not delivered then the cardholder is entitled to getting their money back.
This is one of the basic consumer protection principles that apply to credit card transactions.
Why is so much Information Required on the Merchant Account Application?
In order to mitigate this risk, the credit card processor (payment processor) has a screening / application process. Merchant accounts are essentially a line of credit from a processor, and subject to periodic review. This means underwriters need to review a range of documents to assure the business is compliant, financially sound, and a good credit risk.
Please Note: That most processors charge an application fee, and only some will refund the application fee in case of a decline. If you’re concerned about possibly being declined, ask if your setup fee is refundable. It’s not an unreasonable request and if your chosen processor won’t agree you can find another that will. DigiPay’s in-house team of underwriters and risk managers have curated knowledge in all areas risk management. We are best qualified to streamline the application-to-activation process.
Watch Out for Unrealistic Merchant Account Application Promises
When you speak to your prospective payment processor ask what type of documentation will be required and how long it will take to get approval from the bank. They should have concrete answers to this question. In particular, if they are making any kind of blanket promises or statements that seem unbelievable such as… “We approve any type of merchant account”, (especially if you know your product or service is considered high risk), you should be highly skeptical.
DigiPay is unique because we underwrite merchants in-house before we submit their applications to the bank. Because our team of underwriters is experienced in both low risk & high-risk, your business is presented to the bank with all required documents and full disclosure, to engender trust and stability.
This is also a point at which you should make sure you get a copy of your merchant agreement (a read over it carefully) before signing the contract. If it’s seeming entirely too optimistic, with no explanation of the process and little mention of supporting paperwork then consider yourself fairly warned: You may not receive what was promised.
Take our Quiz to see if your Business / Service is Considered High Risk
How to Get Approved for a Merchant Account
Presenting your business in the best possible light from point of first contact is important because merchant accounts are essentially a line of credit from a processor. Chargeback ratios, regulatory and security compliance and adherence to payment card brand guidelines are critically important to maintain a processing account. Complaints to the FDA or FTC against a merchant create liability for merchants and their processors under Know Your Customer (KYC) regulations.
Step 1 – Gather Your Financial Statements
Financial Statements are the single best weapon you can bring to the table in order to leverage the best terms of merchant account application approval.
From time to time we work with clients that do not want to provide financial statements. We get it, company financials are sensitive business information. However, from a payment processing perspective this is a significant mistake. It’s usually because the business is a mid-sized company that is privately owned and they value that privacy. More than anything else, most underwriters will want to see financial stability demonstrated so that they know the company will continue successfully operating into the future.
In the contrary, we have worked with startups that don’t have solid a financial history. Being a startup is tough and being in that situation (especially if you have a risky product) can make it hard to get merchant application approved. The underwriter knows that if a spike in chargebacks come in, the merchant may have difficulty returning the funds to the cardholders. Typically, this is why security reserves must be held.
If a business has worked hard to earn success, it’s a poor decision not to leverage this successful financial history to get the best possible terms of a merchant application approval. Merchants in a startup position would give anything to have a strong balance sheet because it makes a huge difference in their approval. If you’re a positive cash flowing startup, use your financial statements or be prepared to put up a security reserve. You will want to provide the most recent balance sheet, profit and loss statement, and any notes from the business accountant.
A note on startups: if you have not yet completed a year end don’t sweat bullets. If trading volumes are smaller, then merchant application approval should be relatively easy to achieve (less money trading through the account means less potential risk). Payment processors set monthly processing limits, typically between $25,000 and $100,000 per month, for the first three-to-six-months. If you operate a startup business that is likely to do strong trading volume out of the gate you will have to leverage the other tips found below in this article to achieve merchant application approval. It may also be helpful to work with a processor or agent that specializes in consulting with startups to help through the approval process. Keep in mind that some processors are more startup friendly than others.
