In this article, we will closely examine and get into the details of
• High risk merchant account
• Types of high risk businesses.
We’ll open up these two, very confusing topics for our readers, in order to provide clarity and help them to enhance their knowledge on the same.
What and how of high risk merchant accounts?
In simple words, a high-risk merchant account is when your payment processor has labeled your business at a higher risk of either fraud or chargebacks, or both. Hence, high-risk merchant accounts pay higher processing fees to compensate for the risk the payment processor is taking on their risky business. In this article we’ll cover why a merchant account would be labeled high risk, and what impacts it has on their business.
What Is a High-Risk Merchant Account?
Let us deeply analyse, examine and gain knowledge about what exactly is a High-Risk Merchant account.
Basically, when a payment processor labels a merchant account high-risk when they’re determined or sure, your business account is at higher risk for chargebacks, fraud, or a high volume of returns.
There could be many reasons for the payment processor to tag the business account as High-risk such as – you are a new player in the field, which means you are a new merchant who hasn’t processed payments before, or because your industry is considered high risk and has a high chance of fraud (e.g., controversial products).
And therefore high risk businesses are charged a higher fee.
High-Risk High-Fees: why?
Every credit card processing platform is not the same, but high-risk merchant accounts will be subject to higher fees across the board. In general, processing fees for all transactions will be higher for the high-risk merchant accounts, sometimes even more than double that of low-risk merchant accounts.
Low-risk merchants are also paying a chargeback fee (a fee you pay when a customer disputes the charge directly with their credit card), high-risk merchants here as well generally pay higher chargeback fees.
High risk merchant mostly has an obligation, for a longer period of the contract, an early termination fee, or a monthly or annual fee.
High risk merchant accounts are also subject to a rolling reserve, where the payment processor will hold a certain percentile of your income till it further verifies your transactions were not fraudulent or at a high risk of chargebacks.
High-Risk Merchant Account: reasons to consider as such
There can be various reasons for the payment processor to classify your business as high risk. Some of these reasons are obvious, others nuanced. Every payment processor has a different set of parameters to classify the business as high or low risk. But generally, these are the few red flags, which will surely land your business on a High-Risk side and are:-
• New Merchant: If the merchant is new in the arena of business, or has a low record of payment transactions, then they’ll be classified as a High-Risk business account because of no previous track record.
• High Transaction Volume: Merchants may be classified as high risk if they have a high volume of transactions or have a high average transaction rate. If a merchant processes over $20,000 of payments per month, or has an average transaction of $500 or more, then they may be classified as high-risk.
• Sale internationally: If a merchant sells to customers internationally in countries except for the U.S., Canada, Japan, Australia, or the countries in Europe, that are listed as high risk of fraud, they may be considered high-risk.
• High risk company: Despite having a clear record, a business can land on high risk slab, just by the very choice of the field which is labeled as high risks, like- subscription-based companies, etc.
Poor credit score: Low credit score is the most common of all the reasons, which will be enough to make you land in high-risk business criteria.
Businesses: considered High-risk
Here are some businesses which fall under the category of high risk businesses, hence it would be a boon to take a look at them before starting up a business. Some of these businesses are:
~Travel, including airlines, cruises, and vacation planners
~Furniture and electronic stores
~Multilevel Marketing (MLM)
~E-cigarette, CBD, and vape shops
~Subscription services and companies with recurring payment plans
How to get a high-risk merchant account?
In order to get a high-risk merchant account you have to apply. Where you’ll be asked to provide the financial documents (business and tax). After the examination and processing of your application, the payment provider would classify your business either as High-risk or low-risk business and plan it forward accordingly.
Some payment processors are highly suitable for specifically high-risk businesses, hence before choosing a payment processor, make sure you choose the processor as per your needs and suitability.
High-Risk v/s Low-Risk businesses
The classification for high-risk or low-risk business is basically done on certain parameters, some low-risk business parameters are as follows:
• Low transaction volume (less than $20,000 per month)
• Average transactions under $500
• Business in countries labeled low risk
• One currency
• Very low or zero chargebacks and a low percentage of returns
•Industries labeled low-risk
The owners must keep in mind that the risk status is subject to change depending upon how the company is performing lately or how it has performed over a period of time.