Time in Business and the High Risk Merchant Account

Time in business is one of the criteria used in determining the amount of risk associated with a merchant’s credit card processing. Time in business is the length of time that a merchant has been operating the business for which they are applying for a high risk merchant account. Time in business can also include the length of time that a merchant has been operating a merchant account or accepting credit cards, or generating credit card processing history. An acquiring bank can take into account if a merchant has not been operating the specific business for which they are applying, but has been active in the business type or industry, or has previous experience with high risk credit card processing. A business that has only been operating for a short time or a new business can require a high risk merchant account. A short time in business can also contribute to a lower monthly sales volume limit, higher discount rates and fees and reserves, and longer funding delays. New businesses or businesses that have only operated for a short time, can need 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 for an established business with a track record or previous credit card processing history to get approved for a loan than it is for a new business, it is generally easier for an established business with a lengthy time in business to get approved for merchant account than it is for a new or newly established business.

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, the business’ lack of a track record or previous processing experience 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. 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.

New or newly established businesses present a higher chance of merchant failure and / or inability to pay chargebacks and / or fines. With a new business just starting out, there is no guarantee that the business will succeed and / or be profitable. 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 a newly established 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 business is new or newly established there will be a lower chance that the acquiring bank will be able to mitigate any losses attached to the account.