If you run an online business with a higher risk of chargebacks and want to process credit card transactions, you need a high-risk merchant account. But what is a high-risk merchant account and how do you know you need one?
Many traits define a high-risk merchant. The landscape of high-risk e-commerce is ever-changing and ever-evolving. With more than 15 years of furnishing e-commerce businesses with high-risk merchant accounts, we like to think we’ve remained up to date with shifts and regulations.
Most small business owners will never hear the phrase “high-risk merchant account” unless their company is identified as such. It does seem strange at first.
In some situations, it may appear to be an unfair decision against your company, the service you give, the items you offer, or you. That is not correct. It is typically a sign that your business poses a higher risk for chargebacks from the standpoint of the merchant provider and has nothing to do with what your firm has done or how it has performed.
What Makes a Business Risky?
Every day, banks reject online merchants with excellent credit scores, decent reputations, and steady income sources because they lack brick-and-mortar businesses or sufficient assets. Banks define these businesses as high-risk merchants because there is a greater possibility that they may fail or go bankrupt before repaying their debts.
Traditional financial institutions also dislike working with firms like online dating, auctions, gaming sites, adult entertainers, telemarketers, and web hosting providers. Banks refuse them because their failure rates are greater and they sell risky products or services.
When it comes to understanding how merchant services function and choosing the best payment processing partners to collaborate with your business, understanding this crucial classification provides you with the keys to the universe. Unfortunately, no industry-wide standard defines one business as high risk while defending all others. It is extremely subjective, and some variables just make your company more likely to receive this title, such as the following:
You work from home –Your company’s location is important, and home-based firms are riskier for payment processors. Keep in mind that conducting business outside your nation may also classify you as a high-risk merchant account before you make ambitious plans to dominate the world.
How long have you been in business?–The more interested partners you have at your service, the longer you’ve been in business.
Your experience with other merchant accounts –Is crucial. When looking for new merchant partnerships, keep your records and operate ethically.
Amount of chargebacks– Almost nothing can be said about this. When possible, stay away from them. Create procedures to resolve customer issues, provide refunds, and interact with customers to prevent them.
You’re in one of the identified high-risk industries – Some industries are just riskier than others from a payment processing partnership perspective.
Your credit – This has a larger impact than many business owners know, believe it or not. Increasing your credit score makes you appear to be a less risky investment for potential business partners.
Of course, there may be reasons not included on this list that identify your business as a high-risk merchant account.
HOW IS RISK EVALUATED?
Merchants are evaluated before receiving a merchant account to determine how much risk the business poses to the acquirer. Several variables are taken into consideration. The following are some, but not all, of the characteristics that are considered risky:
- The merchant is registered in the MATCH List database because previous merchant accounts have been terminated.
- The business is new and has very little payment processing history.
- The merchant’s industry is known to have a high rate of chargebacks or is classified with an MCC the card networks have deemed high-risk.
- The merchant sells products or services using a subscription billing model.
- The business sells to international customers in certain high-risk countries.
- The merchant sells custom goods.
- The merchant has a high average ticket amount.
- The sales model includes delayed or future delivery of goods.
- The merchandise the merchant sells poses a reputational risk to the acquirer.
High-risk merchants aren’t eligible for traditional merchant accounts. They must contract with a payment processor that offers high-risk merchant accounts
A high-risk merchant account is a certain type of business bank account assigned to those merchants who present a degree of risk associated with their business.
Acquiring banks and payment service providers, perhaps more than ever, are boarding high-risk merchants with caution in one form or another:
- Requiring additional KYC documents and tightening underwriting procedures
- Welcoming only certain high-risk business types
- Imposing volume caps, security presets on transactions, and/or mandatory chargeback prevention schemes
It is the new landscape of high-risk merchant accounts: Acquiring banks, credit card issuers, and big name brands have grown leery of the risk some merchants and businesses bring.
How a High-Risk Merchant Account Impacts Your Business
Being categorized as a high-risk merchant account may demand further verification before you may access merchant services. You may even be forced to keep a certain amount of cash on hand or to limit the total number of transactions you can make each month.
Because of your high-risk classification, you will usually be required to pay higher processing rates in accessing a variety of merchant services. Some providers may even refuse to work with you.
Benefits of Having a High-Risk Merchant Account
You might be shocked to hear that being classified as a high-risk merchant has various advantages if you’re ready to pay the higher fees and go through the additional inspection and control that high-risk merchant account holders face. Among these advantages are the following:
Payment acceptance solutions that are more versatile – Low-risk merchants can only accept specific sorts of credit card payments. High-risk merchants have fewer restrictions, which means they can:
- Offer recurring payments
- Process higher sales volumes for launch events and special sales
- Sell a wider variety of products and services
Ability to work globally – When it comes to international transactions, low-risk merchants are limited and severely restricted. High-risk merchant accounts have fewer restrictions that could limit their global expansion plans. The idea is to choose high-risk credit card processing partners and merchant service providers wisely.
There are both pros and cons of payment processing with a high-risk merchant account.
High-risk merchants typically pay more in transaction processing fees and chargeback fees to compensate for the danger they could potentially cause to the payment processor’s bottom line. They are also more likely to have money held in reserve. However, high-risk merchants are usually allowed a higher chargeback-to-transaction ratio.