Merchant account limits are an important component to understand when it comes to payment processing. These limits are set in place to protect you, your cardholders, and the financial institutions involved in the process.
If you’re looking to sell a product or offer a service, one of the most important decisions is how you will accept credit and debit cards. Accepting these payments is vital, and in the case of an online or eCommerce business, it’s essential.
However, despite seeming rather simple on the surface, accepting credit cards can be complex and merchants need to fully understand the details to avoid paying extra fees or possibly even losing their account.
This is especially true for merchants who run high-risk businesses or conduct high-risk transactions. These transactions have specific conditions that must be understood and met so merchants can continue processing payments smoothly.
One of the areas all merchants need to be aware of is account limits. Account limits are in place for virtually every merchant and are a critical part of understanding the entire payment ecosystem as well as your own account and processing.
Below, we’ll go over the key details of account limits, why they exist, and tips for you to remain compliant with them or change them if needed.
Merchant Account Basics And How To Open A Merchant Account
To understand merchant account limits, it’s important to understand the basics of how to open a merchant account and how they fit into the broader payment processing system.
What Does A Merchant Account Mean?
A merchant account is what allows a merchant to accept electronic payments, including credit and debit cards in person or on the merchant site or merchant page. A merchant needs to apply for a merchant account through a payment processor, also known as the acquirer or acquiring bank.
Part of this application process is to determine that the merchant is A) a legitimate business and B) trustworthy to have access to the payment system.
A merchant will have to provide some or all of the following to obtain a payment merchant account.
- Business bank account
- Business entity registrations
- Bank records (optional)
- Type of product being sold
- Typical dollar amount of transactions
The last two are usually the most important and will have the most to do with your merchant account limits.
How Much Is A Merchant Account?
A merchant account generally has a low monthly fee of around $30. Plus fees per transaction. There may be additional fees like setup fees or annual fees depending on the processing volumes and other factors.
How Can I Get A Merchant Account?
You need to apply with a payment processor who will approve your business for a merchant account. You can contact ECS Payments for more information about opening a merchant account. This is how to open a merchant account in the U.S.A. Keep in mind countries outside of the U.S. may have different regulations.
Your application when opening a merchant account will be handled by the payment processor you choose. This is why choosing the right payment processor is so important. A credit card processor that works with you can help walk you through this process and help navigate any potential problems, such as with your industry or account limits.
Once all of your information is submitted, the processor will begin the underwriting process. The underwriting process for a new merchant account is essentially a risk assessment of the merchant, their business, and policies of the business regarding return policies, billing, and more.
It’s during this process that the payment processor will determine the limits for merchant transactions based on industry and card issuer guidelines. These accounts are not meant as restrictions per se, instead, they are based on industry standards to minimize risks for both the merchant, banks, and customers.
Now that you understand the process of how account limits are made and introduced, we can discuss what each limit is and how it pertains to your account and processing
Merchant Account Limits
Your limits are broken down into a few key areas that pertain to your overall processing profile. Below, we’ll go over the different limits and explain each one
Processing volume is the total amount of credit or debit card transactions on a monthly basis that a business makes. This is determined by your initial application and is usually based on your average sale amount and sales expectations per month.
Processing volume is generally considered a soft limit. If you happen to slightly go over this limit, your account won’t be in jeopardy. You may pay a fee or other surcharge as outlined in your merchant account agreements.
The only real issue comes if you go over your processing volume limit by a large amount. This is generally considered a serious situation and you’ll need to immediately address this with your payment processor to avoid any repercussions to your account and processing ability.
On the other end, not making your minimum is not a serious issue and usually incurs no penalties or other problems. There may be a minimum volume fee if you are severely under your limit, but this will vary between merchant accounts.
Overall, not making your limit or falling significantly short is a cause for alarm, at least from a processing standpoint.
Finally, some merchants use multiple merchant accounts for business purposes or to spread transactions across different accounts. In this case, these need to be treated individually in most cases.
Specific Ticket Limits
Within your overall processing amounts, there are also specific limits regarding individual tickets. We’ll discuss those below.
