Business Type and Merchant Account Approval

Business type or business model is one of the criteria used in determining the amount of risk associated with a merchant’s credit card processing. The business model is the product the merchant sells or the service the merchant provides, how the product is sold or the service provided, marketed, delivered, supported, and how much it costs.

Acquiring banks classify certain business models as high risk merchant processing and these business types find it more difficult to obtain approval for a merchant account. A business model that is classified high risk credit card processing may be subject to limits on monthly sales volume, higher discount rates and fees, rolling or upfront reserves or deposits, and increased funding delays. Acquiring banks may choose to decline wide ranges of business models simply because the bank does not want to underwrite the business types due to their nature, or due to previous losses, or due to external factors like changes in laws or economic activity. Acquiring banks will also decline business models due to the potential chargeback liability for the acquiring bank. Some business models have been shown to generate higher numbers of chargebacks. The bank is responsible for any chargeback liability that the merchant cannot pay.

The risk factors that are most important to the bank are a higher incidence of chargebacks, a higher incidence of crossing the chargeback thresholds set by the card associations resulting in fines and sanctions, and a higher incidence of merchant failure and inability to pay chargebacks and/or fines, and fees associated with the high risk merchant account.

In many cases there are elements present in a merchant’s business model, the business’ previous processing history, and in other merchants that the bank may have processed for previously that have resulted in higher numbers of chargebacks. Factors that can contribute to an acquirer determination for a decline or approval of a merchant account are a high average ticket size, sales methods, future delivery, marketing methods, customer satisfaction, target market, recurring billing or membership components. 

The amount of risk attached to these factors is higher due to the chance that the merchant will fail to take the necessary steps to mitigate chargebacks. This can occur from the merchant’s lack of knowledge of card association rules, lack of experience with preventing and disputing chargebacks, and failure to provide the necessary customer service support and infrastructure required to reduce and avoid chargebacks in a high risk merchant account environment. This can result in a classification as high risk credit card processing and a decline of the merchant account application.

High risk business models present a higher chance of merchant failure and / or inability to pay chargebacks and / or fines. This can occur due to the merchant failing to take the necessary steps to mitigate chargebacks, failure to comply with card association rules, failure to prevent and disputing chargebacks, and failure to provide the necessary customer service support and infrastructure required to reduce and avoid chargebacks in a high risk merchant account environment.  There is always the possibility that the business will fail and fail to meet its obligations to the acquiring bank for repayment of chargebacks, fees, and fines. The failure of the business can also cause there to be unmet obligations to the merchant’s customers / cardholders for which the acquiring bank could be at risk via chargebacks. Any interruption of cash flow or settlements can have very detrimental effect on some high risk merchant processing business types ability and / or willingness to continue processing.

Once the merchant has stopped processing, the acquiring bank’s exposure to continuing chargeback liability from previous processing can be quite extensive.