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.