A high-risk merchant account is a payment processing account maintained by businesses regarded as high risk to the banks. As these accounts come with higher risks, they are charged higher fees for merchant services. Payment processors note a few factors in your business as a high-risk business account. Few factors include industry with products or services of questionable legality, low personal credit score, chargeback, and fraud rates.
This article discusses what high-risk business means and which various businesses are considered high risk.
Many high-risk payment providers charge a setup fee and additional monthly and annual fees. You need to read all instructions mentioned in the contract beforehand. Make sure that the details of the termination fee are mentioned in the contract. The payment processing industry is growing by leaps and bounds in a competitive market. Hence, look for high-risk payment processors and high risk merchant account providers who charge you only for transactions through your website or application.
The processing fee for high-risk merchants is generally double that of low-risk merchants and accounts for all transactions. These accounts generally take longer contract terms with the bank. High-risk merchant accounts go through a rolling reserve, where the payment processor holds a part of your income until it can verify the sources and credibility of all your transactions.
The higher the risk a business comes with, the larger the rolling reserve by the acquiring bank. High-risk contracts generally include an early termination fee that is charged when you close your account before your contract term ends. Some contracts have a liquidated damages clause that raises the price of breaking a contract before time.
Businesses that need to have a high-risk merchant account
Knowing whether your industry is considered high-risk to plan your finances is vital. However, here are a few categories that are regarded to be high-risk businesses:
- Casinos, gambling, and gaming
- Debt collection and credit protection services
- Travel that includes airlines, cruises, and tourism industries
- Online dating
- Sexually oriented or pornographic merchants
- Nightclubs and bars
- Health and wellness product industry
- Social networking sites
- Cigarettes, CBD, or vape shops
- Fantasy sports websites
- Multi Level marketing
- Companies with recurring payment plans
- Indirect financial consulting
- Music, movie, and software downloads
- Furniture industry
- High-risk tobacco merchant
- VPN services
- Web designing and SEO services
- Weapons of any type like stun guns, knives, or ammunitions
Reasons when a merchant is considered high risk
- New merchant: If a merchant has no previous payments and has no traces of processing transaction history, they are considered high risk because of the unavailability of a track record that renders them new to the arena.
- Involved in high-risk industries: A merchant may have an impeccable record but still be regarded as high risk. This happens when the industry involved is at a higher risk of fraud or chargeback.
- Merchants that receive international payments: When a merchant does business with countries listed in high-risk fraud cases, it is considered high risk.
- High transaction: Merchants are regarded as high risk when they perform a high amount of transactions or the average rate of a transaction is enormous.
- Low credit score: Merchants with low credit scores are considered to come with high risks
- High ratio of chargebacks: If a merchant business has a higher than 2% chargeback, it is considered to have high-risk
Points to remember while looking for a high-risk merchant account:
The market is flooded with many high-risk credit card processors, but thorough research is necessary before you opt for a future payment partner. Here are a few things you should consider while looking out for a processor
- Look for a payment processor that provides a secure payment gateway to facilitate electronic transactions. You should be able to process CNP transactions which are crucial to e-commerce businesses.
- Ensure that your merchant account provider supports mail or telephone order transactions if you need to accept such mode of payments in your business
- Look out for hidden fees like hefty cancellation fees to be on the safe side.
- If a large part of your customer base is international, look for a merchant provider who will be able to accommodate international transactions.
- A good merchant provider will equip you with additional financial tools to make the most out of your merchant account and help grow your business.
- Try to reduce chargebacks in your business. In E-commerce industries, chargebacks stem from prolonged delivery times or mismatch between product description and original product. You need to analyze the reason and eliminate chargebacks while approaching a processor.
How to get a high-risk merchant account?
You must apply for a merchant account along with your business and tax documents. Once the application is processed, the payment provider will deduce whether you fall under the high-risk or low-risk merchant category. The payment provider will plan accordingly. It is advisable to research different providers and opt for the one that suits your requirements.
Understanding the factors that deem your business to be high-risk is critical. No fixed standard identifies one business as high risk while acquitting others of the designation. However, you can consider the same major factors that make your business more likely to be high-risk. Personal credits, amount of chargebacks, and history with other merchant accounts are a few things that are taken into account while identifying a business as high-risk. High-risk merchant accounts provide their own set of benefits like the ability to work internationally and provide you with flexible payment acceptance options.
Additionally, when an industry, like cannabis marketing company, is classified as high risk, it impacts business insurance options. You need to contact insurance agencies specializing in high-risk sectors for a fair deal. Sometimes certain providers hesitate to lock a fair deal. Look for a provider who gives high-quality customer service and fair pricing to high-risk companies.