Understanding High-Risk Merchant Accounts and Credit Card Processing

A high-risk merchant account becomes necessary when a business intends to accept credit card payments but has a high risk of fraud or chargebacks, or if it has certain other characteristics — such as those mentioned before. Credit card processors are always looking to minimize the amount of risk they are taking on. This is why some businesses are considered high risk and may have a harder time getting approved for traditional credit card processing services. A high-risk merchant account is an account that is designated for businesses that may be at a higher risk for fraud or chargebacks. For those who operate in a so-called high-risk business and wish to take credit cards, there is a solution: you may apply for a high-risk merchant account. 

What factors contribute to a company being considered high risk?

There are several factors that can contribute to a business being considered high risk. Each payment processor, bank, and payment service provider develops its own set of rules to define risk. 

Some businesses say upfront that they do not do business with specific industries, but others accept applications from everyone. Payment service providers, as opposed to merchant account providers, are often more selective regarding the sort of businesses that they shall allow on their platform. In any instance, you will be required to submit an application that contains particular information about your company.

Industries that might be deemed as ‘high risk’ include:

  • Forex
  • Cigarettes and other tobacco products like vapes and e-cigarettes
  • Dating services, businesses providing products/services relating to the 
  • Financial services
  • Arms and ammunition, as well as weapons accessories
  • Cannabis industry
  • Online gambling and casinos
  • Firms that provide software as a service, are often known as SaaS companies.
  • Travelling and tourism industry.

If your business falls into one or more of these categories, you may need to get a high-risk merchant account in order to process credit cards :

  • Transaction sizes on average are large.
  • Sales volumes are extremely high.
  • Industries that are heavily regulated.
  • Sales on a global scale.
  • A large number of transactions involving cards that were not physically present.
  • There is little to no business background.
  • Timelines for completion are lengthy.
  • Credit scores that are new or in low standing.
  • Fraud or unlawful activities in the past.

What is the difference between high-risk accounts and normal accounts? 

Payment processing fees are increasing- Payment processing fees for regular small-business accounts may be as low as 0.3 percent on top of the interchange rate, while fees for high-risk accounts may be as high as 1.5 percent on top of the interchange rate, depending on the industry. If the interchange rate were 2.15 percent plus 8 cents, a typical firm would pay $1.16 for a $50 transaction (assuming the interchange rate was 2.15 percent plus 8 cents), while a high-risk merchant would pay $1.76. The actual costs charged differ from business to company. 

The application procedure is more time-consuming- A typical small-business account may be authorised in minutes or less if you require one for your firm. High-risk accounts, on the other hand, may take several days to be approved. In order to qualify as a high-risk merchant, you will be required to provide more information about your business, such as bank statements, and your personal credit may be reviewed.

Chargeback costs are increasing- Chargeback costs, which can vary from $20 to $100 per transaction, are levied on companies in addition to the amount refunded for the initial transaction, in the case of a high-risk merchant account. A regular online business has a lower chargeback ratio as compared to a high-risk business.

The decision-making process followed by payment processors

In the majority of cases, a business owner does not apply for a merchant account on his or her own. Instead, the first step should be to identify a payment processor with whom to collaborate. In order to create a merchant account, the payment processor must first select a banking partner with whom to collaborate.

Recognizing the nature of your business

Andy Roth works as the director of strategic relationships for Payline Data, a payment processing firm that specializes in high-risk accounts and merchant services. He emphasizes that, in most cases, the dialogue is the first step in the process. According to Roth, “we want to know more about their circumstances, and what puts them at high risk.” “There are a variety of variables that contribute to their increased risk. The more information we have upfront, the more able we will be to assist you.”

Looking ahead over the next several years

A high-risk account is not something you open once and forget about; it is the beginning of a long-term relationship. In order to cover chargebacks, payment processors must undertake the risk that a merchant will be unable to refund the cost of the transaction. A chargeback occurs when an item is returned to the merchant after a consumer challenges it with the issuing bank. Internal processes are used by each payment processor to ensure that an authorized application is a good fit for their business. Payment processors, in addition to using their own judgment, evaluate applications using computer-based decision-making tools and algorithms.

