Last updated on March 21st, 2025 at 06:42 pm
Introduction to High-Risk Merchant Accounts
A high-risk merchant account is a specialised credit card processing solution for businesses that face high chargebacks, more than average fraud and extensive regulatory scrutiny. These accounts are provided by specialised high-risk processors. Merchants from industries like dating, gaming, vape, CBD, paraphernalia, business coaching and adult e-commerce use such credit card processing accounts.
Finding the right high-risk credit card processing company is not an easy task. Many merchants keep sending applications but never find any solution. The team at QuadraPay has massive experience in working with high-risk PSPs and high-risk merchants. Our team has written this guide for you. The guide explores various factors related to high-risk merchant account processing. We are confident that after reading it you will be able to easily find the best high-risk merchant account provider for your business. Let’s begin.
Why Do Some Businesses Need High-Risk Merchant Accounts?
Credit Risk/High Chargebacks: Any business that attracts over 1% of chargebacks is a big risk for processors. It is mandatory for processors to ensure that the overall chargeback percentage is always less than 1%. If this threshold is crossed, then the processor may be subject to strict limitations and financial losses. Merchants from industries like travel, matchmaking, and horoscopes can attract high chargebacks. High-risk PSPs follow strict underwriting guidelines that help them to take calculated risks and only onboard merchants that are capable of keeping the chargeback ratio under 1%.
Operational Risk: The way a business operates can also make it high-risk for acquiring banks. Many businesses, such as streaming services, credit repair, weight loss programs, and software-as-a-service (SaaS), rely on subscription payments. These recurring payment requests can attract friendly fraud disputes. The safest transactions are those where the customer makes a one-time payment and the merchant delivers the product within a week’s time. Any business that sells delayed delivery items or services and takes recurring payments attracts high credit risk.
Reputational Risk: Certain industries are considered high risk because of their reputation. Banks and payment processors shy away from getting associated with merchants operating in these industries. Businesses operating in the adult entertainment sector, gambling, betting advice, casinos, poker, fortune-telling, and firearms are excellent examples of merchants that may attract reputational risk.
For high-risk merchants, getting any kind of financial service can be challenging, be it merchant accounts, bank accounts, or even funding. This bottleneck creates severe problems for merchants. For such merchants, the only viable option is to work with high-risk-friendly sponsor banks and payment processors.
High-Risk Merchant Account Approval: Step-by-Step Timeline
To get the account approval, it is important to prepare ahead of time. The approval process can take anywhere from a few days to three weeks. Payment processors conduct thorough due diligence before approving any account.
Getting Prepared: It may take a few days for you to prepare for the application. During this period, you should assess your risk profile, chargeback history, and industry classification to determine whether banks may consider your business as high-risk.
If your industry is not classified as high-risk, you may be able to work with a low-risk payment processor. However, if your business falls into the high-risk category, you will need to apply to a high-risk PSP. We suggest you get quotes from at least 3 processors. You should compare these quotes and then choose the best one for your business.
Document Submission: Once you have identified the perfect processor for your business, then the next step is document submission. On average, merchants spend 2-3 days submitting all required documents. This timeframe can vary based on the industry and merchant’s risk profile. Underwriters may sometimes request additional documents, and this may delay the process.
Underwriting Review: During this time the underwriters evaluate your KYC documents. Underwriters will decide whether a reserve is required or not. What terms on the regular contract should be modified or added? Should there be an early termination fee?
Evaluating applications from high-risk industries takes time. The most time-consuming applications are from industries like cryptocurrency exchanges, insurance companies, money transfer, alcohol, bars, and spas. Underwriters carefully review every aspect before approving the account. The underwriting team generally takes 4-8 days.
Approval & Integration: Once underwriters approve your account, they will send you a contract. You must review it fully and then sign it. Remember, before signing, you may request the merchant processor to modify terms if you wish. After signing, you will receive login credentials for the high-risk payment gateway. If you face any issues, you can always contact the processor for assistance.
High-Risk Merchant Accounts SWOT Analysis
High-risk merchant accounts have advantages and disadvantages. We have done this SWOT analysis so that you get a deeper understanding of the strengths, weaknesses, opportunities, and threats associated with these specialized accounts.
Strengths: For the merchant, the biggest advantage is the ability to accept credit card payment from customers. Low-risk payment processors say no to such high-risk merchants. This can destroy the future of many entrepreneurs. However, with high-risk processors, these merchants can not only accept card payments but also compete effectively in the market with other similar businesses.
Weaknesses: The price is the main drawback. Transaction fees are higher for these accounts when compared to low-risk accounts. A high-risk PSP generally charges a transaction fee between 1.5% and 5%. There is a mandatory annual high-risk merchant registration fee for certain MCCs. Another weakness is slow settlement. Most merchants receive settlements on a weekly basis. For very high-risk merchants, the processors may also keep 1-2 weeks’ transaction amount on hold.
Opportunities: Your business can grow into a profitable company by taking payments from clients all over the world if you have a trustworthy high-risk merchant account. Selling innovative products is an additional opportunity. Software development, AI tools, new marketplaces, and NFT businesses are high-risk for regular processing companies. Only high-risk processors generally explore such accounts.
