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Getting a merchant account should be easy. After all, they're going to make money every time you process a transaction. They should be happy to have your business, right? If only that was the case.

The payments business is highly competitive, and processors obviously want your business - but they still need to do their due diligence before approving your application. In this article we're going to tell you exactly how to ensure your merchant account application is approved, and what to do if you're declined. 

Since the payment industry and the jargon used is fairly complicated, we're also going to define some commonly used terms, like merchant account, payment gateway, and payment processor. If you already know the basics, feel free to skip the definitions. 

What is a Merchant Account?

A merchant account is a special kind of bank account that exists for the purpose of holding funds captured from credit and debit card sales. If you’ve ever used your card and actually wondered where the funds just disappeared to, they went into a merchant account. From there they are transferred out to a normal business bank account, normally on a daily or weekly basis. 

If you want to accept credit card payments online, you need either a merchant account provider (Example: Merchant-Accounts.ca) that issues merchant accounts to businesses. Or, you can use the services of an aggregator (Example: PayPal) a company that processes transactions through their own merchant account on behalf of other companies. 

It's also worth noting that a Merchant Account is a legal agreement between you and the provider. You'll be given terms and conditions and an contract to sign. Here are some things to look out for before signing a Merchant Account Agreement.   

What is a Payment Gateway?

When processing a credit card transaction, information needs to be sent somewhere to see if the cardholder has sufficient funds to pay for the sale. In a traditional brick and mortar transaction it’s actually the POS (point of sale) machine which takes the cardholder data, formats it and sends it to Visa or MasterCard to see if the customer has sufficient funds. 



In an ecommerce transaction the service takes place online via a payment gateway. The payment gateway receives transaction requests (that are sent online by software like Shopify) and then connects to Visa or MasterCard, and ultimately down the line to the customers card issuing bank to see if they have sufficient funds. If they have enough cash, the transaction is authorized and the funds are transferred from the cardholder into the merchant account. Often, a merchant account and payment gateway are set up in one process through the same company.

What is a Payment Processor? 

When discussing payments, the phrase “payment processor” tends to be used arbitrarily and mostly incorrectly. It's most often used by business owners interchangeably in reference to the merchant account provider, the gateway, or both (especially because the merchant account and gateway are often provided together). In technical terms, this is an incorrect usage of the term. However, it’s used this way so commonly and freely that there is in fact a street/layperson definition and a technical industry definition which is quite different.  

In industry terms, the payment processor is the services that a payment gateway sends transaction requests to. The payment processor then handles the transaction request and sends the authorization and settlement files from Visa and MasterCard and distributes them across the network to the various payment gateways and merchant account providers. The payment processor also handles other aspects of the transaction such as the handling of chargeback requests and settlement. In short: Payment processor is a generalized term to refer to a company that processes Visa and MasterCard payments.

What is the Difference Between a Payment Gateway and Processor? 

As we can see above, the terms are used interchangeably, and for a layperson most often mean the same thing. Example: a processor is a company that facilitates the processing of payments on behalf of a merchant. 

Why do I Need to Apply to get a Merchant Account?

Broken down to it’s most basic core, the reason you must apply and be approved in order to get a merchant account is because they have the potential to lose money every time they process a credit card transaction on behalf of your business. 

Visa and MasterCard have a very clear policy that is enforced when a cardholder pays for a good or a service: 

The cardholder is entitled to receive the promised good or service. If such good or service is not delivered then the cardholder is entitled to getting their money back. 

This is one of the basic consumer protection principles that apply to credit card transactions. 

In order to mitigate this risk the credit card processor has a screening / application process. Note that most processors charge an application fee, and only some will refund the application fee in case of a decline. If you're concerned about being declined, ask if your setup fee is refundable. It’s not an unreasonable request and if your chosen processor won’t agree you can find another that will.

