What Stripe, Square, PayPal and others are not telling you….

Learn why merchants face increasing scrutiny and what they can do to improve their chances of getting approved for a merchant account. And discover expert strategies to avoid shutdowns and improve risk management. Also learn the keys to keeping your account open for new and existing business owners. 

Rising Scrutiny in Merchant Underwriting 

E-commerce merchants are high-risk!  

As merchants face heightened scrutiny in the evolving landscape of online payments, underwriting processes are becoming stricter. Verifi’s 2024 Global Fraud and Payments Report highlights a significant uptick in fraud rates and complexities, particularly in North America. Allen Kopelman will share some insights on how to get approved, avoid getting shut down and keys to keeping your accounts open. 

Key Red Flags in Merchant Applications 

Merchants often find their applications flagged due to certain high-risk factors. According to risk managers we speak with industries like online gambling, nutraceuticals, and subscription-based businesses are frequently scrutinized because of their higher chargeback risks. Chargebacks are one of the top reasons underwriters reject applications, making up 45% of high-risk cases. New businesses with weak credit histories or those expecting high transaction volumes are also at a higher risk of facing rejection. Underwriters aim to minimize potential fraud, safeguarding the processor’s interests by erring on the side of caution. 

The Risk of Shutdowns by Major Platforms 

Large payment platforms such as Stripe and Square are known for shutting down merchants who fail to manage risk effectively. One of the primary reasons for shutdowns is a chargeback rate exceeding 1% of total transactions, which is a significant concern for these platforms. Businesses experiencing rapid growth combined with increasing chargebacks are particularly vulnerable. Additionally, businesses involved in prohibited industries or violating platform policies are at risk of being banned from these platforms. Although these platforms value merchant volume, they prioritize effective risk management. 

 What Can Merchants Do When Declined or Shut Down? 

Facing a declined application or a platform shutdown can be frustrating, but there are actions merchants can take. The first step is to contact the platform’s support team to understand why the decision was made. Merchants can appeal against the decision, offer more documentation, or rectify any issues that led to the rejection. In some cases, working with alternative processors may offer a better fit for your business. Adjusting business practices to reduce perceived risks can also improve chances of approval.  

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Why Is Ecommerce Considered High Risk? 

Ecommerce businesses are often categorized as high-risk due to the nature of card-not-present (CNP) transactions. Unlike in-person payments, CNP transactions are more susceptible to fraud. This vulnerability is further compounded by “friendly fraud,” where customers falsely claim they did not receive items. Additionally, the rapid growth of ecommerce businesses can sometimes outpace their ability to manage risk effectively, making them more prone to fraud and chargebacks. 

How Ecommerce Merchants Can Improve Their Approval Odds 

Merchants looking to improve their chances of securing a merchant account should focus on presenting a strong, low-risk profile. This includes maintaining solid credit scores and preparing detailed business plans with realistic financial projections. It is essential to implement robust fraud prevention tools like Address Verification System (AVS), 3D Secure (3DS), and Card Verification Value (CVV). Keeping chargeback ratios low is also crucial in reassuring underwriters about the merchant’s ability to manage risk. 

Securing the Best Possible Rates for Ecommerce Merchants 

Securing favorable rates depends on a merchant’s track record. A history of low chargeback ratios and stable transaction volumes will help merchants build a strong reputation in the eyes of processors. Implementing security measures such as 3DS and AVS and employing chargeback prevention strategies can further improve the merchant’s standing. As time progresses, merchants can leverage their successful processing history to negotiate better rates. 

What Should Unique Ecommerce Business Models Include in Their Applications? 

Merchants with unique business models outside typical merchant category codes should provide as much detail as possible in their applications. This includes explaining the products and services offered, the revenue model, and the transaction process. Providing solid risk management strategies, including fraud prevention measures, dispute resolution protocols, and compliance documentation, will go a long way in establishing trust with underwriters. The more transparency a merchant offers, the better the chances of approval. 

Understanding Chargebacks: The Importance of a Low Ratio 

One of the most common misconceptions among merchants is that chargebacks are just a minor cost of doing business. Excessive chargebacks can result in account terminations or placement in costly monitoring programs. Maintaining a low chargeback ratio is vital for several reasons: it lowers processing costs by avoiding high fees, helps secure better rates, and reduces the likelihood of entering a chargeback monitoring program, which can be a significant inconvenience. 

By focusing on strong risk management, compliance, and transparency, merchants can not only improve their approval chances but also build a solid foundation for long-term success in the competitive ecommerce landscape. 

Allen is the CEO and founder of Nationwide Payments Systems, where he specializes in providing customized payment solutions. He also hosts the B2B Vault podcast, which offers insights into the latest developments and trends in the payment industry.