Merchant Account Services

Merchant Accounts 101

Everything You Need to Know to About Merchant Accounts


Author: Jim Conners

Rating: 10.0

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Security and Risk

Risk is the single largest factor influencing the establishment and maintenance of a merchant account. As with anything financial, someone stands to lose a lot of money if something goes wrong, whether intentional or not. In the world of credit card processing the ones with the most to lose is the acquiring/processing bank. As a result, they make all of the decisions about whether or not a merchant account is established, under what conditions, and whether that account continues to process normally or have their account closed.


The biggest buzz word in the world of merchant accounts is "chargeback". A chargeback is when a customer initiates a refund for a purchase they made on a credit card by contacting their card-issuing bank. The reasons for this can vary greatly but generally is a result of a customer being dissatisfied with their purchase. The customer may or may not have contacted the merchant about remedying this situation ahead of time. They may even be completely wrong. However, responsibility falls on to the merchant to ensure that the transaction goes smoothly and the customer is satisfied. A failure somewhere along the fulfillment process, including at the customer service level, can lead to a chargeback.

When a merchant receives too many chargebacks, approximately 1% of their sales, they risk having their merchant account shut down and losing the ability to accept credit cards again (see "The Match File" below).

To learn more about chargebacks and how to both handle and prevent them be sure to read our article The Chargeback Challenge and our blog post Why Retailers Always Win Chargebacks.

To see common misperseptions about chargebacks read our blog posts Merchant Account Providers Want Chargebacks? and A Contract Does Not Mean Chargeback Protection.


One way a processing bank may protect themselves from the risk a merchant account exposes them to is to hold some of that merchants funds in a special account called a reserve. A reserve allows a processing bank to cover potential future costs they may have associated with the merchant including chargebacks and potential fraud. If the merchant is unable to cover the costs of future chargebacks, possibly because they already have gone out of business, the processing bank can access the funds held in reserve to cover those chargebacks. If they didn't have the funds held in reserve they would have to pay those chargebacks out of their own funds.

The amount of the reserve can vary from a small fixed amount to a large fixed amount or an entire month's worth of credit card processing. How the amount held in reserve is determined is based on the amount of exposure the processing bank faces from a particular account. This can only be determined at the time the merchant applies for the merchant account.

Reserves can be created and work in several ways. Sometimes a processing bank will hold all of the funds owed to a merchant until they reach the predetermined amount of the merchant's reserve. Sometimes the processing bank will hold one month's worth of processing and return it after the following month has passed. This is called a rolling reserve. With the exception of rolling reserves funds held in reserve are not available to be returned to the merchant until the potential for chargebacks for their account has passed. Since chargebacks can usually be filed for up to six months after a purchased is made a merchant won't see their funds held in reserve until up to six months after they close their account. In the case where a business offers a service that takes an extended period of time to complete (e.g. an annual subscription) the merchant may not see their funds for as long as eighteen months.

High Risk Businesses

Some businesses by their very nature have higher then normal chargeback rates. Sometimes this is due to the product or service offered by the merchant being in high demand but also being high priced (e.g. high end electronic, jewelry, etc.). Sometimes it is because the service causes customers to be misled whether intentionally or not (e.g. multi-level marketing schemes). Regardless of the root cause these businesses will usually find it difficult, if not impossible, to establish a merchant account.

The businesses considered to be high risk will vary from merchant account provider to provider. However, there are some businesses and industries that are consistently considered high risk. This list includes:

  • Adult Book Stores
  • Adult Entertainment
  • Adult Novelties
  • Adult Video Stores
  • Advanced Sales
  • Check Cashing Services
  • Child Pornography
  • Collection Agencies
  • Credit Repair Services
  • Dating/Escort
  • Diet Marketers/Programs
  • Exotic Dancing Establishments
  • Multi-level Marketing
  • Pharmacies (Card Not Present/Internet)
  • Pornography
  • Sexual Encounter Firms
  • Telemarketing
  • Time Share
  • Travel Clubs/Tours/Guides
  • Vacation Packages

For these businesses to accept credit cards they typically have to turn to high risk merchant account providers. These companies are typically off shore and always charge higher rates then traditional merchant account providers. Rates can go as high as 20% of sales and some may charge set up fees of $1,000 or higher. The reason why these rates and fees are so high is the high risk merchant account provider needs to make sure they make enough money to cover the costs of the high number of chargebacks they will receive.

Be sure to also read our blog posts Changing or adding products after establishing a merchant account to see why you need to plan ahead when opening a merchant and What Exactly is Adult Content? to learn more about the most common type of high risk content.

The Match File (A.K.A. Terminated Merchant File)

The Match File is a database file used by MasterCard and Visa processing banks to identify specific merchants and owners who have had their merchant accounts terminated. Once a merchant is on this list it is highly unlikely that future merchant account applications will be approved. The Match File is essentially a BLACKLIST from which it is almost impossible to be removed.

For a business or merchant to be added to the Match File they need to violate Visa and MasterCard rules in some way. The most common reasons include:

  • Fraud
  • Factoring (ringing sales for another business)
  • An excessive number of chargebacks
  • The processing bank concludes that serious violations of the merchant agreement could result in increased loss exposure to itself or the credit card community.

Once a merchant has been placed on The Match File only the processing bank that added them can remove them from it. The merchant must work with them directly to accomplish this.

You do not want to be on the Match File! 5

Things You Can't Do

Just because you have a merchant account doesn’t mean you can do anything you want with it. Visa and MasterCard has guidelines governing their use. Here are some things you cannot do: 6

  • Personal Use

    Visa and MasterCard do not allow their services to be used for personal reasons. All accounts must be established for one business and to be used only for that business' products and services. An account cannot be established for an individual nor can a merchant use their merchant account for personal reasons.

  • Factoring

    Visa and MasterCard do not allow more then one business to use a merchant account. All accounts must be established for one business and to be used only for that business' products and services. When a business processes transactions for another business, even if they own that business, they are “factoring”.

  • Charge More for Credit Card Transactions

    Visa and MasterCard does not allow a merchant to charge more for products/services paid for by their credit cards. They do not want paying by credit card to be seen in a negative light.

    If a merchant wishes to offset the additional costs of accepting credit cards, they should do one of the following:

    • Increase prices on their products/services for all purchases
    • Increase prices on their products/services and then offer a cash discount

    Charging a convenience fee for accepting credit cards is not considered acceptable.

  • Set a Purchase Minimum

    Visa and MasterCard do not allow merchants to set a minimum purchase amount for which credit cards may be used. For example, a merchant may not declare that a purchase must be at least $50 in size in order to use a credit card for payment.

5 What is The Match File?
6 What You Can't Do With Credit Card Processing

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