Your payment processor suggested a High Risk Merchant Account because your business has a high risk of fraud or chargebacks. High Risk Merchant accounts pay more for processing to cover the payment processor’s risk. This article explains why a merchant account is high risk and what that means for your business.
What Exactly is The Term “High Risk Merchant Account”?
When a payment processor looks at your business account and decides that it has a high chance of chargebacks, fraud, or a lot of returns, they call it a “High Risk Merchant Account.”
This could be the case for a number of reasons, such as the fact that you are a new merchant who has never processed payments before or because your business is in a high-risk industry where fraud is common (for example, controversial products).
High risk merchant accounts have processing costs that are proportionally higher because of the risk they pose. Higher high risk merchant account fees can be higher depending on the credit cards acceptance rate.
Any transaction will cost more to process, often more than twice as much as it would cost with a low-risk merchant account. Even though low-risk merchants also have to pay chargeback fees, high risk merchants usually have to pay more.
Assessment of chargeback fees when a customer disputes a transaction with their credit card company. A high risk merchant may have to sign a contract with longer terms, pay a fee to get out of the contract early or pay a monthly or annual fee.
There is also the chance that a High Risk Merchant Account will have a rolling reserve. This happens when the payment processor holds back a certain amount of your earnings until it can make sure that none of your transactions were fraudulent or put you at risk of a chargeback.
There are a number of reasons why a retailer might be considered high risk.
Whether or not a payment processing platform labels you as high-risk depends on a number of things. Some of these things may seem obvious, but others aren’t as clear.
The following businesses are to consider as the high-risk by most service providers.
- There are many risks in a certain area. Even if a merchant has a perfect track record, their business sector may be at high-risk for fraud, chargebacks, or refunds. Subscription-based businesses are risky because many customers sign up for a free trial but keep paying afterward. They often dispute the payment when they look over their bills and find charges they had forgotten about.
- A high number of total transactions. If a merchant has many or a high average transaction rate, their bank may label them high-risk. If a merchant handles more than $20,000 in monthly payments or averages $500 per transaction, it may be a high risk merchant account.
- A score of low credit. If the company has bad credit, it could be seen as a high risk.
- Being able to process payments from other countries. If a retailer sells to foreign countries with a high fraud rate, the retailer may be high-risk (any country except the U.S., Canada, Japan, Australia, or Europe).
A new owner of a business. There is a consideration of a merchant with no payment history or few transactions as a high risk merchant account.
The Various Categories of Companies That Are Considered to Be High-Risk
It’s crucial to be aware ahead of time if your business sector is considered high-risk or not so you can make the right plans. Below are some of the examples by Legal Founders of companies that fall into this category:
- Travel-related businesses, such as airlines, cruise lines, and travel agencies
- Multilevel Marketing (MLM)
- Vape stores, CBD dispensaries, and electronic cigarettes
- Businesses that offer customers a recurring payment option and subscription services
- The collecting of debts
- Adult industry
- Shops selling home furnishings and technological goods
- Online dating
Difference between a Low-Risk Merchant Account High-Risk Merchant Account.
There are a few common traits that, when present in a merchant, indicate that the business poses minimal risk to a payment processor. Most of the time, low-risk merchants have the following:
- A low number of transactions (less than $20,000 per month), on average
- Average transactions under $500
- Conducting business in a single nation is seen as having a minimal risk (the U.S., Canada, Japan, Australia, and the countries in Europe)
- One standard currency
- A very low or zero chargeback rate, as well as a low return rate as a percentage
- Sectors of the economy deemed to be at a low risk
It’s important to know that as your business grows, the risks it faces may change. For example, if your business grows quickly, your service provider may start to see it as a high-risk project.
A payment processor could also see this as a change in how risky it is to do business with you if you start doing business in other countries or switch industries. If this happens, your payment processor may change your status or stop doing business with you if they don’t work with high risk merchants.
How to obtain a High-Risk Merchant Account?
When you sign up for a merchant account, you will be asked to fill out an online NY Biennial Statement Online about your business and taxes. After processing your application, your payment service provider will decide if you are a high-risk or low-risk merchant, and they will change their plan to fit.
Some payment processors are better for customers who are at a higher risk. It would be best to compare several service providers to find the best fit for your business.
Before you choose a payment processor, you should read the contract in detail. This is because each bank and payment processing platform is different, so they each have their own set of rules for high risk merchants.