The ultimate guide to merchant accounts and online credit card processing for your business.

Are you seeking a merchant account for your credit card transactions?  It’s easy to get confused about the terms and requirements involved in taking credit card payments or electronic check payments. What is the difference between a merchant account, a payment processor, and a payment gateway?  What is the purpose of your application?  What factors affect your approval?  We have created the ultimate resource to help you understand the merchant services industry and the steps to getting your merchant account application approved.

merchant account application
merchant account application

Understanding the Purpose of a Merchant Account

When a credit card transaction is processed, the money does not instantly appear in your bank account.  That takes at least a couple of days. However, the money has to be held by a financial institution while it is in transit from the customer to your bank account.  A merchant account receives the payment from your customer’s credit card and holds it temporarily until it is deposited into your bank account.

A merchant account is a bank account – but it is not an account that gives you access to the funds.  You can’t withdraw cash from it or write a check against the balance.  It is strictly a holding account with a purpose to receive money from a credit card or other electronic payment transaction so that it can be routed to your regular business bank account.

Unlike your regular bank account, a merchant account carries some risk for the financial institution. If your customers dispute payment because they are dissatisfied with or do not receive the goods or services that they paid for, the bank which holds the merchant account must refund their money.  They will issue this refund even if the money has already been transferred to your bank account. This is called a “chargeback.” When this occurs, you owe money to the bank that issued the merchant account to cover the chargebacks, usually along with a fee.  Essentially, the bank has extended you credit to cover your chargebacks until you bring in additional funds from future transactions.

Because of this credit risk, you must submit an application, go through an underwriting process, and receive credit approval in order to open a merchant account.  The underwriter will review your credit history, transaction history, and the nature of your business to determine if the account should be approved and to assign a fee structure that is appropriate to your business’ risk level.

Get Your Merchant Account Today

We understand that you don’t have time for endless application work. We make the process simple for you, so that you can focus on running your business.

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What is a Low Risk Merchant Account Application?

A low risk merchant account application is submitted from a business that presents a strong credit history, stable revenue stream, and low occurrence of chargebacks.  If your credit history is strong, the bank has less concern about getting paid when credit is extended.  If your revenue stream is stable, this indicates that your business can cover the volume of transactions that you have requested. This also shows that your business is not likely to close suddenly and leave the bank with angry customers who want their money back.

If the underwriter determines that your business exhibits little-to-no signs of costing the bank money in unpaid credit balances, your account will be considered low-risk.  However, risk is also calculated based on the nature of your industry.  An industry that is generally profitable with little occurrence of chargebacks will be looked at favorably by an underwriter unless your business gives other reasons for an unfavorable review.

merchant account

What is a High Risk Merchant Account Application?

A high risk merchant account application is submitted from a business that has a higher likelihood of costing the bank money.  Some reasons that a merchant can be labeled as high-risk include a lack of business history, low credit rating, a history of high chargebacks, and a sporadic revenue stream.  All of these things indicate to the underwriter that the bank might have to extend a high amount of credit and that your business might not be able to repay the credit balances.

What if your business has a strong financial history with a low chargeback rate, but it still gets labeled as high risk?  This can happen for businesses in certain industries that are considered to be high risk based on the common account activity of all businesses in that industry.  In short, you can be penalized for the behavior of other businesses. You can run a reputable and profitable business but still have problems opening a merchant account simply because of the industry in which you operate.

Is Your Merchant Account Considered High Risk or Low Risk?

There are a number of factors that determine the risk classification of each industry. Most traditional brick and mortar businesses are considered to be low risk.  A restaurant or general retail store operate in industries that are looked at favorably by underwriters.  However, if your business is 100% online, your risk will be higher because the customer did not present the credit card in person.

There are other industries that carry a high risk classification.  Companies that offer nutraceuticals or herbal products are flagged as high-risk because of the absence of government regulations on their product and the number of companies that have offered fraudulent products.  Businesses that charge an automatic monthly payment, such as online dating or digital content subscriptions, also present a high rate of industry chargebacks.  Travel merchants incur a high volume of disputes from reservation policies such as cancellation or change fees. Other high risk industries include adult entertainment companies, e-cigarette vendors, VOIP services, and foreign exchange companies.  In addition to these, any company that processes a relatively high volume of transactions can also be labeled as high risk.

The Role of a Payment Gateway in Payment Processing

Before a payment transaction is processed, the bank that issues the credit card must be contacted for approval of that payment.  If approval is granted, then the data from the issuing bank needs to be translated into money so that it can be transferred to a merchant account.  At a brick and mortar establishment, a credit card terminal facilitates this communication.  However, if a transaction is made online, then a payment gateway acts as the system of communication that makes this possible. The payment gateway is a network of software and servers that electronically request and receive transaction approval and sends the approved funds to the merchant account after the payment is processed.

