If you run a business and want to accept credit cards, you’ll need to open a merchant account.
There are many merchant account providers (commonly known as “credit card processors” or just “processors”) so it’s important to understand what a merchant account entails and what to keep in mind when you apply and while processing.
While merchant accounts aren’t free, we’re not going to tackle rates and fees extensively in this article. Instead, we’ll focus on what merchant accounts are, how to apply, and possible penalties for misuse. If you need more info on costs or processing in general, check out our credit card processing guide.
- What is a Merchant Account?
- High Risk Merchant Accounts
- Information Needed to Apply
- Explanation of Terms
- Calculating Volume and Tickets
- Why Do Ticket Amounts Matter?
- Changing Your Processing Volume or Average Ticket
- Declaring Correct Transaction Percentages
- Merchant Account Approval
- Merchant Account Penalties
- Avoiding Penalties
What is a Merchant Account?
A merchant account is essentially an open line of credit issued to a business by an acquiring bank that allows the business to accept credit cards. Like a credit line, a merchant account has limits, rates, and other provisions that govern its use. A business owner’s personal credit may factor into whether a processor will approve that business.
Related Article: Personal Credit and Merchant Accounts.
It’s easier to think of a merchant account as a line of credit rather than an account in part because you don’t actually directly access your merchant account like you would a bank account. When you accept credit and debit cards, your processor will deposit the funds into your business bank account – you won’t actually remove your funds directly from your merchant account. You can also change the bank account associated with your merchant account if necessary.
Merchant Account Rates and Fees
Different merchant accounts have different costs, but none are free. It’s simply not possible to accept credit and debit cards without paying a fee. Instead, you’ll want to focus on paying as little as possible for processing. That means understanding which fees you can negotiate, and ensuring you have competitive pricing.
Fees that you can’t negotiate include interchange and assessments. What you can negotiate is the processor’s markup, which includes things like monthly or annual fees, volume markup, per-transaction fees, batch fees, and more.
Processing rates and fees are complex enough that we’ve written several articles on how it works. If you’re new to processing or need a refresher on fees, check out credit card processing fees for a great explanation of costs.
Merchant accounts come with a contract, called a merchant processing agreement (MPA.) The contract spells out the processor’s service, charges, and liabilities. It will also detail your responsibilities and include information about terminating the contract. Note that most contracts stipulate automatic renewal if you don’t cancel at the conclusion of the original term.
In many cases, processors charge an early termination fee if you cancel before the contract expires. Processors can charge flat cancellation fees, or an amount based on the loss of income ending early will cause. The latter, called “liquidated damages” can be particularly expensive.
At CardFellow, we prohibit cancellation fees in our quote marketplace. Whether you use our services or not, we strongly suggest avoiding merchant accounts with cancellation fees. If a processing rep tells you that they will waive the cancellation fee, be sure to get that in writing and check the contract for an early termination fee. Remember, the contract you sign will override verbal promises the sales rep makes.
High Risk Merchant Accounts
In credit card processing, some industries are considered “high risk.” A business considered high risk might be in an industry with higher than average chargebacks, sell items that are age restricted, or have other variables that pose a greater risk of issues for a processor.
Because of that, high risk businesses need a high risk merchant account. The account functions the same way, but not all processors offer them. Additionally, high risk merchant accounts will cost a little more.
Industries considered high risk include adult entertainment, gambling, vape / e-cigarettes, travel, debt collection, tech support, firearms, and more.
Information Needed to Apply
The specific information needed to apply for a merchant account will almost always include:
• Average volume
• Average transaction total (also called “ticket”)
• Highest anticipated ticket
• Transaction percentages
If you’re already accepting cards, your new processor will likely also request processing statements. Depending on your industry, you may also need to provide bank statements.
It’s important to declare accurate numbers when you apply for a merchant account, as these figures will affect the terms of your merchant account. Failing to declare the correct figures could result in a credit card processing company terminating your account.
If you don’t know exact numbers when you apply, you can estimate the totals, but make sure they’re as close to accurate as possible. Additionally, it’s worth getting in touch with your processor before making any big changes to your processing profile. (For example, if you begin selling much more expensive items that will raise your average ticket significantly.)
Explanation of Terms
Processing volume is the amount that the processor will allow you to charge in Visa and MasterCard sales in a monthly period. Think of the processing volume as the limit on the line of credit. If you exceed your declared processing volume the processor may impose surcharges, penalties, or take other action to stop the violation. While moderately exceeding your declared processing volume may not lead to any recourse, grossly exceeding processing volumes can be a serious issue.
