Merchant Account Risk – Who Takes it On?

Joe Thompson/MerchantSeek

Have you ever wondered why most providers of real merchant accounts go through verifications and checks on not only your business but also on your individual processing history as an owner (unless you are a 501c3 Non-Profit)? And why approvals can take from 1-5 days for merchant accounts?

You probably ask “Why are they treating this as if I’m applying for a loan? This should be as easy as visiting my favorite 3rd party processing service’s website and entering my checking account information”.

Well merchants need to understand that there are very legitimate reasons for merchant providers being just a little more cautious than third party payment processing providers.

– A. Merchant account providers have to abide by very different rules than other payment service providers. Visa/MC sets forth rules that are to be honored by not only merchant account providers but their sponsoring bank. And in the case of Visa/MC’s rules for merchant account providers, many of them have been put in place by Visa/MC after many years of being in the branded credit card business so they’ve drafted many of their current contracts in effort to prevent past operational mistakes from reoccurring – just as any business person drafts a contract, to prevent the worst and protect their interests

– B. Many merchants do not understand that the government does have some sort of say so in what’s going on in the merchant industry. It’s called Homeland Security, and though they’re not yet working as closely as they want to with merchant providers their Homeland Security rules to have parameters set in place where banks can be held responsible for clients that use their services to break Homeland Security laws. (Note: there have been reports that they are fighting hard to have all of merchant’s processing data turned over to them – and processors are fighting back, so it’s not 100% complete yet).

– C. At least 95% of merchant account providers ask for voided check copies or bank letters for verification when a merchant applies for an account. Merchants sometimes wonder why the processor cannot simply “call my bank to verify the information and go on and approve the account”. Well in that method there’s no paper trail or proof in writing that the provider actually verified the checking account information. And in both the legal world and in Visa/MC’s rules this carries no weight in the case of a merchant signing on and causing a fraudulent catastrophe.

– D. Merchants should also understand that with a real merchant account they are processing their own sales either by allowing their customer to enter card data or by the merchant manually entering card data. They are entrusted with very sensitive credit card data. Have you ever noticed that with many 3rd party payment processing providers that are not real accounts often charge much more for allowing merchants access to their Virtual Terminal, which allows the merchant to enter their own sales as needed? Well this is because when the merchant can just take a card number and enter it themselves the risk of fraud does increase, as if the merchant isn’t the most honest business person they have the opportunity to steal card numbers and enter the numbers into the Virtual Terminal themselves at will.

This is why many third party providers often offer their “cheap” options as the option that only allows customers to enter their own data and charge much more for the Virtual Terminal, but as many merchants know this isn’t always the most feasible or professional way to do business, as sometimes your customers won’t want to have to “visit your website” just to pay for a product or service, they may want to pay for it via mail, phone, or even in person. This is where being entrusted to use the Virtual Terminal ethically comes in handy, and if the merchant is not ethical it’s ultimately the processor that’s responsible for resolving the fraudulent activity (explained more below).

E: Contrary to popular belief the merchant account provider and bank is taking on much more risk than many merchants believe. Here’s an example scenario where the merchant should be held responsible for fraud but a processing bank may be:

  • A merchant applies for an account, without the best intentions, they are approved by the bank’s underwriting.
  • The merchant gets access to stolen card information and manually enters that info themselves via either their Virtual Terminal or Web Interface. Let’s say $500.
  • The real customer, having no knowledge of where this charge originated sees that their card was used fraudulently.
  • The customer disputes that transaction with their credit card company considering it fraud because they did not authorize it.
  • The merchant provider/processor attempts to contact the merchant to inform them that they have a chargeback and will have to refund this customer because the customer charged this transaction back with their credit card company and the merchant has no proof of customer authorization (so the customer wins the Chargeback dispute).
  • The problem is that the merchant had bad intentions to begin with and they’re long gone.
  • In this case who has to refund the customer that money because the merchant is no where to be found? The merchant processor and processing bank does! Though the merchant is responsible for the fraud they cannot be tracked down in this instance but the customer must still be refunded. So the role of the provider in this case is to take care of reimbursing the customer – of course this would make any provider a little cautious about who they sign on.

Operating a business that accept credit cards is, at the end of the day, a responsibility that should not be taken lightly. Think about it, if it were your credit card being used by a business wouldn’t you want the bank that’s trusting and processing for that merchant has done due diligence to verify that the merchant has good intentions? Sometimes merchants are frustrated that providers turn them away as if only they should be the ones choosing in the process, but when there’s so much at stake providers have to ask just as many questions before boarding a merchant as a merchant has to ask before choosing a provider.

Joe Thompson of Thompson Merchant Services is a lead contributor to content on MerchantSeek.

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