Merchant Account Services Blog

Anyone who has attempted to open a traditional merchant account from the same provider as their retail store while offering “adult content” on their website can tell you how quickly they are told “sorry, but we cannot establish an account for adult content”. But what is “adult content” and why can’t you get a typical merchant account for it?

Adult content is usually describe as offering pornography for download or for sale through a website. Videos, full length movies, and photographs of sexual acts and nude models are your typical examples of adult content. Websites that offer this kind of material traditionally have much higher rates of chargebacks versus traditional businesses. There are various reasons for this including:

1) Some people don’t feel guilty scamming a pornography website.

2) Some people purchase content from these websites and have their spouse discover what they have done. To cover their tracks, and save their butts, the claim the card was stolen and charge back their transaction.

3) A disproportionate number of porn sites are scams relative to other websites and help to ruin it for everyone else.

The result of this high chargeback potential is all adult websites must seek a high risk merchant account. These accounts work in a similar fashion to a traditional merchant account but the fees are usually higher and include a large set up fee (but not always) and usually some of the merchant’s funds are held in reserve as “insurance” against fraud and chargebacks.

But just because a product is adult in nature doesn’t mean it necessarily is adult content. What isn’t adult content are tangible adult products that aren’t pornography. Stores that sell adult toys and apparel typically can establish a merchant account without any extra work or hassle. This is because those kind of products do not share the same high rate of chargebacks as pornography does.

So, if your product is of an adult nature, you will need to determine whether it is pornography or just an adult product. If it is pornography, you will need a high risk merchant account. If it tangible products aimed at adults, a traditional merchant account should work just fine. Keep in mind the policies of merchant account providers do vary so some may consider adult products as adult content, too. In those cases just look for another provider who doesn’t. They’re definitely out there.

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When applying for a merchant account most small and medium-sized merchants will notice that a personal guarantee is required to establish the merchant account. A personal guarantee basically says that if the business cannot fulfill its obligations to the processing bank then the processing bank can legally pursue the guarantor to fulfill those obligations. This basically means if your business owes the processor money and it does not or cannot pay then the bank can come after the guarantor seeking those funds.

The reason why the processing bank does this is because of the high risk they are exposed to due to the nature of their business. If a new merchant commits fraud or just mismanagements their business and merchant account, the processing bank can be on the hook for a large sum of money. Naturally they wish to protect them from this scenario as best they can.

But what if a merchant does not wish to give a personal guarantee? What if they started their corporation with the explicit intent of separating personal assets from business assets? What are they to do? Some merchant account providers will allow you to use alternative forms of guarantees in place of a personal guarantee. These options include:

1. A Corporate Resolution

   Instead of using your personal financial strength to back up your business, you use your business’ financial strength instead. To do this your business must be in a strong financial position. This typically means you have been in business for at least one year, although two or more is typically required, and have documentation to show your business’ financial strength. Typical examples of satisfactory documentation include balance sheets and any financial statements prepared by a third party.

2. Provide a Letter of Credit

   A letter of credit basically is money that your bank promises to give your merchant account provider at a future date up to a certain amount if certain criteria are met (which are detailed in the letter). Basically, if you owe the processing bank money they can invoke this letter of credit and receive that money. This in turn essentially turns into a loan from your bank to you. It’s basically allows the processor to have a guarantee that funds will be available to them if they need it but you don’t actually have to take out a loan or front any money. As long as you don’t owe your processor money the letter of credit is never invoked.

3. A Reserve

   In cases where the above two options are not practical or possible, simply allowing the processing bank to hold some of your funds in reserve may be enough to allow you to process without a personal guarantee. Basically if they have your money, they know they can get to it if they ever need. The amount the processing bank will want to hold will depend on many factors but it all boils down to how much exposure they calculate they will be subject to with your merchant account. Funds held in reserve are typically held for six months after a merchant account is closed although it is possible that can be extended depending on the product or service being offered.

Keep in mind not all processors offer these alternative although most offer at least one of them.

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