Watch Out for Unrealistic Promises  


When you speak to your prospective processor ask what type of documentation will be required and how long it will take to get approval. There should be concrete answers to this question. In particular, if they are making blanket promises or statements that seem unbelievable like “we approve any type of account”, (especially if you know your product or service is higher risk), you should be highly skeptical.  
This is also a point at which you should make sure you get a copy of your merchant agreement before signing the contract. If it’s seeming entirely too rosy, with no explanation of the process and little mention of supporting paperwork then consider yourself fairly warned: you may not receive what was promised.

How to Get Approved for a Merchant Account

1. Gather Your Financial Statements

Financial statements are the single best tool you can bring to the table in order to leverage the best terms of approval possible. 

From time to time I work with clients that do not want to provide financial statements. It’s usually because they are a mid-sized company that is privately owned and they value that privacy. Company financials are sensitive business information. However, from a payment processing perspective this is a significant mistake. More than anything else, most underwriters will want to see financial stability demonstrated so that they know the company will continue successfully operating well into the future. 

On the flip side of this coin I work with startups that don’t have solid a financial history. Being a startup is tough and being in that situation (especially if you have a risky product) makes it hard to get approval. The underwriter knows that if a pile of chargebacks come in the merchant may have difficulty returning the funds to the cardholders. Merchants in a startup position would give anything to have a strong balance sheet because it would make a huge difference in their approval. If a business has worked hard to earn success, it's a poor decision not to leverage this successful history to get the best possible terms of approval. Use your financial statements or be prepared to put up a security reserve. You will want to provide the most recent balance sheet, profit and loss statement, and any notes from the accountant. 

A note on startups:  if you have not yet completed a year end don't fret. If trading volumes are smaller, then approval should be relatively easy to achieve (less money trading through the account means less potential risk). If you operate a startup business that is likely to do strong trading volume out of the gate you will have to leverage the other tips found below to achieve approval. It may also be helpful to work with a processor or agent that specializes in consulting with startups to help through the approval process. Some processors are more startup friendly than others.

2. Consider Your Processing History

Having a strong processing history is another extremely important tool to leverage your application. The more money you trade, and the fewer chargebacks, the stronger case you build. The logic is simple: if you've processed credit cards previously and been successful then why would that change? It wouldn’t. Always supply at least 3 months processing statements whenever available. 6 months is going the extra distance. If you trade high volumes or have a high risk product or service dig up an entire years worth of statements. It may be a bit of extra work but it will be well worth the effort if it reduces or eliminates the need for a security reserve. 

Processing statements should always show the following broken down by month:

  • Number of transactions
  • Total transaction volume
  • Number of refunds
  • Total refund volume
  • Number of chargebacks
  • Total chargeback volume

A Secret Weapon to Ensure Approval

There is no magic phrase or secret handshake that will get you through the door of any processor. However, the most obvious strategy is also the one that is most often overlooked: Explain what you're doing in plain English with an old fashioned cover letter.

Write the cover letter almost as if you were applying for a job, except it’s being written on behalf of a company. Your goal is to address the hot button points that the underwriter will consider when reviewing your application. It’s certainly true that the underwriter’s job is to protect the processor’s best interests. They will not approve applications fraught with chargeback risk. However, for the most part they want to help businesses succeed. 

Some processors are more lenient than others in this department. For example, some processor encourage underwriters to reach out to merchants by phone to discuss any concerns, where other processors do not. You may not ever get the chance to speak to the underwriter and make your case, so your cover letter should work to proactively address any concerns that may come up as they review the file. For this reason, the cover letter is perhaps the ultimate weapon in your arsenal.

6 Tips on Writing a Merchant Account Cover Letter 

Writing a good cover letter is a question of balance. First, seek guidance in this department from your sales representative. This is important because each bank or payment processor has a different risk appetite for different industries. They may have valuable insight or advice. 

Also remember that underwriters are people, and can be swayed and reassured like anyone else. Get your best foot forward. If you have a high risk or complicated service it’s critical that you prepare a brief, carefully worded, and extremely clear cover letter that hammers home your points. Attempt to address any concerns that might come up, and answer any questions before they even have the chance to be raised. If you do this these questions can’t foster doubts and will never grow into concerns. It’s the classic “head it off at the pass” approach. 