On the other hand, there are generally no penalties for not meeting the processing volume that you declare on your merchant processing agreement. This means that if you declare a processing volume of $5,000 a month but don’t process a single penny in credit card sales, you won’t be penalized. However, some processors impose a minimum amount you must process or else they’ll impose a fee.
Transaction percentages refers to the way that you accept credit card payments. Processors need to know how you will be transacting your credit card sales to assess the risk associated with the transactions that you will be running. Some processors may simply ask for the percentages of swiped credit card transactions and keyed-in transactions, while others will ask more detailed questions such as whether you accept cards by phone, online, and more.
Average ticket is a term used to refer to the dollar amount of an average MasterCard or Visa sale. When applying for a merchant account, you’ll be asked for this number so that your processor will have a rough estimate of how much money you process per credit card sale.
Highest anticipated ticket (also sometimes called average ticket limit) refers to the highest amount you expect for any single credit card sale. This information helps processors accommodate businesses that have a relatively low average ticket but process a large sale now and then.
Calculating Volume and Tickets
Before applying for a merchant account, you’ll need to calculate your volume and average ticket. It’s important to declare accurate numbers even if you’re estimating.
Calculating Average Ticket
The products or services that you sell will dictate the average ticket amount. For example, a coffee shop will usually have an average ticket around $5 while a gym might have an average sale of $50 for a membership.
Use your business plan or make an educated guess at what you think the lowest and highest possible transaction amounts will be. Use these two figures to find the average sale amount. Once you find the average ticket amount, you can pad the number a little bit within reason. You don’t want to raise your average ticket to an unreasonable amount that will cause your application to be denied, but you should increase it a little bit to be safe. You will not be subject to penalties if you overestimate your average ticket.
Calculating Processing Volume
For established businesses, it’s easy to determine monthly processing volume by looking at your past merchant account statements. Your processor will list the total credit card sales for the month on your statement.
For new businesses, the best way to figure out the processing limit to declare is to start by making an educated guess at what your gross sales will be each month throughout the year. Take into account any seasonal swings that your business will have. For instance, the highest grossing months for an ice cream shop will be the summer time when it’s warm and customers want ice cream.
Once you’ve figured out the highest grossing months and have an idea what the gross sales will be, figure out what percentage of that number will be Visa and MasterCard sales. (For retail merchant accounts, assume 30-40% of gross sales will be Visa and MasterCard sales. For an online or mail order business assume that 90-100% of gross sales will be Visa and MasterCard sales.)
Take the appropriate percentage of gross sales, depending on the business type, and round the final figure up to the nearest $500 increment.
Why Do Ticket Amounts Matter?
Processors pay close attention to the average ticket amount as one way to counteract fraud. If you process a transaction for an amount much higher than your declared average ticket amount you may be subject to penalties such as having the funds from the transaction held for undetermined periods of time, having your account closed, or both.
From your standpoint as the business owner, average ticket plays a role in choosing the right pricing model. Some businesses with very low average tickets (under ~$10) may find that a flat rate processor saves money. However, most businesses will pay the least when using competitive interchange plus pricing. Knowing your average ticket can help you navigate the right pricing models. If you need help, you can create a free business profile here at CardFellow and we’ll work with you to determine the best model for your specific business needs.
Changing Your Processing Volume or Average Ticket
If after you begin processing you realize that you underestimated one or both of these figures, contact your processor as soon as possible to discuss your options. Processors can often have the limits on your account raised, or they can take other actions to help you avoid service delays or penalties.
Increasing Your Average Ticket
For most businesses, the average ticket amount will not change over time because the business continues to sell the same products and services. However, your average ticket may increase in situations such as starting to carry higher end products or implementing marketing pushes to increase it.
If either of those situations apply in your business, be sure to keep your processor informed. It may seem unnecessary, but the more your processor knows, the less likely you are to have a problem with your merchant account.
Increasing Your Processing Limit
You’ll usually need your processing limit raised as your business grows and sales increase. Most processors will allow the processing limit to increase naturally over time. Processors understand that as a business grows the gross sales will increase and credit card sales will increase as well.
However, doubling or tripling processing volume in the first six months of business is not considered natural growth. If you expect rapid business growth, you’ll need a processor who is flexible about increasing your processing limit. Some processors will not increase processing limits regardless of business growth or age; instead, they will require you to request an increase when needed. Be aware of your processor’s procedure for limit increases: if they will increase your limit naturally, or if it’s something that you need to request.
