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Merchant Status

Definition: The relationship between a company and a bank or credit card company that allows the company to accept credit card payments from its customers

To accept major credit cards from customers, your business must establish merchant status with each of the credit card companies whose cards you want to accept. You'll probably want to start by applying for merchant status with American Express or Discover. For these cards, all you need to do is contact American Express or Discover directly and fill out an application.

However, chances are you'll want to accept Visa and MasterCard, too, since these cards are used more frequently by consumers. You can't apply directly to Visa or MasterCard, however; because they're simply bank associations, you have to establish a merchant account through one of several thousand banks that set up such accounts, called "acquiring banks."

The first thing you need to understand about accepting credit cards is that the bank views this as an extension of credit. There's also the real concern that if your company goes out of business before merchandise is shipped to customers, the bank will have to absorb losses.

While the requirements vary among banks, in general a business does not have to be a minimum size in terms of sales. However, some banks do have minimum requirements for how long you've been in business. This doesn't mean a startup can't get merchant status; it simply means you may have to look a little harder to find a bank that will work with you.

While being considered a "risky business"--typically a startup, mail order or home based business--is one reason a bank may deny your merchant status request, the most common reason for denial is simply poor credit. Approaching a bank for a merchant account is like applying for a loan. You must be prepared with a solid presentation that will persuade the bank to open an account for you.

You will need to provide bank and trade references, estimate what kind of credit card volume you expect to have and what you think the average transaction size will be. Bring your business plan and financial statements, along with copies of advertisements, marketing pieces and your catalog, if you have one. If possible, invite your banker to visit your store or operation. Banks will evaluate your product or service to see if there might be potential for a lot of returns or customer disputes. Called "charge-backs," these refunds are very expensive for banks to process. They are more common among mail order companies and are one reason why these businesses typically have a hard time securing merchant status.

In your initial presentation, provide a reasonable estimate of how many charge-backs you will receive, then show your bank why you do not expect them to exceed your estimates. Testimonials from satisfied customers or product samples can help convince the bank your customers will be satisfied with their purchases. Another way to reduce the bank's fear is to demonstrate that your product is priced at a fair market value.

The best place to begin when trying to get merchant status is by approaching the bank that already holds your business accounts. If your bank turns you down, ask around for recommendations from other business owners who accept plastic. You could look in the Yellow Pages for other businesses in the same category as yours (home based, retail, mail order). Call them to ask where they have their merchant accounts and whether they are satisfied with the way their accounts are handled. When approaching a bank with which you have no relationship, you may be able to sweeten the deal by offering to switch your other accounts to that bank as well.

If banks turn you down for merchant status, another option is to consider independent credit card processing companies, which can be found in the Yellow Pages. While independents often give the best rates because they have lower overhead, their application process tends to be more time-consuming, and startup fees are sometimes higher.

You can also go through an independent sales organization (ISO). These are field representatives from out-of-town banks who, for a commission, help businesses find banks willing to grant them merchant status. Your bank may be able to recommend an ISO, or you can look in the Yellow Pages under "Credit Cards." An ISO can match your needs with those of the banks he or she represents, without requiring you to go through the application process with all of them.