Why do startups struggle to obtain merchant accounts?
Payments
Asked by Question Bot02/Jan/20151 answer
1 Answer
F
Faisal Khan
Answered 02/Jan/2015
Merchant Account approval is all the rage these days. Imagine companies that are outside the traditional countries, who are 100% genuine and face the same dilemma you do - getting a merchant account.
The issue is basically that of risk. This is how the acquiring banks and in turn their PSPs (Payment Service Providers) see it. Having experienced this for a lot of our customers it turns out the basic underlying factors are:
All these are perhaps acceptable factors when you have a running business at hand, but when you are a new start-up, it can be a herculean task to try to convince the banks to give you a merchant account. One way to circumvent this is to have a ready-deposit, which the banks, etc. can tap into should chargebacks, etc. occur. The only problem with this is that most CTL system cannot work with a secondary account to tap into and withdraw money into a nostro account pending investigation of a chargeback, this is a manual process.
To the best of my knowledge, no automated system exists for this. This compounds the problem. Startups who are willing to put a deposit against their risk, are turned down, because the systems cannot handle this.
To be fair this is not a government issue. Its not even a financial regulator issue. This is pure actuarial science at work.
To the banks you are not low risk. You are high-risk because of the fact that you have zero operating history with them or anyone else.
The only work around currently for obtaining a merchant account is to work with a 3rd party payment provider, with the downside being that your discount rate shoots up! More rolling reserves, etc.
There are plenty of 3rd party payment providers that will work with you on this. Do try to tap into them. It can be a frustrating experience, filling out detailed forms etc, but in the absence of a merchant account, you have little recourse as far as an alternative is concerned.
The issue is basically that of risk. This is how the acquiring banks and in turn their PSPs (Payment Service Providers) see it. Having experienced this for a lot of our customers it turns out the basic underlying factors are:
- Credit History
- Operating History
- Chargebacks
- Credit Risk
All these are perhaps acceptable factors when you have a running business at hand, but when you are a new start-up, it can be a herculean task to try to convince the banks to give you a merchant account. One way to circumvent this is to have a ready-deposit, which the banks, etc. can tap into should chargebacks, etc. occur. The only problem with this is that most CTL system cannot work with a secondary account to tap into and withdraw money into a nostro account pending investigation of a chargeback, this is a manual process.
To the best of my knowledge, no automated system exists for this. This compounds the problem. Startups who are willing to put a deposit against their risk, are turned down, because the systems cannot handle this.
To be fair this is not a government issue. Its not even a financial regulator issue. This is pure actuarial science at work.
To the banks you are not low risk. You are high-risk because of the fact that you have zero operating history with them or anyone else.
The only work around currently for obtaining a merchant account is to work with a 3rd party payment provider, with the downside being that your discount rate shoots up! More rolling reserves, etc.
There are plenty of 3rd party payment providers that will work with you on this. Do try to tap into them. It can be a frustrating experience, filling out detailed forms etc, but in the absence of a merchant account, you have little recourse as far as an alternative is concerned.