A merchant account is a financial contract between a business and the bank that issued the merchant account. It is basically an open line of credit that is issued to a merchant by an acquiring bank. Like a credit line, a merchant account has limits, variable rates, and other provisions that govern its use. Applying for a merchant account requires submitting an application to a merchant bank for their review.

The following outlines general requirements a business must fulfill before receiving a merchant account:

1) Present a business plan: explain the details of your product or service, provide the business website address, and any promotional programs

2) Provide the details about your suppliers

3) Explain the delivery method of the product or service being offered

4) Provide cashflow details, the expected average online transaction values, and estimated conversion rates.

5) Provide details about the secure internet server you will use

6) Supply your bank the details and authority to carry out a credit check.

7) Provide a list of the directors or partners in the business

Credit and Fraud Risk: Credit risk is the risk the bank takes regarding the amount you may owe the bank. Merchant accounts are often given to individuals who have no credit or poor credit histories. This is because fraud and contingent liability risks are much more important considerations. New merchants are at great risk since they are not as familiar with the methods of detecting and preventing illegal credit card transactions. Credit rating becomes more important the longer a business operates, especially as the monthly charge amount increases. Contingent liability risk is the greatest risk that is associated with the merchant account. This type of risk not only includes the risks associated with fraud, but also all of the unexpected risks that may crop up. You must be able to show the bank that you are well informed about fraud and contingency liability risks and have taken the appropriate measures to reduce these risks.

High Risk Businesses: High risk businesses may be required to pay higher setup and/or transaction fees. Reserve amounts are held in escrow by the bank in the event that they have to make up costs for unexpected chargebacks. Although merchants may see reserve requirements as a negative commitment, they can serve as protection for businesses that may be at a greater risk of receiving a high number of chargebacks. Reserves are normally created by withholding a certain percentage of each transaction.

Location Requirements: Establishing a merchant account in the United States requires: that a business checking account is held with a US bank, a US postal mailing address is used, and a business website's server must be located within the US. Additional requirements that may possibly be imposed if a company is located outside the US include: a company must be a US Corporation, there must be a personal guarantor who has a US Social Security Number and good credit, and the product must be warehoused and shipped from within the US

Most people use some form of payment card to make the majority of their purchases. This is why having the ability to process cards is vital to a businesses success. When a person decides to apply for a merchant account, having the knowledge to understand what the procedure entails will go a long way to ensuring a smooth and uncomplicated process.