Before we start dealing with the principal requirements for opening a merchant account, it is essential to understand the basics. So, let's get going.
What is a merchant account?
In very simple words, a merchant account is a sort of financial agreement between a merchant bank and the entrepreneur, where the former grants the latter a new line of credit. Each time, a business transaction is made, the merchant bank will step in to collect and transfer the amount to your savings bank account. The processing costs and interchangeable fees will be automatically deducted from the deposited amount. Additionally, the merchant bank will submit a request for payment in the bank that has provided you a customer card. In nutshell, the main objective of a merchant account is to conduct a business transaction competently and proficiently.
Why are so many safeguards and cross-checks associated with a merchant account?
A merchant account is typically associated with innumerable risks like credit risk, fraud risk and contingent liability risk. In a bid to minimize these risk, several safeguards and cross-checks are implemented. You will be able to understand the significance of the safety measures only after you understand the volatility of these risks. So, let's try to decipher these risks.
Credit risk- It is the risk that the merchant bank takes with regard to the amount of money you owe to the bank. Merchant accounts are generally given to individual with poor or no credit rating. Hence, the risk that the bank takes is quite high.
Fraud risk- As your business is internet-oriented; therefore the probability of fraud risk is exceptionally high. The typical example of fraud risk is credit card transactions made by an unauthorized credit card holder. This risk is unavoidable, but fully preventable.
Contingent liability risk- This is the most dreadful risk that may even enforce you to close your enterprise. The best example of contingent liability risk is a situation where a large number of customers start asking you to give back their money. This risk is unforeseeable and disastrous for any entrepreneur.
Am I eligible for a merchant account?
If you have a high-risk business like online video gaming, credit card restoration agency, online pharmacy and so forth, then it would be very difficult to obtain a merchant account. The set up fees would be exceptionally high and the transaction fees would also be unreasonably high. Besides this, you would also be expected to maintain a reserve. This shouldn't be viewed as a negative requirement because the reserve acts as a safety net in distressing business times. It serves as an escrow for the bank and allows you to deal with unanticipated business problems with ease. In the end, the entire reserve amount is solely yours. The total amount of reserve and how it is established by the merchant bank is fairly variable.
What are the geographical requirements for setting up a merchant account?
The geographical requirements for a merchant account are as follows:
• Your enterprise should be a US corporation.
• Your merchandise should be stored and deported from US.
• You should have a valid postal mailing address in US.
• All your business transactions should be in US dollars.
• Your bank guarantor should have an authentic social security number and a good credit rating.
• Lastly, the server of your business website should be US-based.
Some more requirements that need to be taken into account
Apart from the above crucial requirements, you would need to fulfill some more essentials too.
If your business activity is regulated by federal or state government, then without delay get a business license. Also, make arrangements for a personal guarantee. Finally, fill up the application form very carefully. Give detailed information about yourself, your partners and suppliers. Furthermore, without any hesitation, divulge the details of your internet server, method of delivery and cash flow. Lastly, authorize the merchant bank to perform a credit check. Once, all this is done, sit back and relax for this is all that needs to be done to open a merchant account.
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