We recently received an inquiry from a merchant who is a consultant for Pure Romance, a company where women host parties for other women and introduce them to a variety of adult novelties and toys.  The consultants provide a form of sexual education and do their best to enlighten and entertain their guests, showcasing a variety of products meant to enhance couples’ sexual encounters or heighten an individual’s sexual response.

Now typically the adult entertainment field, including ones that offer adult novelties, is strictly taboo to the vast majority of underwriting groups in the merchant account field.  Such businesses are often on the prohibitive list and applications are automatically declined.

Even those underwriting groups that will accept higher risk businesses, such as those in the adult entertainment field, will typically refuse to grant credit card processing capability to online merchants.  Why do underwriters exercise a greater degree of caution when business folks sell products over the Internet?  The simple answer is that the risk of fraud and even future chargebacks is greater when it comes to e-commerce.

Now the Pure Romance consultant who called me was not selling online but was looking to key in orders via a virtual terminal.  She informed me that she was going to eventually open a wireless merchant account, but for now, she just wanted to input the customers’ credit card information.  (Keying in credit card info and establishing a mail order telephone order, or MOTO, account carries similar risks as an online enterprise.  Indeed, a customer’s credit card is not present at the time of the transaction and, as a result, the risks of a fraudulent transaction become greater, and statistically, so do chargebacks.

However, one of our underwriting groups had accepted several applications from those selling Pure Romance, and as such, I was confident that we could approve the caller’s application, too – particularly as she seemed to have good credit.

I was therefore surprised when I received the following message from the underwriter regarding the “pure romance” application:

“Unacceptable moto merchant type (adult novelties).  We can not approve as a MOTO account.”

I should have realized that the other Pure Romance applicants had all opened swiped or card present accounts, not MOTO or Internet accounts which again carry greater risk in the underwriter’s perception.  Indeed, if the business owner had attempted to open a wireless merchant account where she would have swiped cards, an application approval would have been issued.

So underwriting lesson #1, particularly applicable for owners of high risk businesses, is that the method in which you accept payment may have an important impact on whether you will be granted credit card processing capability.  It’s always easier to receive application approval for a swiped account vs. an Internet or mail order telephone order account.

Although the Pure Romance consultant and I were both disappointed to hear that the application was not approved by one of our underwriting groups, I then asked her if we could try to place the account with a company whose underwriters appear to be more liberal-minded.  Fortunately, she was willing to give it the old college try and today we received word that the other company gave the account a “thumbs up.”

This leads to underwriting lesson #2:  While commonalities exist among underwriting groups, some are more “accepting” of certain types of business.  Our second parent company was much more comfortable with the Pure Romance business model even though adult novelties and toys comprised the product line.  (By the way, even if a business is considered higher risk does not necessarily always translate to higher fees.)

Finally, underwriting lesson #3 suggests that underwriters truly evaluate each application on a case-by-case basis.  Again, the underwriters may feel reassured that pure romance business owners are typically meeting their customers, thereby lowering the risk of fraud or chargebacks.  On the other hand, if adult novelties and toys were just offered on a site to the general buying public, the same underwriting group may not approve the application.

All in all, whether your selling adult novelties and toys on behalf of Pure Romance or engaging in any other so-called high risk business venture, remember that there are countless merchant account providers, and that you just have to find one that accepts your product line, your business model, and the way you receive payments.  Of course, you also have to find a credit card processor that meets your budget.  Finding the best and accepting merchant account provider for you is just another example of pure romance

I received a call this week from a US-based merchant who is a dual US/Canadian citizen who wanted to know if we could deposit funds into his Canadian bank.  I explained to him that Homeland Security laws would prohibit us from accommodating his request.  Indeed, merchant account providers need to be privy to and adhere to all laws, rules, and regulations governing the banking and processing industry or face financial liability or risk even being shut down.

This is precisely the reason why it’s not a slam dunk to automatically obtain a merchant bank account.  Credit card processing companies need to mitigate potential losses and liabilities and cannot just grant “anyone” the capability to accept credit cards.

Consider the business owner with an unfavorable credit score.  This person may have experienced financial turmoil in the past and may have serious financial constraints going forward.  Now if a future chargeback takes place, it may be very possible that this merchant may not have ample funds to cover the chargeback.  Who must provide financial restitution to the customer?  The answer is the merchant account provider who  will then likely pursue legal action to obtain the funds from the merchant.  There is no business entity that would want to be in a position to cover someone else’s expenses and then get embroiled in a legal entanglement.

Here is another “what if” possibility: Accepting a business owner who has every intention of committing fraud.  By empowering someone to accept credit cards, there exists the risk that the individual is not well-intentioned and will charge cards without the cardholder’s authorization.  Once again, the credit card processing company is responsible for the return of the cardholder’s funds and this time, the merchant may be long gone, without a trace, and there’s no way to recoup the processor’s losses.

Indeed, obtaining a merchant bank account is tantamount to a loan and therefore the “lender” is going to be very cautious in the process.  Even if a business owner has good credit, an application may be declined if the business appears on a “prohibitive list.”  Multi level marketing, debt collection, pay day loans, and adult entertainment are just some businesses that are considered high risk – particularly because the likelihood of chargebacks is greater.  Owners of such entities may automatically receive an application decline.

Similarly, any merchant who has encountered problems with a prior vendor and placed on a Terminated Merchant File (TMF) list, tantamount to a blacklist, will find it almost impossible to obtain credit card processing capability.  Merchant account providers are also wary of accepting applications from owners who may indicate a high volume of processing and very high ticket amounts without ample bank reserves.  Some credit card companies will also not approve new businesses (particularly Internet-based enterprises), or again, high risk businesses, although other companies may either increase their fee structure to such owners to counter any potential losses or require a reserve amount to be held at their acquiring bank in case chargebacks ensue.

Many business owners find it counterintuitive that any applicant would be turned away.  After all, the processing companies only make money when they add merchants to their client process.  But there is a lot at stake for processors when offering a merchant bank account so they need to be circumspect in their evaluation process.

Credit card processors are not only at risk when making underwriting decisions but now face possible financial losses and liabilities if they do not adhere to the cardholding associations’ PCI (Payment Card Industry) compliance regulations.  This primarily pertains to the safe protection and storage of sensitive customer credit card information.  The backend networks must be secure and consistently tested and monitored.  (Even merchants must comply with PCI regulations.)

All in all, providers entrenched in the merchant account field must walk a fine line to maintain profitability while balancing inherent risks.  Providing merchant bank accounts may prove lucrative or a surefire way to get to the “Poor Farm” – especially if companies are not careful and deliberative in their doing business approach.