So you have decided to setup a business online and need a way to process credit cards. For that you need a merchant account. Setting up a merchant account should be fairly straight forward. You ring your local bank, fill out some forms and you are ready to go.
What few new online merchants know, is that your success greatly depends on the type of business you want to start.
Merchant Account Basics
Merchant Accounts are a type of bank account specifically for holding the funds from customers credit card and debit card transactions. Customers pay online or over the phone using their credit card details and funds are deposited into the merchant account.
Depending on the volume of transactions, the funds are then transferred to a normal business bank account daily or weekly.
You can either setup your own merchant account with a local bank, or use a third party service like Paypal, which processes all the credit card transactions through its own merchant account and then pay you after deducting their fees.
If you choose to setup your own merchant account, you are basically entering into a legal contract between yourself and the bank.
The problem arises when the Banks deny your application. This is because banks are risk averse, and don’t want to deal with business that will like have a lot of refunds or charge backs. They consider some business models too high risk.
Before applying for you merchant account, see if you business falls in to any of the categories below.
- Your previous merchant account has a high number of refunds
- Your previous provider closed your account, for any of the reasons that follow
- You sell internationally and have foreign currency credit card transactions
- You have a high volume of transactions +$25k per month
- Online or over the phone transactions where the customer is not present to sign
- You have been blacklisted, or put on the Terminated Merchant File
There are entire industries that some banks just won’t touch. Your only option here is to use a service that deals specifically with higher risk merchants. They match merchant account providers, willing to take on more risk in return for higher fees.
Risky industries include
- Firearm Sales
- Travel and Vacation packages
- Adult and Dating sites
- Selling Alcohol online
There are many horror stories of online business owners having their merchant accounts shut down overnight, devastating their business. Once you have been shut down and put on the TMF or MATCH list, all merchant providers can see the black mark against your business, making it even harder to get a new account. Similar stories can be found using third party services like Paypal where accounts with thousands of dollars in them are frozen indefinitely.
If you are in one of the high risk industries mentioned earlier, it is better to get the right merchant account from the start.