For suggestions, here are common criteria that should always be addressed on the cover letter.

1. Consider the Product Risk Specific to your Industry.


Guns and ammunition. Enriched uranium. Ivory tusks from endangered elephants. If you are selling any of the above your cover letter had better be written with magic ink. On the plus side some processors would refund your setup fee after being declined, which you could then put towards bail after you were arrested! In reality these would be on the prohibited list which is maintained by Visa and MasterCard. You simply won’t get approval for some type of products. Let’s focus on the sale of products and services that won’t get you arrested. 

The highest risk accounts usually require a specialist processor. In the high risk category, discount rates are extremely high and security reserves are large. It’s best to summarize that in this sector you will need to find a specialist processor. Two examples of high risk accounts in the eyes of obtaining a merchant account are: 

  • Pornography / Adult material 
  • Online gambling 

A step down the risk ladder takes us to businesses that are traditionally considered high risk, but approval is most often achievable with the proper effort. These businesses should leverage every one of the tips in this article to get approval.  

Some examples of moderate risk businesses:

  • Travel packages, airfare, and accommodations
  • Telephone services (especially long distance telephone and calling cards)
  • Multi level marketing
  • Group buying websites
  • Penny auction websites
  • Discount memberships
  • Gym memberships

Another rung down the risk ladder takes us to low risk applications that where you will find most B2B and B2C products and services. I would think that most Shopify ecommerce store owners would fit into the low risk category.   

Talk to your sales agent at your prospective payment processor and ask if the type of product or service you provide is usually supported. Knowing what to expect ahead of time will give you a heads up in case you really need to give your cover letter polish. 

2. Highlight What is Good

Sing your praises and don’t be shy to provide relevant information that is factual. Remember to stick to the facts though, and don’t get carried away. You wouldn’t want to tell the underwriter that you have an IQ of 160, can cook a pretty mean omelet, and can bench press 300 pounds. You have a short window of opportunity. Keep it brief because if it’s long winded the underwriter may not read the whole thing, and if it’s too fanciful it will lose credibility. Stay on target by talking about the directors, principals or people involved in the project that lend credibility. For example, if you were selling a book that you’ve written and your editor also works on books by Stephen King it would be very relevant. Industry relevance or insight that you have earned, gained or acquired should be highlighted.

If you know your product is affiliated with a higher risk industry then you should ask yourself if there is anything that separates your business from the crowd.  Do you have proactive policies towards monitoring fraud? Do you offer a groundbreaking product that makes yours superior to that of your competitors? If there is anything of note put it in, while staying factual and concise.

3. How to Address High Trading Volumes

Trading volumes directly impact the potential risk to the processor because more money is moving through the account. If you are going to be trading strong volumes you should highlight to the underwriter that you have a strong processing history. If you are a startup and don’t have a strong processing history then tell the underwriter what is unique about your business that will cause strong volumes to happen out of the gate. You should be validating the application by providing logical reasons why your business is going to perform the way that it is, and make sure that you demonstrate an ability to keep up with orders to smoothly operate the business. 

4. How to Address Long Fulfillment Duration Timelines

There is something in the industry called “fulfillment duration” which refers to the amount of time that passes between when a payment is collected and when the product or service is delivered. For example, if you sold baseball mitts online the fulfillment duration would likely be about a week because if you ship the glove immediately the customer would receive the product within a week. If you sell vacation packages the fulfillment duration would be much longer (about 60-90 days) because most people book their vacation 2 to 3 months ahead of time.  What you want to keep in mind is that the more time that passes between the date of the sale, and the date the order is complete, the higher the risk score goes. 


Subscriptions are always impacted directly by fulfillment duration. Anytime you buy something with a future expiry date (like subscription access to a website) the risk score tends to be higher. You would ideally build your business in a way that controls or limits the risk from fulfillment duration. In some cases you will have no control over this point because external factors will dictate how this must operate.  

