Protecting Your Merchant Credit Rating

In some situations, you could be flagged as high-risk when you create your merchant account. The good news is that being flagged as high-risk during onboarding isn’t exactly damaging, it’s simply an opportunity to establish you and your business’ credibility. However, until you improve your standing, you’ll likely have a mandatory reserve account, deal with higher processing rates, be limited to specialty high-risk processors, and face longer underwriting processes.

If any of the following apply to your business, you have an increased chance of being high-risk when you open your merchant account:

• You have a business with a high-risk MCC code, specifically, consulting (of any kind), coaching, marketing, PR
• You are a new business with no prior history (will need to provide personal financial documentation in place of business financials) 
• Your credit score is low
• Your requested business volume is over $500K annually or max ticket is $2500+ 
• Using corporate PO Box especially in states: Delaware, WY, South Dakota
• Previous records show funding delays, chargebacks, refunds, declines (higher than 1%)

 

Reserve accounts protect banks and processors against losses from chargeback, fraud, or merchant default. They can be imposed on a business from the beginning or when/if the business is flagged for suspicious processing behavior.

There are three types of reserve accounts that could be imposed:

• Rolling reserve (the most common), where a fixed percentage is held for a rolling period. 
• Capped, where the funds are withheld until the reserve reaches a set threshold
• Upfront (only for very high-risk merchants), where a lump sum is held when the account is opened

Unfortunately, if you operate in a high-fraud area or industry, there isn’t much you can do as a new business. As a new business, we recommend following these best practices before setting up your merchant account:

• Form a proper legal entity.
• Have a dedicated business bank account.
• Get an EIN. 
• Ensure your Name, Address, Phone Number match on your bank account, website, directories, social media, match. 
• Maintain documents (business licenses, state registration, operating agreements, etc.,), as these will be needed during underwriting.
• Ensure your website has an SSL and features transparent content with clear terms and conditions, a privacy policy, and a refund/return policy (yes, your underwriter will review your website).
• Mandate CVV on your website checkout page and implement reCAPTCHA 
• Choose the correct MCC, and try to find a code in a lower-risk category.
• Take steps to avoid chargebacks by using clear billing descriptors (e.g. make sure your business name is what appears on a customer’s bank statement), send order confirmations, and ensure you have a responsive customer support team.
• Avoid aggregators like Square, Stripe, and PayPal as your primary processor because they’re more likely to freeze or terminate your account due to high-volume requests.

Once you’ve opened your merchant account, monitor your transactions. 

• Don’t engage in factoring (processing transactions for other businesses).
• Notify your processor ahead of time if you expect sudden spikes in transactions from promotions or discounts.
• Track your chargeback ratio every week and enable alerts. 
  • You can also auto-refund chargebacks under a certain threshold to prevent chargebacks altogether
• Take the time to review your statements. Are there PCI non-compliance fees? New line-items that weren’t in your last statement?
• Understand your merchant agreement and set thresholds you have with your processor(s).
• Track your reserve balance and release schedule, and request reserve reductions when your processing history improves.

There are several “blacklists” that businesses can be added to if their merchant account is flagged as high-risk. Getting flagged and added to a list can be due to excessive chargebacks or something as serious as fraud or money laundering. 

The most well-known high-risk database is MATCH (Member Alert to Control High-Risk Merchants), which is managed by Mastercard. Businesses who get listed on MATCH will remain there for five years (from the date they were added). Additionally, the MATCH list includes individual principals, not just business names, making it difficult to open another merchant account under your name. In many cases, it’s difficult to remove your business before this period expires.

Visa’s equivalent of MATCH is VMAS (Visa Merchant Alert Service). 

Processors like Visa and Mastercard also have monitoring and penalty programs, including:

• VMO (Visa Merchant Monitoring Program): A Visa monitoring program with multiple warning tiers.
• CMM (Chargeback Monitored Merchant): Managed by Mastercard and used as a first tier warning for chargebacks.
• ECM (Excessive Chargeback Merchant): Managed by Mastercard.

American Express and Discover have internal risk databases; they don’t provide the level of transparency to the public that Visa and Mastercard do. OFAC (Office of Foreign Assets Control) and FinCEN (Financial Crimes Enforcement Network) also maintain databases related to suspicious activity reports, which banks and other processors may have access to.

Processors and banks are paying attention to your company’s transactions, even if you aren’t. If banks and processors notice high-risk patterns, the consequences can range from held or delayed funds and rolling reserves to account termination. 

These are the types of processing behaviors that can impact your company’s reputation to financial institutions:

• High chargeback ratios
• High refund rates
• High decline rates
• Spikes in processing volume
• Big transactions that require additional verification
• Foreign cards
• Card-not-present transactions on an account with a history of card-present transactions