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Understanding the Payment Industry is a tough task. Merchants are faced with confusing statements, hundreds of various payment processing fees, and numerous processing options offered by Merchant Service Providers, Payment Gateways, and other payment processing entities. The PAYMENTINSIDER provides articles, posts, and whitepapers on the Payment Industry, including this article, Merchant Service Provider – Underwriting and Risk, with the goal of creating transparency in this marketplace.

Merchant Service Provider – Underwriting and Risk

A merchant service provider offers many products and programs to help businesses process payments and may also act as the underwriter on your merchant account; meaning they assume the risk should your business not deliver on its promise.

The Risk

The risk associated with credit card processing is complex. There are a number of variables that are considered when determining a merchant’s payment processing application:

  • Merchant’s longevity and financial stability
  • Type of industry and business model
  • Product or services sold and length of time to deliver
  • Card-present versus card-not-present processing environment
  • Previous payment processing history

A merchant service account is essentially a line of credit for the business. Merchants usually accept payment prior to delivering a product, leaving the consumer at risk for a merchant’s inability to deliver. Even in cases of payment on delivery, the consumer still has some risk associated with the transaction, as the product or service may be defective or not as originally promised. The merchant service provider, acting as the underwriter for the merchant, assumes the risk for losses and chargebacks.

Merchant service providers may evaluate a merchant’s risk in varying manners and price an account accordingly. As such, it is common for a card-present merchant selling food (restaurants, for example) to have a better payment processing rate than an e-commerce merchant selling magazine subscriptions.

Understanding how your type of business and financial history impacts your merchant account rates is one step to securing lower fees and puts you in a position to negotiate. Even still, you may be overpaying for these services, as the payment industry is complex and most of the information a merchant obtains regarding these services comes directly from the providers. It’s why we believe so strongly in the services we provide. VeriProcess is not a payment processor or merchant service provider; we are a consultancy and advisory firm working on behalf of merchants.


Payment Topic: Merchant Services
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