A high-risk merchant account shows that a payment gateway has evaluated the likelihood of fraud or refunds as being higher for a particular business. To make up for the danger the payment gateway is bearing, high-risk merchant accounts are subject to increased processing fees. This article discusses the reasons behind a merchant account’s high-risk designation and what it entails for such a company.
Key Takeaways
- High-Risk Merchant Accounts: Assigned to businesses with a higher likelihood of fraud, chargebacks, or returns.
- Reasons: High transaction volume/value, international sales (in higher-risk countries), new businesses, high-risk industries, poor credit.
- Higher Costs: Increased processing fees, higher chargeback fees, potential contract penalties, and rolling reserves.
- Low-Risk Accounts: Characterized by low transaction volume/value, domestic sales (in low-risk countries), established businesses, low-risk industries, and good credit.
- Risk Can Change: Business growth or market changes can alter risk status.
- Getting a High-Risk Account: Compare providers, understand terms, ensure financial capacity, and maintain a good credit score.
- Capitalixe: Specialises in finding payment solutions for high-risk businesses.
What is a high-risk merchant account?
A high risk merchant account is when a payment processor determines that a company account is more likely to have chargebacks, fraud, or a significant number of returns. This might happen in a variety of circumstances. The possibility that the account holder might be a new seller that has never handled such great transactions earlier. Another could be the fact that the industry in question has a high risk or has been through a substantial instance of fraud. Each payment processing system is unique and follows different rules, yet high-risk business accounts will generally incur higher costs across all such services.
If a merchant has a high possibility of fraud, chargebacks, refunds, lengthy delivery windows, or large transactions, payment processors will likely classify them as high-risk. To cover this risk, processing costs are greater for high-risk merchant accounts.
Processing costs for all payments will often be increased and, in some cases, double those of low-risk account holders. While low-risk sellers are also charged a refund fee high-risk sellers often pay larger chargeback fees. This is paid when a customer challenges the charge directly with their credit card.
A high-risk merchant may be compelled to commit to prolonged contractual provisions. These include an early termination penalty, or a monthly or yearly charge. With a rolling reserve, the payment processor keeps back a portion of the earnings from high-risk merchant accounts. This is until it can confirm that transactions weren’t fraudulent or otherwise suspicious.
Factors That Make a Merchant High-Risk
A payment processing system might classify somebody as high-risk for a multitude of reasons, some of which may appear obvious while others are more subtle. As for what qualifies as a high-risk merchant account, each operator has its own set of standards, but the following are the types of accounts that may fit into this category:
A large number of transactions
A merchant processes a large number of transactions every month. If he or she also has a high average transaction rate, they become high risk. A vendor could be categorised as high-risk if they handle more than £20,000 in payments every month. Also, if their typical transaction is £500 or higher.
Receiving payments from abroad
A retailer may be categorized as high-risk if they conduct business with clients abroad. Especially those located in nations with a high likelihood of fraud in any country except the U.S., Canada, Japan, Australia, or European countries.
Newly established businesses or merchants
Simply because they lack experience, merchants who have never accepted payments before. High-risk merchants have little experience or have handled a small number of transactions in the past.
High-risk sectors
Even if a merchant has a perfect track record, they could still be classified as high-risk. If their sector is more susceptible to fraud, refunds, and chargebacks, they can be considered high-risk as well. For instance, businesses that rely on subscriptions are classified as high risk. This is because several customers sign up for a trial period only to forget to stop making payments. Many times, they charge back the amount after reviewing their statements and discovering the overlooked costs.
Poor credit ratings
A low credit score can make a merchant high risk. One can improve these scores. Every business owner or finance department can ensure that their business credit is the best possible. Good ratings help get loans. They also help avoid payment services from flagging accounts as high-risk.
What are the Typical High-risk Businesses like?
Knowing if a specific occupational or business sector is prone to being high-risk can be useful. Then the businesses or merchants can implement appropriate measures. Organizations that come under this category include many of the following:
- The Adult Industry
- Travel services, such as airlines, cruise companies, and trip organizers
- Electronics and furniture businesses
- Dating sites and online gambling
- E-commerce websites
- Network Marketing (MLM)
- CBD, vape, or e-cigarette stores
- Companies and businesses that accept recurring payments
- Collection of debts
- Financial services & payment service providers
Comparing high-risk and low-risk account holders
Payment gateways consider users with a few common traits low risk. A low volume of transactions, just under £20,000 each month. They have an average deal value of less than £500. They have employment in a sector with a reduced rate of chargebacks, frauds, or refunds. These are all characteristics of low-risk traders. In comparison to high-risk merchants, low-risk vendors owe their payment services less in processing fees. Low-risk business owners often have the following characteristics:
- Low transaction volume (less than £20k monthly)
- Transaction volume averages below £500
- Doing business in a low-risk rating nation, such as the U.S., Canada, Japan, Australia, and European countries.
- Use of one currency
- Minimal or no refunds and a low rate of return
- Sectors deemed to be low risk
Remember that as a company grows, its risk status may fluctuate. A provider can start viewing the company as high-risk if, for instance, it experiences a rapid phase of expansion. Additionally, a payment processor can judge risk in different circumstances. A business or a merchant’s expansion into new markets or industry changes can be a shift in average risk. If this occurs, the payment processor can alter the company status. If they do not support high-risk merchants, the processor can dismiss the company as a customer. The business might have to look for a new service to handle their transactions in such a case.
How do I get a high-risk merchant account?
One must submit tax and business data when one registers for a business account. The payment provider then decides if a specific business is a high-risk or low-risk establishment. This happens after processing the application. Then the provider adjusts its terms accordingly.
It is a smart option to compare service providers. Businesses should choose the one that most closely satisfies each of their requirements. Some payment processors are better suited for high-risk clientele which can be helpful.
One should carefully study the deal before selecting a payment platform. Each institution and payment processing platform is unique. It can have various rules for the vendors they deem high risk.
A high-risk business account service provider may not accept all firms. Consequently, businesses might want to be sure that the vendor allows similar kinds of a company when selecting such services.
Additionally, the business should make sure that it has the available funds. The costs of dealing with extra fees and penalties can then be covered by these funds. Such companies often have to pay greater fines than other low-risk companies. Finally, confirm that the credit score is accurate and as high as it can possibly be. A poor credit score increases the likelihood that a firm or a merchant will be approved for a high-risk merchant account. A business with a poor credit score may have trouble obtaining a merchant account. Therefore, the appropriate department might need to focus on improving its credit score in such cases.
