How not to Apply for a High Risk Merchant Account

Merchant fraud stands out as one of the biggest issues we have to deal with when examining new high risk merchant account applications. Quite often new applicants would try to make their paperwork look better than it actually is, to make themselves look more appealing to the underwriters. Usually, these are innocent fudges of some non-essential numbers, things like number of employees, sales projections, etc. However, in their attempts to improve their chances for approval, many applicant businesses resort to much more drastic measures by falsifying information.

We had to deal with just such a case, and on a much larger-than-usual scale, over the course of this past month. An international telemarketer had reached out to us looking for merchant accounts for their several businesses, which, together, were generating about $3 million in monthly sales revenues, give or take. The merchant’s overall volumes were growing fast due to increased capacity in their call centers, we were told, so new high risk merchant accounts were needed and preferably with new processors. As all international businesses which have been accepting credit cards for some time, this one had some special requirements, which all sounded perfectly reasonable and we got down to work feeling quite optimistic that we would be able to quickly wrap this one up and give the merchant what they needed. After all, their paperwork package was complete and they were promptly following up on all of our requests for additional information. Well, things turned out to be much more interesting than we expected at first and the whole process provides a teachable moment.

Getting the First Merchant Account Approval

Having collected the merchant’s documentation, we proceeded to examine the application package and, on first review, it all looked great. The business incorporation paperwork was all in order, the financial statements looked good, the credit checks didn’t uncover anything out of the ordinary and the merchant had a solid processing history with two acquiring banks. So we contacted one of our acquiring partners, which we felt was best suited to handle this type of business and asked them to take a look at the merchant. Well, they also liked what they saw and we could now proceed and make a specific proposal to the merchant. And we did what we always do: came up with a processing rate and terms that took account of the merchant’s industry and volume. It was a proposal, which we knew the merchant could accept, even if they attempted to haggle over the rate, which they sometimes do just for the sake of it. In the event, however, the snag took an altogether different shape.

The merchant didn’t like our choice of an acquiring bank. The owner, who was also the person we were in contact with throughout the process (which is always the best way to go about it), told us that friends of his had previously had bad experiences with acquirers in the part of the world where our acquirer was located, so he would decline the proposal, rather than take his chance with a potentially troublesome bank. We did what we always do and did not argue with him, beyond pointing out that there was more than one acquirer in this particular country and all of them followed their own business practices. After all, we were certain that we would be able to easily find another acquirer for our merchant and do so quickly. Well, this is when the real fun began.

Skeletons in the Closet

We contacted another acquirer and asked them to examine the package. By the way, for those of you who are new to the industry, we couldn’t just send the paperwork to a bunch of acquirers around the world to speed up the process. The thing is that, when banks notice that a particular application package pops up all over the place, they get wary, very wary. We’ve always had trouble figuring out why this is the case, but it is. In any case, we sent the package to one of our partners and were expecting a prompt follow-up.

Well, the acquirer did get back to us within a couple of days, but not with the response we were expecting. The merchant’s paperwork, we were informed, was fraudulent, all of it! We didn’t believe that — after all, we had already verified the validity of some of the paperwork, so all of it could not conceivably be fraudulent. We thought that instead the acquirer probably didn’t like either the industry (banks often change their attitudes) or the somewhat high chargeback rate, but thought that citing fraud as a reason for their decision would make it sound better. Yet, a nagging suspicion began to take shape.

So we contacted another acquirer and this one took much longer than the previous two to get back to us. When they did, the merchant was once again accused of falsifying the paperwork. This time the acquirer was much more specific: the processing statements and the bank letter were both fraudulent. We don’t know why they thought that the bank letter was fraudulent — we had verified that the merchant had an active account with the bank in question, although the bank didn’t release information about the available funds. Still, at this stage of the process there could be little doubt that something was seriously wrong. But what?

See, we were quite certain that our merchant was doing the volumes he was claiming. After all, if he got approved and then failed to generate the stated volume, he would quickly find himself in trouble and risk losing his new merchant account. And we knew that the merchant knew that — there could be no question that he had plenty of industry experience. So why go into the trouble of falsifying his processing statements? Well, there was only one possibility that we could come up with — the merchant was aggregating the processing volumes of multiple businesses, meaning that all of these businesses were processing their sales through a single merchant account. This practice is unequivocally prohibited by Visa and MasterCard and, of course, the merchant would have been well aware of that as well.

But even this explanation wasn’t quite good enough. Let’s assume that our hypothesis was correct. The thing is that if such a combined processing volume ($3 million per month or so) were split among even as many as a dozen businesses, each one of them would more than likely have plenty of volume to get decent terms if they applied on their own. Yes, some, or all, of the supposed individual businesses could have been blacklisted by Visa and MasterCard, but even then there are ways to find solutions for them. Yes, the terms would be considerably worse than what a $3-million-a-month merchant could get, but it would be all perfectly legal and well accounted for. And, by the way, the discount rate is never the most important consideration for experienced, high volume merchants like this one. We had discounted the possibility that the merchant may be using its merchant accounts as fronts for very hard-to-place businesses, because he knew that we would be contacting some of their customers from time to time to make sure that they were selling what they applied for.

Eventually, we ended up dropping the application, simply because we weren’t trusting this merchant. So what is the moral of this story? Well, if you are a merchant who is hiding something, but still manage to get your high risk merchant account application approved, you should accept the proposal and go about your business. Then just follow the rules and hope for the best. Alternatively, you can choose to tell your prospective processor precisely where you stand at the very beginning to avoid any complications that are likely to arise further down the line, even if you do get a merchant account with falsified paperwork. The thing is that there is always a solution to be found for a high volume business, which is legally incorporated and follows the rules. Even if you get yourself placed on the TMF list, there would still be a solution available for you. Well, we would advise you to select the latter course of action, but the choice is yours.

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