This one is fairly easy to understand and it simply means the average total amount of a sale from your business. Of course, this is an average, so it doesn’t have to be precise. But most businesses in the same category will have ticket averages of a similar amount.
This one is for the highest anticipated ticket your business may process. For example, you may have somewhat smaller average tickets but do on occasion sell a very high-priced item. A situation like this may be a business that sells antique items in a specific price range, but occasionally they have a rare item in their shop that sells for much more than the average item.
Disclosing this helps payment processors better understand your risk profile and prevents them from flagging normal purchases that may seem out of line with averages.
Type Of Transaction Percentage
Many businesses take credit and debit cards in a variety of ways. They may have POS hardware to take cards physically, or “swiped” as it’s referred to in the industry. They may also take cards by phone using a virtual terminal. Finally, they may accept cards online.
Some businesses may only take cards via one of these methods. Whatever your situation, the processor will want to know the percentage of each one that will make up your total transactions.
This is how they determine risk and structure your fees and other account specifics based on the risk of the transaction types.
Therefore, if you deviate from your initial transaction types, it means your risk profile has also changed.
Once again, these aren’t hard limits. For example, if you said you will take 30% of your transactions by phone but the real number is 35%, that won’t matter. However, if suddenly 70% of your orders are by phone, now that would be an issue.
How Limits Are Calculated
If you’re an existing business, it will be much easier to calculate these numbers when applying for a new merchant account. Likely, you can go through your accounting software and find these values rather easily.
For a new merchant, it may be slightly more difficult and will take some forecasting and estimation. But it’s important to do this carefully so your forecasts are accurate. As we mentioned, these are used to determine risk and if your actual sales exceed these limits, you may have issues.
Average Ticket Calculation
This is straightforward and simply a calculation of what your average transaction amount will be. For some businesses, this may be rather easy. For example, a cafe will have an average of somewhere between $5 and $30. However, if they do catering, they have a much higher average ticket.
A membership-based business likely also has a stable average ticket amount. If you run a fitness facility based on memberships, you likely only have a few tiers of memberships, and transactions fall within those tier amounts.
So even if you have no sales yet, it should be easy to determine your average ticket amount. However, you should pad this slightly to account for overages. Not reaching your limit causes virtually no penalties other than possible small fees. So it’s far better to overestimate amounts than underestimate.
However, don’t overestimate so much that the processor sees you as a risk and denies your application. Keep it within reason.
How To Calculate Process Volume
Once again, an existing business can easily look into its accounting software and calculate these numbers. When doing so, make sure to account for any swings in business. For example, if you’re a pool cleaning service, your volume may be much higher in summer than in winter.
For a new business, use existing businesses in your area or industry to estimate your processing volume.
Also, take into consideration how much of that volume will be credit cards and not total sales volumes. For brick-and-mortar stores like restaurants, this can be up to 50% depending on the industry. Of course, online retailers might be 100%.
Payment processors understand your business will grow, so they expect volumes to increase from year to year.
Why Are There Limits?
It’s important to know that merchant account limits aren’t in place to cause your business any hardship. In fact, they are mostly to help your business.
Credit card Fraud is always a concern when it comes to maintaining the security and legitimacy of online payments. Limits help processors and banks better monitor fraud attempts. This keeps your costs lower in the long run as well as everyone else’s.
Another reason for limits is to help the merchants and their payment processors find the right fees and other options that serve their businesses but also allow for the lowest costs.
For example, certain low transaction averages may be better served by different pricing structures than a business that has very high average ticket amounts but lower volumes.
Taking all this into consideration helps the payment processor tailor a plan that works best for you, and also helps to reduce fraud which can hurt your business.
Tips On Managing Account Limits
The key to managing your account limits is to keep a close eye on your transactions. This can be done through your accounting software or through the dashboard of the payment gateway you use, such as Authorize.net.
It’s also important to be aware of limits if you change a core aspect of your business. For example, if you start carrying a different kind of product that prices differently than your other products.
Another change to be aware of is you start offering a different kind of service or bundle of services that significantly changes your per-ticket averages.
