The term ‘High-Risk Merchant Account’ is used for businesses that pose a significant risk of fraud and chargebacks to the banks. High risk merchant account can also be based on the nature of the company, owner’s credit, business history, and various other factors. A merchant is usually analyzed as high risk if their business has a long history of chargebacks and refunds. In such cases, you will mainly be required to pay a higher amount or processing rates to receive various merchant services due to the increased risk potential.
What is a merchant account?
A merchant account slightly differs from a regular bank account. Merchant accounts are set up with merchant service providers and allow businesses to accept payments through debit or credit cards. On the other hand, one can use a regular bank account to both pay and receive funds. The funds in the merchant account are inaccessible and get transferred to the standard bank account in 1-2 business days. Obtaining a merchant account is a way for a merchant to grow their business by extending out to many customers who can pay for their goods and services with only credit or debit cards.
High-risk merchant account
Merchant accounts linked with high-risk businesses are called high-risk merchant accounts. Being named a high-risk account on various occurrences means the owner must undergo extra scrutiny to receive merchant services. Also, they can be limited to a certain number of transactions in a month or be required to maintain a certain amount of cash reserves.
Here are some general criteria of a high-risk merchant. However, keep in mind that they may vary significantly depending on the guidelines of a particular payment processor:
- Excessive chargebacks and poor credit history.
- Credit Card transactions that are above $500.
- Over $20,000 in sales each month.
- Offers goods and services to nations with a high rate of fraudulent activity.
Nowadays, there are various such payment gateways available in almost every business. Therefore, finding a reliable payment service provider among such a variety of gateways is the most challenging task for a person. Also, this process becomes more complicated if you need a payment gateway for high-risk businesses.
Businesses labeled as a high-risk
Having a high-risk business does not imply that it is unlawful or illegal. Moreover, businesses related to adult content, dating, and casinos are not the only high-risk businesses. Several factors influence the chances of a company falling into the high-risk category.
Merchant accounts may be classified as high-risk based on factors such as a specific company location, multi-currency activities, and poor credit history. To be concise, these are highly unstable businesses in the banks’ perspective and fall in the category of high-risk. One of the prime examples is the tourism sector. This sector is associated with high risks as various circumstances like weather conditions, seasons, etc., may lead to sudden cancellations. These typically result in a large number of refunds and chargebacks from consumers.
Merchants can still accept credit payments despite being labeled high risk, but they have to deal with a much higher processing rate. In addition, high-risk merchants must maintain a rolling reserve. It is a layer of security for the bank to prevent chargebacks or other unanticipated actions, such as fraud instances on your part. One way to put it is that the bank secures 5-10% of the credit card processing volume. The reserve amount is maintained in a state of limbo for a set length of time, typically between 6-12 months, and is then is automatically credited to one of your weekly statements. Rolling reserve calculation is based on the amount of risk a company poses. It is also tied to the interest rates charged by the acquiring bank.
Benefits of a high-risk account
You can be surprised to know that there are several benefits to having a high-risk account. Some of the following benefits are as follows:
- Flexible payment acceptance options– Low-risk merchants can only collect certain types of revenue by credit card, unlike high-risk merchants, who have fewer limitations. The high-risk merchants can offer recurring payments. They can also process higher sales volumes for launch events and sell a wider variety of products and services.
- International Coverage– Low-risk merchant accounts have severe restrictions to international transactions. On the other hand, high-risk merchant accounts have fewer restrictions with no limit towards the goals for global expansion. Accepting transactions in various currencies and selling worldwide can help in achieving better growth for the business. It will allow you to connect with a wider range of customers and marketplaces.
- Chargeback Leniency– A standard merchant account with low risk may face termination if it crosses the chargeback threshold. These are highly unlikely in the case of high-risk accounts if they surpass the level once.
Drawbacks of High-Risk Accounts
Sometimes, most banks believe that these high-risk businesses are likely to go bankrupt or disappear before repaying their debts. As a result, banks turn them away. Almost every day, banks turn down online merchants with excellent credit scores, good reputations, and solid revenue streams because they don’t have enough assets. Traditional financial institutions also avoid working with businesses, such as online dating, auction, gambling sites, adult entertainers, telemarketers, etc., because of their high failure rates.
Numerous factors may contribute to a company being deemed high-risk. High-risk business comes with the need to pay higher fees for merchant services as they are more prone to chargebacks. So, be confident about avoiding chargebacks and frauds easily if you choose a reputable, high-risk payment gateway processor that prioritizes security. Remember to read your contract carefully before you apply for a high-risk account since the conditions it offers may be harsher than those in a normal merchant account. Lastly, be sure to check for any hidden or additional fees, rolling reserves, and charges.