DigiPay is unique because we underwrite merchants in-house before we submit their applications to the bank. DigiPay’s risk management team works closely with merchants and sponsoring banks to shorten trial periods and raise processing limits. Once new merchants establish credibility and trust with DigiPay banking partners, they receive personalized attention and ongoing risk management from DigiPay’s team of payment specialists.
Step 2. – Gather Your Past Processing History
Having a strong processing history is another extremely important tool to leverage your merchant account application. The more money you trade, and the lower your chargebacks, the stronger case you build. The logic is quite simple: if you’ve processed credit cards previously and been successful then why would that change? It shouldn’t. Always supply a minimum of 3 months processing statements whenever possible. If you’re going to go the extra distance, pull 6 months of processing statements. If you trade high volumes or have a high risk product or service, dig up an entire years worth of statements. This may be a bit of extra work but it will be well worth the effort if it reduces or eliminates the need for a security reserve.
Processing statements should always show the following broken down by month:
- Number of transactions
- Total transaction volume
- Number of refunds
- Total refund volume
- Number of chargebacks
- Total chargeback volume
Step 3. – Have an Infrastructure Set in Place
Many entrepreneurs who are just beginning to get established as businesses may not have the appropriate levels of customer service support to deal with consumer complaints and inquiries. Consumers who are unable to communicate their concerns to merchants are at increased risk of turning to payment card issuers for refunds and chargebacks.
It is important not to ignore chargebacks, because win/loss ratios matter. Visa and Mastercard can impose penalties and fines in the tens of thousands on payment processors and their sponsoring banks for continuing to process transactions for merchants that exceed the permissible 2 percent chargeback ratio.
Here’s some suggestions for a properly setup Infrastructure:
- Stop fraud before it happens: Proactively identify fraudulent and stolen cards and suspicious behavior when possible. Having items like an SSL certificate, additional billing details, and other fraud detection tools.
- Be accessible to customers: Dissatisfied customers with access to live support generally appreciate the opportunity to air their grievances. They may be satisfied with a simple return or refund and find it unnecessary or initiate a dispute or chargeback.
- Maintain excellent logistics and fulfillment: In the always-on, always-connected world, corporate customers expect immediate confirmations and emailed receipts. A good CRM program can automate this process.
- Initiate pre-chargeback and refund alerts: Create instant notifications of incoming requests for refunds, chargebacks and assorted customer inquiries. These services can be implemented in-house or outsourced to third-party providers. Merchants have a small window to react to inquiries and disputes before card brands rule in customers’ favor. Automated chargeback and refund alert systems help to mitigate this risk.
- Implement a billing support hotline: Providing customers with a dedicated, toll-free number and email address will alleviate their concerns and build good will. Businesses that are responsive to customer inquiries have been shown to decrease chargeback and refund ratios.
- Create an easy refund process: Refunds are a reality of life and a cost of doing business in any industry. By accounting and budgeting for refunds, merchants can accommodate dissatisfied customers, avoid chargebacks and improve transaction flows.
- Use email marketing: Follow up with a simple survey or thank you email. This simple gesture will improve brand recognition on billing statements and make it easy for clients with complaints and inquiries to contact your company.
A Secret Weapon to Ensure Merchant Application Approval
There is no silver bullet or secret handshake that will get you through the door of any payment processor. However, the best strategy is also the one that is most often overlooked: Explain what you’re doing in plain English with an old fashioned cover letter. Yes, that’s correct, a Cover Letter.
Write the cover letter as if you were applying for a job, except it’s being written on behalf of a company, applying for a merchant account. The goal is to address the pressing points that the underwriter will consider when reviewing your merchant application. It’s the underwriter’s job is to protect the payment processor’s best interests. They will not approve applications destined for chargeback risk. However, for the most part they want to help businesses succeed.
Some payment processors are more lenient than others in the risk department. For example, some processors encourage underwriters to reach out to merchants by phone to discuss any concerns, where other processors may not. In most cases, you may not ever get the chance to speak to the underwriter and make your case. In this event, the cover letter should work to proactively address any concerns that may come up as the underwriter reviews the file. For this reason, the cover letter is perhaps the ultimate weapon in your arsenal.