Threats: various regulations apply to most high-risk industries. Certain high-risk industries are highly regulated, such as escort services, sports betting, lottery sites, tobacco, cigars, tactical gear, and Forex brokers. The regulations related to such industries can change any time. A sudden change in the regulatory landscape may result in account shutdowns.
Although high-risk merchant accounts have high fees they can give a favorable return on investment (ROI). Merchants can negotiate with the processor for better rates. Sometimes processors may lower or remove the reserve requirements and even reduce the transaction fee.
KYC Documents for High-Risk Credit Card Processing
For the approval of a merchant account, you will have to provide various documents to the payment processor. These include personal and business documents. Let’s explore these in detail.
Business license: The first document is your business license. You can provide your company’s certificate of incorporation or any similar registration proof. If your business operates in any regulated industry that requires special licensing, then you will have to share the active license copy. Examples can be gaming licenses, MSB licenses, and crypto exchange licenses.
Processing History: Most high-risk acquirers prefer to work with merchants who have at least three to six months of credit card processing experience. You will have to share the history if available. The processing statements should display chargeback ratios, refund percentages, and transaction volumes.
Bank Statements: The statement helps to determine the financial strength of the UBO and the company. If your statements show little to no balance, it may discourage underwriters.
Photo IDs of Directors: Identifying the business owners is essential. You must provide a national ID, which should include a photo, full name, and date of birth. In most cases, a copy of a driver’s license or passport should work without any hassle.
Utility bills for the company and its directors: Underwriters must verify where the company operates from and where the directors live. For this, you should submit a recent bill for gas, electricity, or municipal services.
Domain registration proofs or shopfront photographs: If your business operates online, you must provide a domain registration certificate. Proof of domain registration is mandatory. For retail businesses, you will have to submit photographs of your store and inventory.
FAQ: High-Risk Merchant Accounts
What Are Common Reasons for Application Rejections?
The most common reason for application rejection is a high chargeback ratio. This is especially important for those high-risk merchants that are already accepting credit card transactions. If your current high-risk credit card processing account has over 1% of chargebacks, then the new processor will certainly hesitate to onboard you. It is important for merchants to keep the chargeback ratio under 1%; for this, they can use chargeback alert services.
Merchant account applications are also rejected because of bad credit scores. A payment processing account is underwritten in pretty much the same way as a loan account, where the underwriters check the credit score of the applicant company and the ultimate beneficial owners. If your credit score is bad, then you will have to be ready to face many obstacles. In such cases you should talk to the merchant account provider and let them know that you are ready for rolling reserves and delayed settlements. These two initiatives can reduce the credit risk and may motivate the underwriters to onboard you.
Not providing the required documents promptly can also result in an application being declined. This is because payment processors cannot onboard accounts without fully evaluating the merchants’ risk profile, which cannot be done without looking at all the KYC documents. If you do not provide the documents on time, the processor will assume that you are not serious about the account and may reject your application.
Are There Alternatives to High-Risk Merchant Accounts?
It is a known fact that credit card processing accounts are the best solutions for most high-risk businesses, but there are various other options as well, such as e-checks and ACH. Sometimes it may become impossible for certain businesses to get a credit card processing account even if they are technically operating in an approved industry. This may include reasons like being listed on the MATCH list. In such scenarios, we advise merchants to start with alternative payment options and build their processing history.
What Are the Biggest Mistakes of High-Risk Merchants?
High-risk merchants sometimes make mistakes that can significantly reduce the chances of account approval. Some merchants try to hide their real business and present something else. However, underwriters are trained professionals. They are trained to differentiate between genuine and false representations. If an underwriter identifies that a merchant is presenting a fake business model, it will result in permanent rejection from that processor. That is why we say, Show what you sell and sell what you show.
Another mistake is to apply to every high-risk merchant account provider website. Merchants do this hoping that it will improve their chances of approval. Unfortunately, this approach often backfires. Understand that the number of verified high-risk processors is very limited in each region. If the same processor receives your application from multiple Independent Sales Organizations (ISOs), it will not create a good impression. We suggest that you should stay calm and let any reputable company handle your high-risk merchant services search.
Future and Trends Associated with High-Risk Merchant Accounts
The high-risk payment processing industry will experience massive changes in the coming years. The key transformations will include the use of blockchain and artificial intelligence by processors to reduce payment fraud. Running a high-risk e-commerce business will become easier. Innovative tools like smart contracts will automate refunds and reduce disputes. The use of cryptocurrencies will increase, and it will help merchants reduce their cost of card processing. Many new high-risk industries will emerge, especially those that heavily depend on AI. Overall, the future looks bright for merchants and payment processors.
High-Risk Merchant Processing: Conclusion
High-risk merchant accounts serve as a lifeline for many businesses. These accounts provide businesses with market access despite industry reputation and strict regulatory scrutiny. For merchants, it is important to utilize advanced fraud prevention tools to keep the account active for a long time. Every high-risk merchant must use tools like 3DS, AVS, and chargeback alerts to reduce the risk of fraud and chargebacks. We hope that now you have a solid understanding of how to choose a high-risk merchant account. Just in case you have any further questions, please do not hesitate to email us at [email protected]. We will be glad to assist you.
Suggested Resources
https://www.mastercard.us/en-us/business/overview/support/rules.html