You can contact your processor to request an increase in your processing limit. Depending on the amount of the increase that you’re requesting, getting your processing limit increased may be as simple as filling out a quick change form. In other cases the processor may suggest that you open a new merchant account.
Declaring Correct Transaction Percentages
Each processor has a percentage tolerance for the merchant accounts that they provide and require merchants to stay within certain processing percentages in order to qualify for a particular account. For example, it’s typical for processors to require at least 80% of credit card payments to be swiped card-present transactions in order to qualify for a retail merchant account. In this scenario, a merchant set up with a retail account that doesn’t transact at least 80% of their Visa and MasterCard sales by swiping the customer’s credit card could be found in violation of their merchant agreement and may be subject to account closure or other action from the processor.
It’s a good idea to declare processing method percentages that will afford you the most flexibility with your merchant account. This is especially important if you think that you will be processing a diverse array of transaction types. For example, it may be fine for a retail store to declare a 90% swipe rate and a 10% key-entered rate, but a pizza restaurant could run into problems if they were to declare the same percentages. The pizza restaurant may have to declare 50% swiped transactions, and 50% key-entered transactions, making them ineligible for a retail merchant account. Note that just because you may not be eligible for one type of merchant account doesn’t mean that you can’t get a different type of merchant account.
Declaring the correct transaction percentages will help ensure that you’re set up with the correct merchant account for your business and decrease the likelihood of penalties or termination of your account.
Merchant Account Approval
With traditional processors, the approval process can take anywhere from a couple days to a few weeks. On average, a processor can approve an account in a few business days. However, if you don’t provide all information upfront or if you’re a high risk business, it will take longer.
While it may seem like a hassle, it’s better to go through approval upfront. Some processing companies like Square and Stripe offer same-day approval, but don’t actually do due diligence upfront. In some cases, businesses begin processing only to have their account closed a few weeks later when the companies ‘catch up’ and realize that they can’t support that business.
Possible Account Restrictions
A merchant account isn’t strictly “approved or denied.” You can be approved for an account with restrictions. If that happens, you’ll still be able to accept cards. It simply means that the processor wants to offer you an account but needs to impose conditions in order to do so.
Restrictions are common for businesses with no processing history, owners with poor personal credit, and industries with high chargebacks. Two of the most common are ACH delays and rolling reserves. An ACH delay simply delays your fund deposits for a couple days. This is the less restrictive of the two, as once it begins, you won’t notice it much. Rolling reserves mean the processor will withhold a percentage of your sales for X number of days before releasing them to you. That’s the harsher restriction of the two. However, if your choice is no merchant account or an account with restrictions, opening the account with restrictions will at least allow you to take cards.
Fortunately, restrictions aren’t usually permanent. Once you establish good processing history, the processor may be willing to remove the original restrictions. If your processor imposes a restriction, you’ll be notified of the type, percentage, and timeframe.
Merchant Account Penalties
The merchant processing agreement (MPA) that you sign when opening a merchant account is a legal document that gives the processor many rights over your processing relationship. When you sign an MPA, you are granting the processor full access to your business bank account so that they can deposit funds from credit card sales and debit processing fees or chargebacks. You also give the processor legal rights to any funds resulting from credit card sales.
Almost every business person has heard at least one story about a credit card processing nightmare, but processors aren’t the monsters that they are made out to be in the majority of these cases. Most of the time the processor is well within the guidelines set forth in the MPA and the business violated these regulations.
It’s absolutely crucial to know the boundaries and regulations described in your processor’s MPA and to take them seriously. If you choose not to learn and follow the guidelines, you are opening yourself up to liability. Violation of processing limits, average tickets, and general misuse of merchant processing abilities are the most common reasons why processors take actions to protect themselves. You can avoid these by reading your MPA and asking your processor to clarify anything that you’re unsure of.
If the processor determines that any of your transactions are suspicious, they can hold all or a portion of the un-deposited funds for a period of time in order to investigate the transaction. This period of time can be as long as 6 months. The most common reasons why a processor will hold funds are:
• Processing in excess of the declared monthly volume
• Processing in excess of the declared average ticket amount
• Excessive chargeback ratio
• Using the merchant account to sell products or services that were not declared on the original merchant account application
• Using the merchant account to sell products or services that are declared unacceptable by the processor
A credit card processor can terminate a merchant account at any time with or without notice. Although it’s inconvenient to have your merchant account closed, it’s the most lenient recourse that a processor will take against any misuse. Not all account closures are permanent. Some processors will suspend a merchant account if the violation is not severe. The most common reasons why a processor will close or suspend a merchant account are:
Closures not usually permanent
- Excessive ACH rejects
- Using the merchant account to sell products or services you didn’t declare on the original merchant account application
Closures usually permanent
- Processing in excess of the declared monthly volume
- Processing in excess of the declared average ticket amount
- Maintaining an excessive chargeback ratio
- Using the merchant account to sell products or services the processor declares unacceptable
If your merchant account is closed, you’ll be able to seek processing from another company unless the processor places you on the Terminated Merchant File or MATCH list.