The Role of the Payment Processor

The payment processor provides the legal framework for you to collect electronic payments from customers. A payment processor actually verifies the credit card data and manages the transactions from credit cards and other electronic payment sources for a merchant.  A payment processor provides the merchant with the connection to the bank that issues a merchant account.  Electronic payments must be monitored for fraud and high risk transactions, and payment processors fulfill this role.  Payment processors are regulated and must demonstrate strict criteria to be “PCI Compliant.”

How a Payment Gateway differs from a Payment Processor

A payment gateway simply facilitates communication between the processor, the merchant account, and the customer’s credit card issuer.  However, it is the payment processor who actually manages the transaction and checks its validity.  The payment gateway is a virtual credit card terminal. It connects all parties involved in the transaction and translates the data so that the transaction can be completed and money can flow to the merchant.

merchant account

Applying for a Merchant Account

Because of all of the risk factors involved, applying for a merchant account is similar to applying for a credit account or a loan.  The bank that issues the merchant account must evaluate your business history, financial history, and credit record.  Therefore, your application must go through the underwriting process before receiving approval.  This underwriting process will also determine the rate you will be charged for processing transactions.

Choosing a Payment Processor that Brings Value to Your Business

Before you apply for a merchant account, you will want to find the right payment processor to facilitate your application. Look for a local representative who is willing to learn about your business and consult with you face to face. Be wary of anyone who wants to sell you a service before gaining a true understanding of your specific needs. A good representative can make suggestions on the right package of equipment and services for your operation and can even offer ideas that will improve your marketing.

The right payment processor will also be a good fit for your business model. For example, you should consider the level of technology that your business will use and compare that with the processor’s ability and willingness to keep up and integrate with that technology.  Will you be using a top-of-the-line Point of Sale system? How familiar is your processor with this system and how can they help you maximize its features? These are questions you should have answered before you commit to a processor.

Another area of technology you should investigate is the ability and ease of accepting cards with EMV chips. Consumers are receiving updated credit cards with EMV chips at a fast rate. This could increase your liability for fraud if a customer presents a chip card and your terminal only has a magnetic strip reader. Basically, if the customer uses a card with the extra protection of an EMV chip, but you do not provide a way to use that chip, you can be liable for any resulting fraud that occurs.

You should also make sure your processor is going to be there for you when you really need them. Look for responsive customer service and local support that is available 24 hours. If your terminal is down on a busy shopping holiday, you want to be sure that you can reach someone who can get you back online quickly. That small discount in fees that a bargain processor is offering can disappear in a day if you lose business because of poor customer service.

Choose a Payment Processor that brings value to your business.Click To Tweet

Review Your Merchant Agreement Carefully

Reliable customer service and representatives who add value to your business are important factors in choosing a processor; however, you should also make sure that you review your merchant agreement carefully.  Be sure that you understand all fees, obligations, and policies before making a commitment and investing the time and effort into a merchant account application. There should be no ambiguity about the process or the costs involved. If there is anything that you don’t understand, ask before starting the application process. If you are not completely confident in the agreement, wait until all of your questions are answered to move forward.

The Merchant Account Application Process

The first step to applying for a merchant account is to fill out an application and submit the necessary documentation for underwriting.  This documentation includes:


  • Tax ID number
  • Driver’s License
  • Voided Check
  • 2-3 months of bank statements
  • 2-3 months of processing statements (if you already have a processor)
  • Business License (if required for your business)


Your processor will collect this information from you, review it, and submit it to the underwriter. The processor will stay in touch with the underwriter and let you know if they require any additional information. Once your application has been approved, your processor will move forward to install equipment and get your business ready for payment processing.

Get Your Merchant Account Today

We understand that you don’t have time for endless application work. We make the process simple for you, so that you can focus on running your business.

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Keys to Getting Your Merchant Application Approved

There are no tricks or shortcuts to getting your merchant application approved.  However, there are things that you can do to make sure your business is viewed in a positive light. There are also things that you can do to make it much easier for the underwriter to get a full understanding of your business and make a decision on the approval of your account. The less an underwriter has to dig and press you for details, the more favorable view they will have about your business and your application.

The less an underwriter has to dig and press you for details, the more favorable view they will have about your business and your application.Click To Tweet

Be Transparent about Your Business

One of the first keys to gaining the trust of an underwriter is to establish transparency about your business practices.  This means that not only the underwriter but also your customers understand exactly what to expect from you in regards to your product and service.  Your website and other business communication should very clearly explain who you are, exactly what your business provides, and how you provide it.

