It's My Merchandise and Services, It's My Money, or Is It?

Chargebacks hit merchants on a daily basis. Consumers either did not receive their products or they were not happy with the services or products they got, or one that is coming up even more so now, regret. Or maybe it was fraud? From someone using a stolen credit card, to Johnny using his mother's credit card to purchase that new fishing pole.

When applying for a merchant account, the acquirer must consider the credit standing of the merchant. Merchant acquirers will perform a credit analysis, but this analysis is entirely different from asking a bank for a loan.

For example, for the bank loan, the bank delivers the funds to the borrower. A merchant acquirer advances no funds. It actually indemnifies a third party - the card issuing bank who actually indemnifies the cardholder, in the event that a merchant cannot cover a chargeback. Thus, the acquirer is responsible if a merchant skips out on a merchant account.

If you sign up with a third party processor, you are adding another party to the scenario. Is it worth it?

Most third party processors will not do a credit check, so if you are on the TMF list and you think you cannot get a merchant account, this might be an option. Cardservice though has a reputation of approving quite a number of merchants who might be on this list. Most third party processors charge a bit higher transaction rate and most will hold your money for a certain amount of time or rely on you to request your money. Your account is usually monitored a bit more closely than a merchant account because they realize this.

A perfect example of an acquirer taking the brunt of responsibility is Global Payments. During four months (October 2005 - January 2006), the acquirer processed $86 million for this merchant. They did actually hold back $47.6 million in cash reserves because they suspected the merchant was not legitimate.