It’s also important to be aware of things like multi-merchant processing. This technique may raise your volumes as additional merchants are added.
How To Change Limits
There may come a time when you have to change your established limits over the course of your business. Changing your limits would be due to your estimates changing drastically, and more than just normal growth from year to year or a rise in inflation-related expenses for goods.
If you do need to make this sort of change to your credit card merchant accounts, it’s critical that you contact your payment processor as soon as possible to discuss a solution. Don’t wait until after you exceed your limits or wait for your processor to contact you. By then, you may already be dealing with issues that could have been avoided.
There’s nothing wrong with having to change your limits, so communication is key to making sure it is handled smoothly.
Average Ticket Increases
For most businesses, this won’t change much unless their business model changes. For example, a bike shop may start off selling entry-level bikes for kids and adults. However, they may transition to high-end bikes at some point. This will likely increase average ticket amounts.
So these increases do happen, and in this case, the merchant would want to contact his processor. However, for many businesses, unless they change business models, the average ticket amount shouldn’t change enough to warrant action.
Processing Volume Increases
Processing volumes are different from transaction averages as this metric often does change over time. Mostly, this is due to the natural growth or success of the business.
Of course, this is normal and most processors allow for this. However, you will still need to contact your processor if you are approaching your limit or beginning to go over it. Even though they may account for this growth, all processors are different and they have different solutions.
With that being said, what is not normal is drastically overshooting your limits. For example, if you overshoot your estimates within the first month or so, that will likely be a problem.
This generally means your estimates were wrong, even if they were wrong for totally innocent reasons.
If you are in this situation, you need to contact your processor as soon as you notice this rapid growth. They may ask that you apply for a new account since your entire profile is now likely different. Other processors may have different solutions for high-volume merchant accounts.
Now, let’s say you expected and forecasted this rapid growth and increase. If this is the case, you need to communicate this with the processor during the application process. Some processors may work with you, but some may not be able to process for such a business.
So once again, communication is key here. If your forecast calls for explosive growth in processing volume, make sure to let your processor know when applying so you have the best chance of finding a solution that works.
Merchant Account Restrictions And Penalties
Somewhat related to limits are merchant account restrictions and penalties. These can be for new accounts if the merchant has no history or bad credit. It can also be due to the merchant being in a high-risk category. These restrictions still allow these merchants to conduct business, just with certain precautions.
For example, one restriction may be rolling reserves. This means a certain amount of total transactions are held in reserve to cover any possible chargebacks or other incidents.
The money is released over time and new money replaces the reserves, this is why it is termed a rolling reserve. The reserve time can be a few days, which is usually the case. Sometimes it can be longer, but that is less common.
Some merchants may need to agree to a rolling reserve in order to accept credit cards. However, after a period of good standing, these reserves can often be removed. So while these may seem like a hassle, they are actually a solution for merchants who would otherwise not qualify for a merchant account.
Rolling reserves can also be due to excessive chargebacks or higher-than-normal chargeback ratios. In that way, rolling reserves help merchants the most, not processors.
Penalties can vary and are mostly in the form of fees. For example, there may be volume monthly minimums that must be met, or a certain fee is assessed to cover the difference.
Your merchant account fees should be clearly outlined in your documentation when you opened your account. So make sure to check these documents for your fee structure.
Large overages may result in an account being suspended or the account being terminated. For this reason, it’s very important that all estimates you provide to your processor are as accurate as possible.
If you believe you may exceed your limits, it’s important to contact your processor as soon as possible to increase your limits.
Help With Merchant Account Limits
Applying for a merchant account can be an involved process and it’s important that you follow all the steps necessary to make the process as fast and efficient as possible.
Using a trusted payment processor like ECS Payments can help you navigate issues with merchant account limits whether you already have an account or are looking to open a merchant account.
Our experts work with business owners in virtually every industry and we also specialize in high-risk industries. We can help determine your merchant account limits and make sure your account is never in any danger.
Contact ECS Payments today and let one of our in-house experts walk you through and process and help your business start accepting payments and increasing revenue.