Friday, July 2, 2010

Question from the Field: Why does my credit score relate to getting a Merchant Account?

One question I receive consistently over the years, relates to merchant credit issues. They don't understand why their credit affects their ability to get a merchant account, or even why their credit is checked at all when applying.

There are a number of reasons as to why credit is an issue. The basics:

Let's say that you are merchant and have been provided with a monthly volume of $25k to process. When you have a merchant account, you are expecting to be paid within 3 - 5 business days. (We get some merchants shocked that the funds are not in their bank account the next morning) In the course of the first three months, you have received $75,000 for transactions processed. As of this time, your customer has been mailed their credit card statement. They then have up to 30 days to pay that bill. If you have not provided the goods/services offered, the disputes/chargebacks start rolling in. The merchant service provider, who paid you $75k already, could be looking at tens of thousands of dollars in chargebacks. The merchant service provider has a significant amount of RISK. Your credit report is not a guarantee that you will or will not run a legitimate operation, but it does give some indications as to whether you are fiscally responsible, pay your bills on time, have had liens filed against you, etc.

Would you loan $75k to someone you don't know, who promises they will provide goods/services to their customers and that you will get your money back within 90 days...without first checking their credit?

Merchant Service Providers deal with RISK. They have separate departments who's entire responsibility deals with determining whether they should assume risk by accepting a merchant, which may include requesting additional documents such as Photo ID's, Utility Bills, Corp Docs, etc. They may feel that a reserve account (funds held in trust) may be necessary in order to protect against potential losses. They attempt to reduce their exposure at all cost, while trying to add as many new merchants as possible. It's a tough balance.

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