Merchant account processing - merchant account setup Q and a

Opening a merchant account is not as difficult as many merchants initially believe. Indeed, it's a rather quick, straightforward process, particularly if you know the answers to the following 7 common questions that pertain to acquiring credit card processing capability for your business:

Q1. What do I need to set up a merchant account?

A1. Although underwriting requirements vary among processors, you will typically need the following supporting documents: Copies of your driver's license and business license or Articles of Incorporation, a sample method of marketing, such as a flyer, brochure, or business card, and a voided check from your bank or a bank confirmation letter, confirming that you have an account with the bank, specifying the account and routing numbers. Of course, you'll also have to complete and submit your application.

If you're a sole proprietor, the underwriting requirements are even less demanding. Instead of submitting a business license, for example, you may only have to provide a copy of a utility bill revealing your name and address.

Q2. Will my application be approved and/or will any conditions, such as a rolling reserve, be required?

A2. It's interesting to note that many processors declare that they accept 98%+ of applicants. This is more a marketing ploy than the reality. While this approval figure is over-inflated, the vast majority of merchant applicants will get approved.

The underwriters will evaluate the application and consider criteria such as the applicant's credit score, nature of business, how long the business has been operating, the processing volume that the applicant needs, etc. The underwriters will make their determination and let you know if any conditions will be imposed. While an initial or rolling reserve is seldom required (mandating that the merchant place funds in the processor's acquiring bank or have a percentage of the processing go to that bank), it can happen. Again, it's extremely rare to have a reserve imposed by a full-service merchant account; in contrast, a third party provider, such as PayPal, may now require rolling reserves for many of their clients.

Q3. What if my credit score is not good? Will my application automatically be declined?

A3. The underwriters may view the credit score as the most important criterion, and thus, an unfavorable score may yield an unfavorable outcome. However, you still may be able to set up a merchant account if other criteria are considered favorable -- especially if you plan to swipe you customers' credit cards. (Card present or swiped merchant accounts are considered much safer than non-card present accounts, and underwriters are therefore more liberal in their decision-making for retail or wireless merchants.)

All applications are evaluated on a case-by-case basis. If your credit score is extremely low, you may also be able to secure a cosigner with good credit, enabling the application to be approved. The remedy of a high score cosigner may not work with all processors but perhaps it's worth a try.

Q4. Why does my credit score matter?

A4. Any time you secure a loan, the powers that be check your credit score. Merchants don't realize that credit card processing is tantamount to getting a loan. You're being funded within a couple of days and it's not a certainty whether you'll have to "pay back" that transaction amount in the future.

Specifically, customer disputes or chargebacks may arise, even six months after a transaction has taken place, where a given customer questions the authenticity of the transaction. When that occurs, the processor may immediately deduct the transaction amount from your checking account. If there are insufficient funds (a low bank balance is common among individuals with poor credit), the processor is left holding the proverbial bag. Some processors alternatively hold that same amount from future batches, causing friction between merchant and processor.

Processors want to ensure that their merchant base can cover chargebacks, and it's probable that business folks with decent/good credit are more capable of doing so that their lower score counterparts.

Q5. Is the application difficult to fill out?

A5. While few of us like to complete forms, the application should be very easy to fill out. Most of the questions asked are self-explanatory, and you'll be providing information about yourself and your business (e.g., name, address, contact information, bank account information, etc.).

The reason you have to provide your bank account information is to let the processor know where to deposit and withdraw the funds. (I suppose this answers the bonus merchant account set up question, "How do you know where the funds go?")

Perhaps the most difficult part of the application is when you have to indicate your anticipated monthly volume, average ticket, and highest ticket. It's always best to OVER-estimate these figures, within reason. For example, if you write that your highest ticket is $200 and you process a transaction in the amount of $500, this will red-flag and the funds will be held. Subsequently, you'll have to provide the risk department with a copy of the invoice and perhaps even bank statements (again, to show you can cover a potential chargeback). The processor will also likely confirm the sale with the customer's card issuing bank. To avoid this scenario, it's better to project higher amounts for these categories.

Q6. I just completed the merchant account but notice all these terms and conditions. How do I know what I'm signing?

A6. You almost have to be an attorney to understand the stipulations listed. All merchant account providers have similar terms and conditions as many directives are imposed by the card holding associations, Visa and MasterCard.

It still worthwhile to read the T&C and you can ask any questions to the agent. A point of reassurance: The vast majority of merchants are processing without any issues, and rightfully so, as this should be an automatic process.

Please also remember that you will see verbiage pertaining to a host of issues -- most of which will never result. For instance, you'll see discussion about reserves but this is not applicable to most merchants who are not required to open a reserve.

Just exercise common sense and you should be fine: Do not "loan" your merchant account to a friend who needs to process a credit card or use the account for a business entity you were not approved. Remember not to exceed your specified highest ticket and have ample funds in your bank account to cover processing-related fees. Of course, only charge cards when you have your customer's authorization to do so.

Finally, all processors have verbiage pertaining to rates, as they can and will raise them at any time. This is understandable as the card holding associations raise their rates; the processors then pass through these increases to the merchants. It's always best to go with a merchant account provider that will waive any termination or cancellation fee if such costs become prohibitive.

Q7. How long does the merchant account set up take?

A7. Typically, it only takes 1-2 days before the underwriter either approves or declines the application. Assuming approval, it then takes about a day for the technical department to build the necessary backend files.

Upon approval, any equipment, if applicable, will be shipped out to you. Internet merchants should receive an activation link so they can start setting up their payment gateway.

By becoming familiar with the merchant account set up process and what it entails, you're now more able and confident to obtain credit card processing capability. Opening a merchant account is really easy; finding the right merchant account provider is much more challenging, but if you're reading this entry, you're on the right track.

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Posted in: Account,Merchant,Processing,SetUp