Why Is the Merchant Account Application Process So Complicated?

Merchants are often surprised by the length of the list of documents required when applying for a merchant account — the generic name of the service that enables businesses and non-profits to accept credit cards and other forms of electronic payments. What I have found out from talking to hundreds of first-time applicants over the years is that they often don’t understand exactly what it is they apply for and, more importantly, how the service is viewed by the processing banks that provide it. So let me explain what a merchant account really is and why processors can be so fussy about application details.

What Is a Merchant Account?

As far as a processing bank is concerned, and beyond the technical aspect of the service, merchant account is a line of credit that the processor extends to a merchant. So when the merchant accepts a card payment, the processor “acquires” it by automatically depositing the payment amount, after first subtracting the processing fees listed in the merchant agreement, into the merchant’s bank account.

Simultaneously with acquiring the transaction, the processor files a payment request with the customer’s card issuing bank. Here is the first important detail you need to understand: the processor gets paid only after it pays the merchant. What this means is that, if for a legitimate reason (fraud, processing error, etc.) the issuer refuses to fund the transaction amount, the processor stands to lose the transaction amount.

To further complicate matters, an issuer has as long as six months of the transaction date to dispute the validity of a payment. If the dispute is valid, the processor must pay back the transaction amount. Of course, the processor can get its money from the merchant, but only if the latter is still in business. You may be surprised how often merchants go out of business, leaving a huge amount of debt resulting from disputed transactions behind them.

The application process is designed to establish the credit worthiness of both the applicant business and its owners and minimize the processor’s potential liability.

How Processors Manage Risk in the Merchant Account Application Process

In addition to the regular paperwork, including application form, incorporation documents, any applicable business permits and licenses, voided check for the applicant’s bank account, etc., the processor may request some additional paperwork to help estimate the risk. Such documents may include the following:

• Business financials. Typically required are financial statements, including profit and loss statements, for the two years preceding the application date.
• Tax returns for the principal owners. Similarly to the above item, two years worth of tax returns are sufficient.
• Processing statements. Merchants currently accepting card payments with another processor are typically required to produce their processing statements for the latest three to six months.

Additionally, the processor will perform the following actions:

• Credit checks and background investigations of the applicant business. If the credit check raises questions, the processor may also do a credit check of the business’ principals.
• Inspection of the business’ physical location. The goal is to verify the applicant’s physical address and to ensure that the business is capable of supporting its operations, as described in the merchant application.
• Check the MATCH file. Processors will reject an application from any business listed on the MATCH file (also known as Terminated Merchant File).

The bottom line is that a processor will do everything it can to ensure that a merchant account applicant is a legitimate business, one that manages its finances in a responsible manner and that has the resources to support its operations. If the business cannot demonstrate that, the application will be rejected.

Image credit: Mediarete.it.