What if My Merchant Account is Declined?
What should you do if you’ve still been declined and you’ve done everything you can do? First of, remember that some payment processors are more lenient and willing to listen than others. Declines can be overturned. If you’ve received a decline you should consider responding back with something like:
“Thank you for taking the time to review our application. I have some knowledge of how merchant industry risk works and why our application may not be able to be supported. For the sake of being thorough I’d like to reiterate that we are sincerely interested in using your service and this is a very serious project for us. If there is anything we can provide, including cash collateral or security reserves we are happy to explore this. We are committed to this business and are willing to provide significant security or anything else that may be required in order to achieve merchant account application approval. If there is anything that we might be able to provide to help achieve approval please let me know, we do want to work with your organization.”
The above is a rough template and should be edited to be specific to your situation and business. What you are trying to do is convey a sense that you want to work with them. We’ve found that the more overtly willing a merchant is to come to the table and have a candid discussion around security, the less security ends up being needed. This is because it demonstrates to the underwriter that you are serious about your business and are willing to “put your money where your mouth is”, so to speak.
I’ve Tried Everything But Was Still Declined!
Bear in mind that different banks and processors have different appetites for risk. Meaning, travel is historically considered a higher risk industry but some processors specialize in travel accounts and can provide them relatively easily. It might be the case that the processor you selected just wasn’t the right fit for your business.
Another example: Right now, group deal coupon (Groupon type) websites are very popular, but there aren’t many banks that will underwrite these merchant accounts. You may have to pound the pavement and research to find the right payment processor. It also helps sometimes if you can work with an Agent that represents a few banks, because they may be able to save you some effort and know which processor will have an appetite for your type of business.
At DigiPay, payment processing is in our DNA. Because we “get” the high-risk unique framework and diversity of categories, business models, SIC and NAIC codes and VISA MCC, we underwrite our merchants before sending the applications to our sponsor bank.
What Happens if all Else Fails?
In almost every merchant application situation “declined” really means “declined right now, but talk to me later once you have more history.”
Some processors specialize in very high risk accounts. We encourage cautiousness when using this type of processor. Thoroughly do your due diligence before going down this road. High risk processors, which are often located offshore, will charge significantly higher fees than low risk processors. In some situations you may not have an alternative option though. If you do use a high risk processor try to make sure you are not locked into a contract. After 6 months to a year of successful processing history you may be able to re-submit a stronger application into some of the processors that declined you previously.
We realize it’s a catch 22 that you can’t get a processing history if you can’t get approved. Some businesses have to start with a high risk processor, with a long term goal of building a solid processing history and moving to a lower risk processor.
A last note regarding this strategy: Be fanatical about preventing chargebacks if you are going to go this route. Maintaining a low chargeback ratio is key to maintaining a healthy merchant account. When chargebacks exceed card brand maximums, your merchant account is at risk of being shut down. If a merchant category has consistently excessive chargebacks, banks will sometimes shut down an entire vertical industry. For this reason, it is critical for high-risk verticals to self-regulate, track chargeback and refund ratios and work collaboratively to establish industry best practices. You want to make sure your processing history is sterling when you try to revisit that application a year later.
Once new merchants establish credibility and trust with DigiPay banking partners, they receive personalized attention and ongoing risk management from DigiPay’s team of payment specialists.
Your merchant account sales representative is the best tool you have access to ahead of submitting your application. Ask questions about approval and listen to the responses. If it’s all pink dandelions & rainbows be skeptical. Be honest with your expectations and if you have concerns, be sure to highlight them upfront. The processor you are working with should want to help you get approval, which should ultimately lead to a mutually beneficial long term partnership.
About The Author: Sandy Travers
Payment technology executive Sandra Travers is Co-Founder & Co-CEO of DigiPay Solutions, Inc.. Her years of experience in early-stage technology ventures brings a unique perspective to payments. Sandra manages operations and risk in addition to new product development.
More posts by Sandy Travers