There are many frustrated business owners that find it almost impossible to get a merchant account for their needs. While we cannot perform miracles and provide a magic formula for getting a merchant account, we can explain, why certain kinds of merchants are being declined on their merchant applications. In this article we will try to explain why merchant applications are getting rejected.
What a startup merchant needs to know
Revenue model
The fundamental thing that needs to be understood is the revenue model that processors use. On average the profit margin for merchant services lies within 1% range (off total volume processed). It means that if your company processes $5,000 monthly, then a merchant services company is going to earn about $50 plus any subscription fees that they might want to charge.
Consequently, one of the reasons why startup merchants have hard time getting their merchant accounts or why they are forced to pay above-the-average processing fees, is because it takes time and effort for a PSP (processor) to onboard and deal with them, while the profit from their particular account is not very significant.
The other fundamental concept to understand is the risk. Essentially, if someone is approved to process $10,000, he is given a credit line of $10,000. The reason is you can process your $10,000 worth of transactions, using stolen credit cards, collect your money the next day, and disappear, while whoever issued your merchant account will be responsible for all of the chargebacks.
Because of that, as part of the underwriting, issuers of merchant accounts try to minimize the risk of fraud by your customers, as well as by you as a merchant. In particular, most of the US acquirers, that issue merchant accounts in US dollars, prefer to deal with companies, that have US registration, US office and US bank account, because it protects them from many potential liabilities. This is the reason why many of the Asian merchants (located in such countries as India, Pakistan, and others) are unable to get US dollar merchant accounts through US firms.
Nature of business
Another aspect that greatly contributes to the risk is the nature of customers and the nature of business you are dealing with. So, if you are in gambling or porn, there is a high probability of chargebacks and illegitimate transactions. Therefore, acquirers either do not want to deal with such accounts, or a significant premium is requested in return for the risk taken.
A less controversial, but, nevertheless, high-risk industry is technical support and various types of development services, provided in international outsourcing type of environment. The reason is because these processes tend to have a high percentage of dissatisfied customers. Moreover, because of the international nature of the business, it is more difficult to resolve potential conflicts in a mutually agreeable fashion, and, therefore, even more chargebacks occur.
To summarize and illustrate the given ideas, let us look at one of the typical examples that we often witness in processing business.
Example
Conclusion
If you find yourself in one of the situations, described above, you have to be prepared to overcome the traditional challenges of the market. For some businesses this might mean finding a partner on the local market, that could provide merchant accounts for foreign currencies. For others it might mean paying higher merchant services fees and accepting more processing restrictions. In either case, as your business grows and you accumulate more processing history, that demonstrates transparent, secure and stable nature of your business, you can always negotiate your processing terms, or find an alternative partner.
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