Why Banks Are Tightening Merchant Account Approvals

If you applied for a merchant account five years ago and then applied again today, you would notice a stark difference in the approval process. What was once a straightforward underwriting review has become a multi-layered investigation that many legitimate businesses fail to pass.

This tightening is not random or arbitrary. It is the result of several converging forces: increased regulatory pressure on banks, a wave of fines imposed on processors for non-compliant merchants, rising chargeback volumes across the industry, and an economic environment that has made financial institutions broadly more risk-averse. Understanding these forces helps businesses navigate the changing landscape and find payment processing solutions that work.

Regulatory Pressure on Banks

The most significant driver of tightening approvals is the regulatory environment. Banking regulators in the United States, the European Union, and the United Kingdom have all increased scrutiny of payment processing activities over the past three years.

In the US, the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation have issued guidance that holds banks accountable for the merchants they process for. If a merchant engages in deceptive practices or accumulates excessive chargebacks, the bank that provides the merchant account can face regulatory penalties, enforcement actions, and even restrictions on its own operations. Banks have responded by raising their underwriting standards across the board.

The EU's Payment Services Directive 3, which is being phased in through 2026, imposes stricter requirements on payment processors and the banks that partner with them. Stronger customer authentication requirements, more rigorous merchant due diligence, and expanded liability for unauthorized transactions have all made banks more cautious about which merchants they take on.

In the UK, the Financial Conduct Authority has taken an increasingly active role in supervising payment institutions. Several high-profile enforcement actions against processors that failed to adequately vet their merchants have sent shockwaves through the industry. Banks that previously delegated underwriting decisions to their processing partners are now conducting independent reviews of every applicant.

The Card Network Crackdown

Visa and Mastercard have both introduced programs in the past two years that penalize banks based on the performance of the merchants they sponsor. These programs shift liability for excessive chargebacks, fraud, and compliance failures from the merchant directly to the acquirer bank.

Visa's Acquiring Monitoring Program tracks each acquirer's chargeback and fraud performance across its entire portfolio. Banks that exceed program thresholds face escalating fines, and in extreme cases, the loss of their ability to acquire Visa transactions. With millions of dollars in potential fines at stake, banks have responded by rejecting any merchant that falls outside their narrow risk tolerance.

Mastercard's Excessive Chargeback Program works similarly but adds a layer of individual merchant monitoring. Banks must report merchants that exceed chargeback thresholds and take corrective action. Failure to do so results in program fees that can reach six figures per quarter. The result is that banks are proactively terminating accounts that approach chargeback limits, rather than working with merchants to reduce them.

Card network rules now require acquirers to perform annual reviews of every merchant account. These reviews reassess the merchant's business model, financial health, chargeback performance, and regulatory compliance. A merchant that was approved three years ago may fail today's review and face account termination, even without any change in its own operations.

Rising Chargeback Volumes Across the Industry

Chargeback volumes have increased steadily across the payments industry, driven by several factors. The growth of e-commerce has made card-not-present transactions the majority of card payments, and these transactions have inherently higher chargeback rates than in-person swipes. Friendly fraud, where customers dispute legitimate charges, has become a significant problem, accounting for an estimated 60 to 80 percent of all chargebacks.

The rise of buy now, pay later services has created new chargeback vectors. When a customer disputes a BNPL installment payment, the dispute cascades across multiple transactions, multiplying the chargeback count. Some merchants have seen their effective chargeback rates double after introducing BNPL options.

Subscription-based businesses face particular scrutiny. Automatic renewal models, especially those with negative option billing where customers are charged unless they actively cancel, generate elevated chargeback rates as customers dispute charges they did not remember authorizing. Banks have tightened approval requirements specifically for subscription merchants, demanding longer processing histories, lower chargeback ratios, and higher reserve requirements.

Industry-wide chargeback data has become more transparent and more punitive. Visa's Merchant Chargeback Monitoring Program now publicly identifies merchants with excessive chargeback rates, effectively blacklisting them across the entire acquiring ecosystem. Once a merchant appears on this list, virtually no bank will approve a new account.

Economic Factors and Risk Aversion

The broader economic environment has reinforced the tightening trend. Rising interest rates have increased the cost of holding reserves, making banks more selective about capital allocation. Economic uncertainty, driven by inflation concerns and geopolitical instability, has made financial institutions more risk-averse across all lending activities, not just merchant accounts.

Bank failures in 2023 and 2024, while concentrated in the regional banking sector, had a chilling effect on the entire financial industry. Regulators became more aggressive in their examinations, and banks became more conservative in their lending. Merchant account underwriting, which sits at the intersection of banking, technology, and e-commerce, attracted particular scrutiny.

The collapse of several high-profile fintech companies that provided payment processing services also contributed to the tightening. When these companies failed, their merchants lost access to processing, and the banks that had partnered with them faced regulatory questions about their due diligence processes. The lesson learned by the banking industry was clear: know your merchant's business better, or face the consequences.

What This Means for Merchants

For merchants, the tightening of bank approvals translates into several concrete changes in the application process. Documentation requirements have expanded significantly. Most banks now require business licenses, articles of incorporation, EIN verification, bank statements for the last six months, processing statements from any previous processor, and a detailed business description that includes specific product or service information, target customer demographics, and marketing channels.

Processing history has become a critical factor. Banks want to see at least six months of processing history with another provider before they will consider a new application. Merchants who are brand new, or who have only processed through payment facilitators like PayPal or Square, face much higher scrutiny and lower approval rates.

Reserve requirements have increased. Where a 5 percent rolling reserve for six months was once standard, many banks now require 10 percent reserves held for 12 months or longer. Some banks require upfront cash reserves deposited before processing begins, tying up capital that small businesses can ill afford to spare.

Application processing times have lengthened. What once took 24 to 48 hours can now take one to two weeks, and in some cases longer. Banks are conducting more thorough background checks, verifying business registrations directly with state authorities, reviewing websites and marketing materials in detail, and sometimes requiring in-person interviews with business owners.

Finding Solutions in a Tight Market

Despite the tightening, there are still paths to merchant account approval for businesses that need them. High-risk merchant account providers have stepped in to fill the gap left by traditional banks. These processors specialize in industries that conventional banks avoid: CBD, forex, travel, subscription services, nutraceuticals, and other categories with elevated chargeback profiles.

High-risk processors use different underwriting criteria than traditional banks. They evaluate the quality of a merchant's fraud prevention systems, customer service processes, and refund policies in addition to traditional financial metrics. They understand that some industries naturally have higher chargeback rates and price accordingly, rather than rejecting applicants outright.

Alternative payment methods also provide options for businesses that cannot obtain traditional merchant accounts. ACH processing offers lower fees and fewer chargeback risks than credit card processing, making it attractive for high-risk merchants even without a traditional merchant account. Cryptocurrency payments eliminate chargebacks entirely, though they come with their own set of challenges around volatility and user adoption. E-wallets like PayPal, Skrill, and Neteller can serve as supplementary payment methods for specific customer segments.

For merchants who can afford the time, building a processing history with a payment facilitator before applying for a dedicated merchant account improves approval chances significantly. Six months of clean processing through an aggregator demonstrates to banks that the business can manage chargebacks and maintain customer satisfaction.

The most important strategy, however, is working with a payment partner who understands the current landscape. A processor that stays current with regulatory changes, maintains relationships with multiple acquiring banks, and can guide merchants through the application process is worth significantly more in today's environment than a low-cost provider that cannot actually deliver approvals.