Credit History and the High Risk Merchant Account

Personal credit is one of the factors used in determining the amount of risk associated with a merchant’s credit card processing. Personal credit is the credit score compiled and maintained by the three major credit rating agencies: Experian, Equifax, and TransUnion. Poor credit can result in the need for a high risk merchant account. A low credit score can also contribute to a lower monthly sales volume limit, higher discount rates and fees and reserves, and longer funding delays. Often, a poor or low credit score can cause a merchant to look for a high risk merchant account or offshore merchant account with unlimited volume.

Obtaining approval for a merchant account is very similar to obtaining approval for an unsecured loan because every dollar processed is a dollar in potential chargeback liability for the acquiring bank. If the merchant cannot pay back the chargebacks, the bank is responsible. Just as it is usually easier to get approved for a loan with good personal credit than it is with a low credit score, it is generally easier to get approved for merchant account with a high credit score rather than a low one.

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 while these factors are not present in a merchant’s business model, but the owner’s poor credit score heightens the amount of risk attached to these factors because there is a higher chance that the merchant will fail to take the necessary steps to mitigate chargebacks, just as they failed to take the necessary precautions to safeguard their credit score. This can result in a classification as high risk credit card processing.

A poor personal credit score can increase the likelihood of merchant failure and / or inability to pay chargebacks and / or fines. If the merchant has failed to meet their obligations in the past, there is a greater chance that they will fail to meet their obligations to the acquiring bank for repayment of chargebacks, fees, and fines. Merchants generating credit card sales can often have high marketing and other costs and while there may be a lot of revenue passing through the merchant account, the merchant does not always have high margins. Any interruption of cash flow or settlements can have very detrimental effect on a high volume high risk merchant’s ability and / or willingness to continue processing. Once the merchant has stopped processing, the only way the acquiring bank can collect is via the personal guarantee of the merchant account signed by the owner, and if the owner’s credit is poor there will be a lower chance that the acquiring bank will be able to mitigate any losses attached to the account.