Terminated Merchant File (TMF)
The TMF, also called the MATCH list, is a database of merchants that have had their merchant accounts closed by a processor. The TMF is a community that processors collectively reference and maintain. Usually only gross violations of merchant processing privileges will land you a place on the TMF, but once you’re on it’s difficult to get another merchant account. A processor can place your name and details on the MATCH list for any of the reasons listed above, but they usually only do this for gross or blatant misuse of an account, such as intentional fraud.
Before processors approve accounts, they will check to make sure that you’re not on the TMF. Only the processor that adds a business to the TMF can remove them. In most cases, businesses on the TMF need to rectify anything with the posting processor to have their information removed from the TMF before they will be able to get another merchant account.
Processors can impose fines for the misuse of a merchant account, but the most dangerous fines come directly from Visa and MasterCard. These fines may be levied for failing to observe proper security measures, or for improper handling of cardholder information. Mail order and Internet businesses should be especially conscious of these potential fines due to the possible security issues from card-not-present transactions, but all businesses should make sure that they are handling cardholder information properly and securely.
Fines can be hefty, but the good news is that they can be avoided by learning about processing regulations. Risk management and fraud information for businesses is available from both Visa and MasterCard.
An overage charge can be assessed to businesses that process in excess of their declared monthly processing volume. The charge is a percentage applied to the amount in excess of the declared monthly processing limit. For example, if you declare a monthly processing limit of $5,000 and your actual processing volume is $8,000, the processor can charge you an overage percentage on $3,000. If the overage charge is 5%, the total overage charge for the month would be $150.
Not all processors impose an overage charge, and they must disclose their overage fee on the quotes that they offer.
Criminal & Civil Charges
Criminal or civil charges for misusing a merchant account are usually reserved for serious breaches, but a processor can bring you to court or press criminal charges if they think it’s necessary. Most people don’t have to worry about facing criminal charges. People that do need to worry about such things are usually well aware of the fact that they’re putting themselves at risk by misusing their processing abilities.
Civil action is something that most merchants don’t think about but it’s a very real tool that processors can use. Processors and associated banks stand to lose money from misused merchant accounts. If the loss is substantial enough they can try to recoup losses through a civil suit.
As we’ve said, civil and criminal charges do not usually result from the misuse of a merchant account because violations are seldom severe enough or are not pre-meditated to the point where a criminal or civil court would find fault. However, be aware that this is a possibility and the more you know about how to properly use your account and the regulations that govern it, the less you will have to worry about facing such situations. If you have specific legal questions, consult your processor or an attorney.
Merchant account violation penalties can be severe. More often than not these penalties are brought against merchants who are unaware of the regulations or limitations on their merchant account. Use these tips to protect yourself from penalties.
Remember your processing limit and track your sales.
Never forget your processing limit and make that sure you are within your limit by tracking credit card sales each month. A good suggestion is to display your processing limit in a place where it is easily visible like on the credit card machine, cash register, or your computer. This will remind you to keep track of your sales volume and will help you to avoid the headaches that come with processing over your limit.
Remember your average ticket amount.
Just like the processing limit, your average ticket amount can cause headaches if you excessively break it. Write down the average ticket amount that you declared on your merchant processing agreement and display it along with your processing limit as a reminder for yourself.
Read the important notes section on your merchant account statement every month.
Each month your processor will tell you about important changes to your merchant account. They will note these changes on your merchant account statement in an “Important Bulletins” section usually located on the front of the statement. It’s very important for you to read these notices each month and follow any instructions set forth.
Read your merchant processing agreement (MPA).
Your processor will give you an MPA when you open your merchant account. If you are already processing and do not have your MPA, you should request a copy from your processor. Read the MPA and ask your provider about anything that you don’t understand. The MPA will dictate how to properly use your merchant account. It will also include details about liabilities and penalties, including cancellation fees.
If you need help getting started with your merchant account, sign up for free at CardFellow to find a processor and begin accepting credit cards.
Looking for high risk processing specifically? We can help with that, too! Check out our high-risk credit card processing options.