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What is a high-risk merchant account?

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.

High-Risk Merchant Account: What Is It?

If a payment processor determines that a specific company account is more likely to have chargebacks, fraud, or a significant number of returns, they classify the associated account as being high-risk. 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 business 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 categorized 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

high-risk merchant account

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.

A High-Risk Merchant Account: How Do I Get One?

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.

FAQs

What are high-risk merchant accounts?

High-risk merchant accounts are titles given to accounts prone to requests for refunds. They face a greater chance of fraud. Varying criteria are used by payment services to designate such titles.

2. What are low-risk merchant accounts?

A low-risk merchant account has safer transactions according to its payment services. Such accounts face a lowered chance of fraud or refund requests by their trade partners.

3. What is a credit score?

A credit score is a number that represents an individual or business’s likelihood of paying back their loans based on their transactional history. Having a good credit score makes you an attractive candidate for loans and EMIs.

4. What are high-risk transactions?

Transactions that can result in fraud or lead to refund requests can be considered high-risk transactions.

5. Which accounts get charged more for payments?

Relatively more liable to scams and fraud are high-risk accounts. To cover deficits caused by such situations, banks and payment gateways charge a greater transactional fee for high-risk accounts.

Reach out to us for help

At Capitalixe, we specialize in helping our clients who are often deemed as “high risk” find the perfect banking and payment solution for their needs. We do this by leveraging our network of over 100+ financial institutions, EMI’s and banks worldwide. Our goal is to help save you time and take the pain of finding trustworthy and suitable solutions away from you.

Feel free to reach out to us for a complimentary consultation. We will be more than happy to help you.

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What are the payment challenges facing the online gambling industry?

Online gambling has been growing exponentially in the last decade. The market is growing rapidly and according to a report by Research and Markets, it is expected to reach $72.02 billion by the end of this year, at a compound annual growth rate (CAGR) of 12.3%.In part, it is due to a fast internet connection becoming available to more people and the demand for online gaming increasing. For most of its history, online gambling was a reasonably secure environment. Still, recent developments have brought about significant changes in how people can pay for their time at the tables, slots, or sports events.

The Challenges

1 Security Issues

One of the biggest problems facing all online casinos is security issues, especially around payments. For many years ‘phishing’ was a big problem for several major casino groups, with hackers sending out emails that appeared to have come directly from the site asking for personal details including passwords, credit card information etc. These attacks were designed to steal money from accounts without raising suspicion until after it was too late. This type of security problem is still a concern as casinos have been targeted several times in recent years, but now the biggest threat comes from within. The employees of online casinos are a serious security issue with many incidences of theft either by internal staff members or ex-employees. This type of breach can cause huge damage to a casino’s reputation and players tend not to trust them again after such incidents.

2 Regulation

One major issue that operators face is regulation. Generally, gambling sites are regulated at the host country level, which means that if you want your site to accept customers from around the world, you need to get licenses from all those different jurisdictions. If you only operate within one territory, this isn’t really an issue, but it makes expansion difficult. The other side of the coin is that regulations can change very quickly, and this makes planning a business difficult.

3 Payment Options

Given that gambling has been a fairly cash-only business for a long time, finding ways to pay online was not always easy. In recent years technology has made it possible to use all the usual payment options, including credit cards, bank wires, and e-wallets such as PayPal/Alert Pay, etc. All these methods have their own pros and cons, but they work well enough for most players as long as they are reasonably secure. For those who don’t want to use traditional payments, there are newer alternative payment providers who also offer solutions. Cryptocurrency Bitcoin has become a popular payment method in the online gambling world, and there are now a number of Bitcoin casinos that offer excellent games and bonuses.

4 Currencies

Another issue that operators face is the different currencies that their players may want to use. For example, you might have customers who want to deposit and play in Euros, while others might want to use British Pounds.

This can be a problem if your site is only set up to deal with one or two currencies, as you then have to find a way to convert them. Most gambling sites now use some form of currency conversion, but it can be an expensive process so casinos are always looking for ways to reduce these costs.

5 Chargebacks

One of the biggest problems for any business that deals with payments is chargebacks. A chargeback happens when a player disputes a payment that has been made to a casino. This can be for a number of reasons, such as the player not receiving the product they paid for, the product not working or being defective, or simply that they didn’t authorize the payment in the first place. In some cases, the player may have been scammed by the casino and so will try to get their money back. The problem for casinos is that chargebacks are often difficult to fight and can be very costly. Not only do they lose the money that has been disputed, but they also lose any associated fees such as those charged by payment processors. In extreme cases, a casino can even have its license revoked if there are too many chargebacks.

6 . Fraud

Another issue that operators face is fraud. This can come in many shapes and forms, but essentially it involves someone trying to either steal other people’s details or break into the casino itself by targeting its software. There are many ways that an attacker can try to get access to other people’s data, but one of the most common is DDoS attacks, where thousands of computers are used to attack a website with traffic until it becomes overloaded and can’t function correctly. The attackers then offer to stop the attack in exchange for money. Another type of fraud includes rogue employees who may be tempted into stealing account information or installing keyloggers on players’ PCs in order to collect passwords etc. As you might imagine, this type of fraud causes huge damage to both the player and operator reputations.

7 Customer Retention

Finally, one of the biggest challenges for any business is customer retention. This is especially true in the gambling industry, where players can be very fickle and may switch sites at the drop of a hat if they are not happy with the experience. It’s therefore vitally important that casinos keep their players happy by offering good customer service, bonuses, and other promotions and by keeping the games running smoothly. If they can do this then they are likely to keep their players for a long time.