This leads to a very important consideration: In some cases you may find that your business is higher risk and a decline is a very real possibility (especially if it’s a young business without financials). If you find yourself in this situation it’s sometimes best to tweak your business model to reduce the fulfillment duration or subscription timeframe because it will cause the risk score to go down. Addressing this in the cover letter can make a significant difference. It could be the difference between a flat decline and the underwriter reaching out to you to open a discussion about approval.

5. Are you Open to a Security Reserve?

Some people think it’s crazy to tell the underwriter that you are willing to put up a security reserve. This is flawed logic because it’s not like the underwriter isn’t going to go down that road anyways if the risk score is getting too high. It’s best to be as proactive as possible. 
  

When in doubt say: “I realize that our industry may historically be considered a bit higher risk. We realize this and are sincerely interested in working with you. If security is required we are willing to look at this if necessary.” It conveys a sense of seriousness about the application. You aren’t going to waste anyone’s time and will work with the processor to find mutually agreeable terms of approval.

6. Dealing with Bad Credit

If you’ve had problems with chargebacks previously, or have bad credit you should be forthright about it. It conveys to the underwriter that you are an honest person and demonstrates that you are willing to step up to the plate and address any issues that may otherwise be a cause for concern for the underwriter.

What if My Merchant Account is Declined?


What should you do if you’ve done everything you can and you have still been declined? First of all, remember that some processors are more lenient and willing to listen than others. Declines can be overturned. If you’ve received a decline you should consider responding back with something like:

“Thank you for taking the time to look at our application. I have some knowledge of how merchant industry risk works and why our application may not be able to be supported. For the sake of being thorough I’d like to reiterate that we are sincerely interested in using your service and this is a serious project for us. If there is anything we can provide, including cash collateral or security we are happy to do explore this. We are committed to this business and are willing to provide significant security or anything else that may be required in order to achieve approval. If there is anything that we might be able to provide to help achieve approval please let me know, we do want to work with your organization.”

Obviously, the above is a rough template and should be edited to be specific to your situation. What you are trying to do is convey a sense that you want to work with them. I’ve found that the more overtly willing a merchant is to come to the table and have a candid discussion around security, the less security ends up being needed. I expect this is because it demonstrates to the underwriter that you are serious about your business and are willing to “put your money where your mouth is”, so to speak.

I’ve Tried Everything But Was Still Declined!

Keep in mind that different banks and processors have different appetites for risk. For example, travel is historically considered a higher risk industry but some processors specialize in travel accounts and can provide them relatively easily. It might be the case that the processor you selected just wasn’t the right fit for your business. 

Another example: Right now, group deal (Groupon type) websites are very popular, but there aren't many banks that will underwrite these accounts. You may have to pound the pavement and research to find the right processor. It also sometimes helps if you can work with an Agent that represents a few banks, because they may be able to save you some effort and know which processor will have an appetite for your type of business. 

What Happens if all Else Fails? 

In almost every situation “declined” really means “declined right now, but talk to me later once you have more history.”

Some processors specialize in very high risk accounts. I encourage cautiousness when using this type of processor. Thoroughly do your due diligence before going down this road. High risk processors, which are often located offshore, will charge significantly higher fees than low risk processors. In some situations you may not have an alternative though. If you do use a high risk processor try to make sure you are not locked into a contract. After 6 months to a year of successful processing history you may be able to re-submit a stronger application into some of the processors that declined you previously. 

I realize it’s a catch 22 that you can’t get a processing history if you can’t get approved. Some businesses have to start with a high risk processor, with a long term goal of building a solid processing history and moving to a lower risk processor. 

A last note regarding this strategy:  Be fanatical about preventing chargebacks if you are going to go this route. You want to make sure your processing history is sterling when you try to revisit that application a year later. 

Conclusion

Your merchant account sales representative is the best tool you have access to ahead of submitting your application. Ask questions about approval and listen to the responses. If it’s all roses be skeptical. Be honest with your expectations and if you have concerns highlight them upfront. The processor you are working with should want to help you get approval, which should ultimately lead to a mutually beneficial long term partnership. 

This article was written by David Goodale  who is the CEO at MerchantAccounts.ca. David has over 10 years of industry expertise in the international and multi-currency ecommerce payments sector.