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What is a High Risk Merchant Account?

by Kimberly Baylies on June 10, 2020

Are you confused about why your business is considered “high-risk” and why you're required to have a high-risk merchant account? You're not alone.

What is a high risk merchant account?

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Many business types considered to be high-risk by banks don't exactly scream danger to anyone else. I mean selling that nice family a new dining room table doesn’t seem like a shady deal. Still, furniture sales are considered a high-risk business by most processors.

Business owners can be pretty shocked when they first find out their business is considered a high-risk business. They often don’t understand why they’re high risk. They worry that being considered “high risk” will mean they can’t get a merchant account to accept payments.

Being high risk won’t keep you from getting a merchant account. But it does mean it won't be as easy as it is for other businesses. Because of this, you need a merchant service provider who's knowledgeable in the sector and has forged the right banking relationships.

Today we’re going to explain what constitutes a risk in the eyes of the processing industry and why. We’ll also go over what having a high-risk merchant account means for your business. And then we’ll provide a guide for what to look for in a reputable high-risk merchant service provider.

What constitutes risk anyway?High risk merchant services

In the bank's eyes, some businesses pose an increased level liability they will assume by accepting the account. Processing payments for these types of businesses can be very costly for the acquiring banks. Because of this, there are few processing platforms willing and equipped to serve high-risk businesses.

Processors and acquiring banks rank business models and industries based on the amount of risk they pose. There are many factors that contribute to whether a business is seen as a risk. Common risk factors include high chargeback rates, high ticket items, business is a potential (or proven) fraud target, business viability, and perceived brand damage.

Chargeback ratios are one of the most common reasons businesses are categorized as “high risk”.

A company’s chargebacks are one of the biggest concerns for the payment processor serving them. Without going into deep detail, chargebacks cost everyone involved a lot of money. This is because acquiring banks are held liable for their merchant’s actions by the card brands (Visa)

When a business incurs chargebacks or fraud, the acquiring bank is initially held liable for the money. Every time a consumer files a chargeback claim, fees are incurred for both the acquiring bank and the merchant. When a person calls their credit card company and disputes a charge it results in a transaction reversal or chargeback. The acquiring bank serving the merchant immediately refunds the charge to the card brand and opens an investigation. A high incidence of chargebacks can cause the processor to be out large sums of money while the claims are investigated.

Visa and MasterCard also set a specific threshold for a merchant’s allowable chargeback percentage. The standard chargeback ratio is .9% for Visa and 1% for MasterCard. Meaning that chargebacks can only account for .9% of the total transactions. When a merchant exceeds this limit the bank is fined, and the merchant is required to enroll in the Visa Chargeback Monitoring Program.

There are certain business types that commonly suffer from high chargeback ratios. These include subscription boxes, monthly or annual membership sites, travel, SEO services, and IT and tech support.

The business type is a fraud magnet.Composite image of magnet attracting dollars on white background

Unfortunately, some businesses seem to attract more unscrupulous activity than others. Online gaming and drop-shipping are susceptible to money laundering.

Online pharmacies tend to be a commonplace where fraudsters like to use stolen credit card information.

The industry as a whole is perceived as potentially brand-damaging.

Not only do these business types experience a lot of chargebacks, but they're often perceived as morally questionable as well. Companies that operate in the adult, tobacco, MLM, firearms, and gaming sectors tend to bring scrutiny. Banks have an obligation to please shareholders. Shareholders don't like it when they do anything that could potentially tarnish the brand.

Heavily regulated businesses and under-regulated businesses.

CBD oil, nutraceuticals, and supplements, even online alcohol and wine sales are very tricky. For example, with nutraceuticals, certain ingredients either haven’t been approved by the FDA or are on the banned substance list. If a company is selling an item with one of these ingredients, the bank can potentially be held responsible by the government for supporting the sale of illegal substances. This is a huge risk.

For this reason, high-risk processors will request a complete ingredient list for every product sold. Only once they've reviewed this list will they approve a nutraceutical merchant account. These business models are either heavily regulated, relatively unregulated, or without clear oversight. Many of the regulations vary by state or contradict federal regulations. This makes them a particularly high-risk liability to take on.

Business viability and creditworthiness.

When a bank takes on your account they have to consider whether you will still be in business in a year. Businesses with high ticket items pose a lot of financial risks if they up and close. Furniture stores, travel agencies, and other businesses that accept payment for future fulfillment fall into this category. If this type of company goes out of business, there is no way for customers to return the product. Or, the company closes with the customer’s money and never delivers the product.

New businesses tend to have a lack of business history. They haven’t been in business long enough to show sufficient cashflow on record of earnings reports to support the business. This means the bank needs to make a decision based on the business owner’s personal financials. If there is a bankruptcy on record or overall low FICO scores this will require a high-risk merchant account.

Being a high risk merchant doesn't mean you have to risk your business.What does a high-risk merchant account mean for my business?

Taking on these business types increases the acquiring bank’s exposure. Still, these businesses need to have financial solutions to operate within the commerce of today. A high-risk merchant account is a way for acquiring banks and processors to mitigate their own liability while still offering processing solutions to risky companies.

Banks providing services in the high-risk sector must find ways to mitigate financial liability. They do this by implementing stringent underwriting, employing a team of risk assessors, and charging higher fees.

If your business requires a high-risk merchant account you’re going to have to jump through a few more hoops. You'll most likely be required to produce more documents to support your application. And, it’s going to be a bit longer process.  It will take between 48 hrs to a week to process a high-risk application for approval and activation.

You are also going to pay more than traditional low-risk businesses. These banks must put in place more fraud reduction strategies than normal banks. They have a full-time staff whose job is to flag any transactions that are potentially fraudulent.  Chargebacks cost money to investigate and put the bank at increased financial risk.

Finally, you may be subject to a reserve account or rolling reserves. A rolling reserve is a risk management strategy banks use to help to offset their own financial risk. This involves holding back a percentage of the daily credit card processing volume for the purpose of covering potential chargebacks.

Generally, this will be from 5-10% of the total credit card volume and is held for 180 days. This is equal to the amount of time Visa and MasterCard give consumers to file a chargeback claim.

How to find a High Risk Merchant Account Provider you can count on.What should I look for in a high-risk merchant account provider?

When you are a high-risk business filling out many applications to see who approves you is a terrible idea.

Not surprisingly, there are relatively few acquiring banks willing to work in the high-risk industry. Having multiple applications in at once is seen as a “red flag” by the acquiring bank and can get your merchant account application denied. Besides,  as an anti-fraud measure, most banks have a process in place to check for duplicate applications.

While there are few banks, there is no shortage of merchant service providers offering high-risk services. Unfortunately, many of these companies take advantage of businesses with few options. Inexperienced salesmen see high-risk as a way to make a quick buck. They sign them up, lock them into high rates, and provide little if no support.

For this reason, it is especially important to work with an experienced high-risk merchant service provider.  The account provider you choose will determine the rates and service you receive. But, it's their experience that makes the difference between whether your merchant account is approved or not.

Before you sign any application, fully vet the merchant service provider.  A reputable merchant service provider will be happy to answer a few questions. Find out how long they’ve serviced the high-risk sector. Have they forged dependable banking relationships and what banks do they work with? Are they ETA Certified?

An experienced high-risk provider will be able to anticipate what their banks want to see. They will be able to guide you on Best Practices for a painless approval and help you get approved.

If you would like to learn more about high risk merchant services or Bankcard International Group's services visit our High Risk Merchant Account page.  Otherwise click the link below to get a stable merchant account tailored to your business' needs with guaranteed competitive rates!

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Topics: High Risk Merchant Account