What is a Payment Gateway?

When processing a credit card transaction, information needs to be sent somewhere to see if the cardholder has sufficient funds to pay for the sale. In a traditional brick and mortar transaction it’s actually the POS (point of sale) machine which takes the cardholder data, formats it and sends it to Visa or MasterCard to see if the customer has sufficient funds. 

In an ecommerce transaction the service takes place online via a payment gateway. The payment gateway receives transaction requests (that are sent online by software like Shopify) and then connects to Visa or MasterCard, and ultimately down the line to the customers card issuing bank to see if they have sufficient funds. If they have enough cash, the transaction is authorized and the funds are transferred from the cardholder into the merchant account. Often, a merchant account and payment gateway are set up in one process through the same company.

What is a Payment Processor? 

When discussing payments, the phrase “payment processor” tends to be used arbitrarily and mostly incorrectly. It's most often used by business owners interchangeably in reference to the merchant account provider, the gateway, or both (especially because the merchant account and gateway are often provided together). In technical terms, this is an incorrect usage of the term. However, it’s used this way so commonly and freely that there is in fact a street/layperson definition and a technical industry definition which is quite different.  

In industry terms, the payment processor is the services that a payment gateway sends transaction requests to. The payment processor then handles the transaction request and sends the authorization and settlement files from Visa and MasterCard and distributes them across the network to the various payment gateways and merchant account providers. The payment processor also handles other aspects of the transaction such as the handling of charge back requests and settlement. In short: Payment processor is a generalized term to refer to a company that processes Visa and MasterCard payments.

What is the Difference Between a Payment Gateway and Processor? 

As we can see above, the terms are used interchangeably, and for a layperson most often mean the same thing. Example: a processor is a company that facilitates the processing of payments on behalf of a merchant.

Why do I Need to Apply to get a Merchant Account?

Broken down to it’s most basic core, the reason you must apply and be approved in order to get a merchant account is because they have the potential to lose money every time they process a credit card transaction on behalf of your business.

Visa and MasterCard have a very clear policy that is enforced when a cardholder pays for a good or a service: 

The cardholder is entitled to receive the promised good or service. If such good or service is not delivered then the cardholder is entitled to getting their money back. 

This is one of the basic consumer protection principles that apply to credit card transactions. 

In order to mitigate this risk the credit card processor has a screening / application process. Note that most processors charge an application fee, and only some will refund the application fee in case of a decline. If you're concerned about being declined, ask if your setup fee is refundable. It’s not an unreasonable request and if your chosen processor won’t agree you can find another that will.

Watch Out for Unrealistic Promises  

When you speak to your prospective processor ask what type of documentation will be required and how long it will take to get approval. There should be concrete answers to this question. In particular, if they are making blanket promises or statements that seem unbelievable like “we approve any type of account”, (especially if you know your product or service is higher risk), you should be highly skeptical.  

This is also a point at which you should make sure you get a copy of your merchant agreement before signing the contract. If it’s seeming entirely too rosy, with no explanation of the process and little mention of supporting paperwork then consider yourself fairly warned: you may not receive what was promised.

How to Get Approved for a Merchant Account

1. Gather Your Financial Statements

Financial statements are the single best tool you can bring to the table in order to leverage the best terms of approval possible.

From time to time I work with clients that do not want to provide financial statements. It’s usually because they are a mid-sized company that is privately owned and they value that privacy. Company financials are sensitive business information. However, from a payment processing perspective this is a significant mistake. More than anything else, most underwriters will want to see financial stability demonstrated so that they know the company will continue successfully operating well into the future. 

On the flip side of this coin I work with startups that don’t have solid a financial history. Being a startup is tough and being in that situation (especially if you have a risky product) makes it hard to get approval. The underwriter knows that if a pile of chargebacks come in the merchant may have difficulty returning the funds to the cardholders. Merchants in a startup position would give anything to have a strong balance sheet because it would make a huge difference in their approval. If a business has worked hard to earn success, it's a poor decision not to leverage this successful history to get the best possible terms of approval. Use your financial statements or be prepared to put up a security reserve. You will want to provide the most recent balance sheet, profit and loss statement, and any notes from the accountant. 

A note on startups:  if you have not yet completed a year end don't fret. If trading volumes are smaller, then approval should be relatively easy to achieve (less money trading through the account means less potential risk). If you operate a startup business that is likely to do strong trading volume out of the gate you will have to leverage the other tips found below to achieve approval. It may also be helpful to work with a processor or agent that specializes in consulting with startups to help through the approval process. Some processors are more startup friendly than others.

2. Consider Your Processing History

Having a strong processing history is another extremely important tool to leverage your application. The more money you trade, and the fewer chargebacks, the stronger case you build. The logic is simple: if you've processed credit cards previously and been successful then why would that change? It wouldn’t. Always supply at least 3 months processing statements whenever available. 6 months is going the extra distance. If you trade high volumes or have a high risk product or service dig up an entire years worth of statements. It may be a bit of extra work but it will be well worth the effort if it reduces or eliminates the need for a security reserve.

Processing statements should always show the following broken down by month:

• Number of transactions
• Total transaction volume
• Number of refunds
• Total refund volume
• Number of chargebacks
• Total chargeback volume