This content should also reflect the true price of your product or service, including any extra fees. You should indicate accurately how long it takes to receive a product or service and how long it takes to process a refund. You should be honest about the quality and condition the customer should expect. You should also clearly state your return policy; this includes being upfront about any restocking fees or any other reason the customer might not receive a full refund. If your customers don’t receive unexpected fees or hassles, then you will naturally have a low occurrence of chargebacks and complaints.

Use Honest Advertising Methods

A slick, “bait and switch” marketing process might get you a lot of initial customers, but it will only hurt you in the long run. As unhappy customers complain and file disputes, chargebacks will add up and your credit will be greatly damaged. Besides the fact that this is not a great way to do business, the costs incurred from extra fees, higher interest rates, or declined merchant account applications will far outweigh any short term benefits. Avoid any sales statements that could be misleading or claims of endorsement by celebrities or others who have never given permission for that endorsement.  In short, be the kind of business that customers will return to or recommend.

Consider Writing a Cover Letter

A great way to establish transparency and trust while providing clear detail for the underwriter is to include a cover letter with your merchant account application. This also gives you an opportunity to highlight any specific strengths about your business that could influence the underwriter’s view of your potential merchant account. If your industry is traditionally considered high-risk, you can focus on policies and procedures you have in place to mitigate that risk. If you can show exceptional customer satisfaction that would minimize the occurrence of chargebacks, you could increase your chances of approval.

Stay off of the TMF List

The Terminated Merchant File (TMF) is a list of companies that have a negative history with other banks. Banks use this as a reference when reviewing applications as a warning of high risk based on past behavior. If you end up on this list, it will be very difficult to get your application approved. The best way to stay off of this list is to offer exceptional customer service combined with honest business practices. Businesses that follow this rule don’t have a high volume of complaints or chargebacks.

Be transparent and honest with your business to get your application approved faster.Click To Tweet
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Understand Why Your Merchant Account Application Was Denied

Sometimes, despite your best efforts at providing a positive, detailed, and transparent application, your merchant account application is still not approved. There are generally two reasons that an underwriter will deny credit for a merchant. The first is excessive chargebacks. The second reason is poor credit.

Excessive Chargebacks

The primary reason that chargebacks are a concern for the underwriter is the financial risk to the bank. However, a high number of chargebacks is also an indication that your business practices are not so transparent and honest. If your credit card processing history reveals a regular occurrence of unhappy customers who want their money back, the underwriter will determine that your business is too risky to extend credit. Remember, the best picture to show on your merchant application is a reliable business with high customer satisfaction.

Poor Credit Scores

While chargebacks tell the underwriter something about your business practices, poor credit scores reveal something about your financial habits.  If your business is carrying a high amount of debt and your bills are sometimes paid late, this is an indication that you are not careful enough with your finances to receive the credit extended in a merchant account.  Poor credit can be overcome, but it will take some time to correct. Don’t get overextended in credit and pay your bills consistently on time to start recovering and improving your score.

There are generally two reasons that an underwriter will deny credit for a merchant. The first is excessive chargebacks. The second reason is poor credit.Click To Tweet

What Can You Do if Your Merchant Application is Denied?

It’s never easy to hear that your merchant account application is denied, but there are some things you can try to overcome this decision. First, you might want to try to appeal to the underwriter to reverse the decision. This is especially helpful if you have gone through a rough patch of business but can show that your situation is improving. Next you might want to ask if you can provide more detail or perhaps contribute to a reserve fund to cover some of the risk. A reserve fund shows that you have confidence in your own business, and this could tip the scales in your favor.

If you try this and your application is still denied, you might want to consider another bank. Not all banks and underwriters have the same criteria for approving or denying an account. Some banks specialize in higher risk accounts and some specialize in specific industries that have trouble getting their merchant application approved.

However, you don’t want to randomly send your application to several banks hoping for approval; this will hurt your credit score. You want to find out in advance which banks are the right fit for your specific challenges and apply only to those. Your payment processor is a good source of advice for choosing the best banks for your application. The more experience your processor has, the more helpful they can be at finding you the right match.

If you have tried everything and still get denied, you might have to wait and take some time to repair your credit history before submitting another application. This might take longer than you had planned, but a true effort to pay bills on time and serve customers well can have a positive effect on your credit.

Your payment processor is a good source of advice for choosing the best banks for your application.Click To Tweet

The Bottom Line on Merchant Accounts

If you work hard to provide a good product or service that customers appreciate and you work honestly and transparently, you have a good chance of getting approval on your merchant account application. Use the information and tips we have provided to give your business the best chance at getting your merchant account application approved.

Get Your Merchant Account Today

We understand that you don’t have time for endless application work. We make the process simple for you, so that you can focus on running your business.