If you want to accept card payments, and you operate a high-risk business, then you’re in a difficult position because you will find that a lot of mainstream providers won’t want to work with you. You may be wondering why – after all, don’t they want your money?
Sadly, merchant services are more complex, in the background, than you might think as a business owner. To you, they’re a service that allows you to accept card payments. To your customers, they’re just an extension of you – a way for them to enter their card details and get billed. The merchant services provider, however, is actually offering you a revolving line of credit. When they process a payment, and then pass the money on to you, they are accepting that should the customer decide to apply for a refund at some point, they will have to issue that refund. They will chase you for the funds, but they are accepting the risk that your credit rating is good enough for them to process it.
How do Merchant Accounts Work?
If you want to accept debit cards or credit cards, then you will need a merchant account, which will be issued to you by a Merchant Services Provider. This account is, essentially, set aside to hold funds that were captured via your credit or debit card. The funds that are held in the merchant account can be transferred to a normal business bank account as required.
Merchant providers can allow people to accept credit or debit card payments in person, or over the Internet. Many people use PayPal or other intermediaries to take payments online, instead of going the merchant account route, but by doing so they accept that they will end up paying a higher fee.
If you opt for a traditional merchant account, then the transaction goes through a long process:
Firstly, the point of sale machine will use a payment gateway to process the transaction, and to connect to the card processing company to confirm if there are enough funds in the cardholder’s account to allow the transaction to go ahead.
The transaction request is sent by the payment gateway, and the processor handles each request, and sends authorization and settlement files to the relevant payment gateways or merchant account providers. This is the company that process payments from Visa/MasterCard accounts.
The bank that runs the merchant account agrees that if the customer requests a refund under the credit card guarantee, for example for fraud, then they will issue it. They are taking on significant risk in this respect.
High Risk Businesses
Merchant accounts are easy to get for businesses that are in low risk industries, but they are a challenge for companies in higher risk industries. The risk is calculated based on the chances of fraud, as well as chargebacks, and other risk factors. Even if you, as a company, have a perfect record, banks have no real way of knowing that on the initial contact, and they base their policies on the actions of the whole industry.
A business might be classed as high risk for many reasons, such as:
– Selling products that are, while not illegal, on the edges of legality (e.g. gun related products, CBD oil or medical marijuana, research peptides, etc)
– If the owners have been bankrupted
– If the company is in a ‘risky’ niche such as supplements, SEO, gaming, or ticket brokers
– If the delivery of the product occurs a long time after purchase
– If the business has had a poor credit rating in the past
– If the company or the industry in general has a lot of chargebacks
– If the company is not registered with the relevant local regulator
Some of the above points are things that a given company does have control over. For example, if there is a regulator for your type of business, then registering with them will make life a lot easier for you – even if it is not compulsory. Some things cannot be controlled. Gaming companies will be seen has high risk, for example, and the best that you can do is find ways to control and limit the amount of fraud that occurs within your business and demonstrate to potential merchant providers that your own level of risk is lower than the average in your industry.
Getting your first merchant account might be difficult because the banks will be reluctant to work with you and you may be faced with higher fees than other new businesses in different niches. Once you have had that first merchant account, though, life gets easier because you will have a transaction history to work with. This means that you can show that you are reliable and well respected, and that you should, in theory, be able to move to an account with lower fees after a reasonable period of time.
When you are applying for an account, it pays to shop around. Once you find a bank that you like the sound of, and you are working on their application form, provide as much information as you are able to and try to answer all of their questions even if some of them seem irrelevant or seem like something you don’t know how to answer. The more information you provide, the better the chance that the person who reviews your application will be able to help you.
If you find that you are constantly being turned down for mainstream accounts, you may need to apply for an account with a company that specializes in high-risk processing. They will be in a better position to work with you, and may even be able to offer advice that will improve the security, robustness and efficiency of your business. Take their advice, because any improvements you make to the way you process orders will be looked upon favorably when you come to try to move to a lower risk account after 6 months to a year with your high risk account.