Final Thoughts

As you can see, there are a number of different payment issues that operators face when running an online gambling site. By understanding these challenges, casinos can put in place the necessary procedures and systems to reduce the risk of financial loss and reputation damage.

At Capitalixe, we aim to assist online casinos in finding reliable payment solutions that fit their needs. We’ve partnered with leading financial institutions and payment processors from all over the world, which means that we can provide access to a variety of banking options for our operators.

We constantly monitor all transactions, so you can be sure that your customers’ funds are safe and secure at all times.

Give us a call and see the difference for yourself.

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What industries are considered to be high-risk?

In the business world, risk is unavoidable. But while all businesses have some degree of it, several factors make some industries riskier than others.

Banks and financial institutions evaluate your industry and categorise it into either high, medium or low risk. If you are perceived as a business in a high-risk industry, many banks and financial institutions are likely to refuse your request to open a merchant account or to set up payment methods with them.

If banks and payment processors do choose to work with high-risk companies, they often charge them a lot more in rates and fees. Plus, these companies may have to give up a portion of their daily transactions. This is known as a rolling reserve.

So what makes an industry high-risk? And how can businesses open high-risk merchant accounts and access high-risk payment solutions if they are in this category?

High-risk merchant accounts?

A high-risk merchant is an identification by a Card Processor of a business that operates in a high-risk industry, sells products or services that experience a high level of chargebacks, is prone to fraudulent transactions, and receives stolen credit cards [1].

This means that, as well as your company’s financial health, banks and payment processors also make their decision based on the industry you operate in.

Industries that are considered high-risk

CBD Oil

CBD products are becoming legal to produce and sell worldwide after their medical benefits were discovered. Each country has different legislations around its use. For example, CBD can be consumed in the majority of EU countries. According to EU law, hemp growing and selling is permitted if the THC content is less than 0.2% [2]. Countries outside of Europe have legalised or are legalising CBD, including Canada, Russia, South Africa and the United States of America.

The main reason why this industry is considered high-risk by banks and payment processing companies is that the industry’s legislation is constantly changing. Businesses have to navigate through unclear regulations regarding how CBD can be sold in various countries. Brexit also had a massive effect on the UK market, as there are now further regulatory restrictions they must meet [3].

Gambling Industry

According to a report by Research and Markets, the online gambling industry is expected to reach $72.02 billion by the end of 2021, at a compound annual growth rate (CAGR) of 12.3% [4]. The gaming business merchants offer many different forms of gambling, including casinos, sports wagering, online poker and mobile gaming.

There are a number of reasons why this industry is considered high-risk to banks and payment processors. Firstly, a lot of online gambling businesses are based in offshore jurisdictions like Malta, Isle of Man etc. Because of this, the industry often falls victim to fraud and money laundering suspicions. There’s also a high volume turnover associated with this business, so banks are cautious about offering merchants a credit line.

Adult Entertainment

The global adult entertainment market is estimated to exceed the value of US$ 300 Bn by 2030, expanding at a CAGR of ~5% during the forecast period [5]. This includes companies that deal in toy and novelty sales and dating services, telephone services, adult and live stream services.

Many of these companies struggle to obtain a merchant account, and they need this to accept credit and debit card payments from customers and clients. This is because a lot of them are subscription-based services. This means that customers pay on a minute-by-minute basis. Banks are also sceptical about getting involved with this industry because there has been some unfortunate coverage surrounding this industry, relating to illegal activity. Because of this, many payment processors fear there will be a reputational risk associated with this industry.

Financial Institutions

Financial institutions encompass a wide range of business operations within the sector including banks, trust companies, insurance companies, brokerage firms, foreign exchange and investment dealers [6].

This industry is categorised as high-risk because working with other financial institutions requires a lot more due diligence. Payment processors need to ensure that the financial intuitions they work with strongly comply with regulations. Plus, financial institutions are much more prone to money laundering. This risk is heightened if their clients are also categorised in a high-risk industry.

Cryptocurrency

We’ve recently seen rapid adoption of cryptocurrency in many high-risk industries [7]. This year the total market of cryptocurrencies reached $2 trillion [8].

Mainstream banks are a lot more hesitant to work with crypto companies, with many unable to accept this new age style of payment method. Cryptocurrency is known for wanting to be unregulated and not tied to any government. Because of this, banks are far less likely to want to work with them. Plus, many payment service providers associate crypto with international criminal organisations and money laundering, which stops them from working with these companies.

Sign Up For Payment Processing For High-Risk Merchants

Although many banks and payment processors refuse to work with high-risk businesses, there are definitely still ways to receive a number of merchant solutions. Choosing the best high-risk merchant account is crucial, and you want to ensure that you’ve done enough research and ideally work with a company that specialises in these industries.

At Capitalixe, we bridge the gap between your business and the financial institutions you choose to operate with. We can provide several solutions, to help businesses open offshore high-risk merchant accounts, forex merchant accounts, and bank accounts for gambling businesses.

Based in London and operating internationally, Capitalixe is a payments and banking consultancy specialising in helping companies in high-risk industries obtain the latest financial technology.

Our team brings a wealth of experience and industry expertise, leveraging our network of trusted providers for the benefit of our clients. Fintech has brought a wealth of products and efficiencies to businesses and individuals – matching these opportunities to our client needs is at the core of the Capitalixe ethos.

Get in touch to set up a free and non-obligatory consultation and learn more about how we can help resolve your payment and banking challenges today.

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