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How do banks evaluate merchant account applications

Merchant accounts for small and large businesses

There is practically no way a business can develop without a merchant account. It's one of the first steps for small ones, and it is almost impossible for large ones to operate without merchant accounts. Basically, a merchant account allows companies to collect debit and credit card payments. Without such an account, a business will only be limited to cash payments, and significant problems with compliance may arise sooner or later. Since most payments are now made with cards, any business needs a good merchant account that fits its particular business scheme and is convenient for the flow dynamics of its transactions.

After understanding what is a merchant account, the most important thing to consider is which kind of merchant account is convenient for your buisness. In other words, which merchant account provider offers you the best conditions for your particular case. Different scales and different sectors will have different priorities. Are convenient transaction fees your number one interest? Are simplicity and speed of transactions? Are reliability? Are laxitude with the political correctness of your business?

When getting a merchant account, choosing the right bank is one of the main concerns of wise businesses, no matter their size. CEOs must conduct extensive research and heavily evaluate all possibilities in order to make a decision. Just as anything else in the business sector, there is always risk involved, and making the right choices will help decrese said risk as much as possible.

Acquiring banks

Acquiring banks are banks that issue merchant accounts with their corporate clients. Since they are businesses themselves, they will also want to make sure the deal they make is convenient for them. See example at Their client's business risk might become risk for them as well, and on top of that, merchant account providers face their own risks, in example cash-back volume and low margins. 

Providing merchant accounts to businesses is always a low margin activity, with rates very rarely over 5%, and sometimes as low as 2%. These activities often involve massive loads of flow either nationally or internationally, with all the operational costs and challenges that involves. Acquiring banks must be very careful when selecting their clients, considering merchant account applications and deciding which terms they are going to offer to each applicant.

When deciding whether or not to make a deal with an applicant, acquiring banks must make sure that said deal would benefit them and match their portfolio interests. Risk policies play a big part here, because different banks will have different approaches on how to evaluate risk in applicants and how much risk they are willing to take when making deals. A bank that likes to play it safe will be eager to provide merchant account services to high risk businesses, or at least ask for premium fees in exchange of the service.

Also, the acquiring bank must evaluate how a particular applicant does or does not fit with the strategic position of the bank itself. Does its type of business or its business plan contradict the strategies of the bank? Is it organic with the way the bank has decided to pursue its goals? Would it contribute to the bank's image and reputation, or instead go in detriment of it?

How banks evaluate merchant account applications

When submitting a merchant account application, businesses must disclose information on their activities, their strategies and their expected money flow. The bank will evaluate this submission and ask for more information if considered necessary. Higher risk clients will undergo a deeper scrutiny before the bank makes its final decision. Certain sectors are considered to be of higher risk, including businesses dealing with pornography, gambling, and long term sales like travel agencies and ticket sale sites. These businesses often have a higher leverl of cash-back requests from clients, which means that the bank will run the operation - with the costs it takes - but not retain any money from them.

Acquiring banks will check the business's background in order to determine the creditworthness of the applicant. Longer running businesses will have an advantage when submitting applications because they may have a possitive record on their activities. 

Card payments performed face-to-face always carry less risk than online payments because there is a hard record of the transaction, while online payments are more susceptible to fraud. For that reason, the bank will evaluate the proportion of presential payments and online payments. The more face-to-face payments a company registers in relation to its online purchases, the better it will look to the eyes of the acquiring bank, and the less fees it is likely to pay.

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