Finding a financial partner is essential.

Upon determining that a firm is a good fit for a payment processor, the following step is to locate a bank that will create a merchant account for the company. In other words, that bank will be the financial institution through which the funds from each card transaction will be transferred in the end.

Roth points out that many payment processors that specialise in high-risk accounts, such as Payline Data, collaborate with a variety of financial institutions to identify the best fit. While a payment processing provider may be interested in forming a partnership with a company, establishing a merchant account is still an important step in the process. Consequently, Roth explains, final approval “relies on our relationship with the banks themselves — they underwrite our policies.”

The relationships that payment processors develop with partner banks enable them to identify potential matches more quickly and efficiently. One bank may have a huge portfolio of cigarette firms while another may be a travel-focused institution, according to Roth in an email. Because we know this in advance, we can guarantee that [customers] have the best experience possible in getting accepted by ensuring that they have all of the necessary documentation prepared in advance, rather than merely “hoping” that this underwriting bank would accept their business.”

The fact that you have applied for a high-risk account does not ensure that you will be accepted. Even for payment processors who specialise in that industry, certain organisations may demonstrate an excessive number of risk characteristics. Additionally, if a business owner has a history of fraud or other similar activities, it will be difficult for them to get a payment partner in the first place. Mastercard maintains a list of retailers who break specific regulations, which might make it difficult to obtain a Mastercard account in any location.

If a banking partner has been selected, an account may be opened, and the firm can then begin receiving credit card payments from customers.

The steps you should take if you require a high-risk merchant account

In the event that you require a high-risk merchant account, adopting these best practices will boost your chances of locating a payment partner:

  • During the application process, be forthright and honest with yourself. Attempting to reveal as little information as possible might be detrimental to your purpose. When it comes to these kinds of circumstances, Roth believes that communication and transparency can only assist.
  • Examine your current monetary position. Cash on hand can be an indication of financial security. According to Roth, banks like to see 25 percent to 50 percent of monthly card transaction activity resting in your account balance at any given time.
  • Assemble the appropriate documentation. Keep in mind that you will need to provide bank statements from the previous three to six months during the application process. These statements should include information about where the money is originating from and where it is going. Some banks may need you to provide a few years’ worths of tax returns.
  • Determine which factors are under your direct control. Even if payment firms perceive your sector to be high risk, there is little you can do to change that. However, you may take actions to enhance your credit score and prevent chargebacks if those are factors in your circumstance. Talk to your payment firm to see if there are any actions you can do to lower your risk; you may be able to negotiate cheaper rates if you do so.
  • Communicate with consumers in a straightforward and concise manner. Not all chargebacks are malicious in nature. Some of these are the consequence of dissatisfied clients. You may take action to limit the number of chargebacks that you get. If so, is your return or shipping policy simply comprehensible and put in a prominent and easily accessible location? Is it simple for consumers to get in touch with you if they wish to fix a problem on their own?
  • Prepare yourself to learn new things. Don’t claim to be an expert in the field of payments. Instead, rely on the knowledge and experience of the personnel from the payment processor. Inquire about their assistance in setting up your payment procedure – and be prepared to put their ideas into action.

Finding a high-risk merchant account provider is a difficult task.

In order to accommodate the vast range of business requirements and risk variables, firms that provide high-risk accounts often rely on customized pricing. As a result, you are unlikely to come across any publicly disclosed pricing or terms. Instead, you’ll need to schedule a meeting with a representative from the firm in question.

The initial stage in the process is to identify a small number of payment processors with whom to communicate. Some payment processors specialize in serving certain industries, such as healthcare and retail. Many may attempt to reach potential clients using well-established industry channels, such as trade journals, websites, or direct marketing campaigns, among others. Familiarity with your industry might be beneficial; therefore, this may be a smart location to begin your search.

At PayPound, we’re experts in handling high-risk merchant payment processing for a variety of high-risk industries, both big and small. Where low-risk providers turn their back, we welcome you with open arms, ready to help high-risk businesses get approved and stay approved.

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