Why Merchant Account Applications Are Sometimes Denied -- And What You Can Do

in Blog
on Thursday, 09 April 2015 21:21

As a new business owner, it’s often the little things that are the most frustrating. For startup merchants, it can be hard to get a merchant account, and you may be forced to accept higher processing fees when you start out. That’s a fact.

There are, however, specific reasons many merchants are rejected.

Here are some specific issues inherent to the payment processing industry that explain why getting that vital merchant account can sometimes be so difficult:

Revenue model. The revenue model of the processor, not your business, is at issue. The profit margin for merchant services is about 1 percent. That means that if your company processes $5,000 in transactions per month, your merchant services company will earn only $50 in addition to subscription fees they charge you. But these providers use significant time and resources to set up new merchants, and some aren’t willing to go to this effort for the very little profit they earn from a small client.

Location risks. When you’re approved to process, say, $10,000 in transactions a month, you are essentially being given a credit line in that amount. Issuers of merchant accounts use location as a way of determining the risk of fraud, fair or not. If a company were to process thousands in transactions on stolen cards and then skip town, the merchant account issuer could be stuck with responsibility for all the inevitable chargebacks. Most acquirers in the United States like to work with companies with American registration as well as offices and bank accounts in the United States. That means that many foreign companies, particularly those in Asia, can’t get merchant accounts in U.S. dollars through a respected U.S. firm.

Business nature risks. The nature of a business can make it potentially riskier for merchant account issuers. In particular, gambling and porn sites are subject to a high likelihood of chargebacks because of illegitimate transactions. So many acquirers won’t work with such companies or require a significant premium. Internationally outsourced development services are also the subject of nature of business risk concerns because these companies often have a high number of dissatisfied customers. And the international nature of these businesses makes dispute resolution harder and chargebacks more likely.

Consider an Indian tech company wanting a U.S. merchant service provider. If the company intends to do about $10,000 a month in transactions, the processor only stands to make perhaps $100 to $150. But there’s $10,000 in liability for the processor, and there’s little control over or recourse toward a foreign company. Plus, tech services often have a high chargeback rate. So the application is denied.

But when merchants are prepared to do what it takes to reach their goal -- like finding a local partner or paying higher fees -- solutions are available. Then as the business builds a history, getting an account with more favorable terms is possible.

At PayVisors, we recommend that new businesses with no processing history and in risky locations or industries take advantage of services offered by PayPal or Authorize.net. While your processing fees will be more than the industry standard, this will get your started accepting cards.

Once your company has grown in volume and you’ve proven yourself as a strong and stable company, turn to our team of experts at PayVisors for significantly better processing rates. We aren’t a merchant services provider, but we can be your advisor in locating one that that’s right for you, and we’ll be here for you when you need us.

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