High-Risk Merchant Accounts: A Comprehensive Guide
High-risk merchant accounts are extremely important for businesses operating in industries that are generally referred to as risk-oriented by financial institutions. These accounts offer specialized payment processing solutions, but they come with a slightly higher cost, stricter terms, and additional risk mitigation conditions. By understanding the nuances of high-risk merchant accounts, businesses operating in certain sectors can easily find the right high-risk payment processor and use the account for a longer time.
The team at QuadraPay is highly skilled in providing merchant account solutions to businesses in various high-risk sectors. Our team has created this extensive guide for the sole purpose of educating merchants and improving their success when it comes to securing a high-risk merchant account. We are confident that by going through this industry-recognized guide, merchants will find it extremely easy to get approval for high-risk merchant accounts. Let’s get started.
What Is a High-Risk Merchant Account?
A high-risk merchant account is a special type of bank account that allows businesses to process credit card payments even if they operate in industries that many financial institutions view as having a high possibility of chargebacks and fraud. These merchant accounts are offered by specialized payment processing companies that are willing to work with businesses that are generally declined by traditional banks.
Why Would a Business Be Considered High-Risk?
Banks and other financial institutions categorize merchants as low-risk and high-risk. There can be many reasons why a merchant can be classified as high-risk. Some of the most important ones are listed below:
- Industry Type: Businesses operating in certain industries have been traditionally regarded as high-risk primarily because of reputational reasons, legal restrictions, or the risk of high chargebacks and fraud. Some of these industries include adult toys, gambling, CBD oil, hemp, cannabis, dispensaries, hookah, mushroom supplies, tactical equipment, supplements, vitamins, health products, hunting accessories, knives, weapons, camping products, gold/silver bullion, digital downloads, electronic cigarettes, vapes, tobacco, peptides, cigars, online dating, and escorts.
- Business Model: Certain businesses that operate on a subscription-based model or collect recurring payments from customers face more chargebacks and cancellations. These businesses find it hard to get a merchant account and are generally best fit for high-risk merchant processors.
- Financial History: Another reason is a bad credit score or history of bankruptcy. Banks prefer to work with merchants that are stable and have a clean financial history. Merchants with poor credit scores or a history of bankruptcy can be a significant credit risk for the acquiring institution.
- Volume of Transactions: Certain businesses have very high monthly sales volume expectations that can increase the risk of fraud and disputes. Having a high average ticket size is also a cause of concern for acquiring institutions.
- Chargeback Frequency: Companies that are not able to manage their chargeback ratio because of bad customer service, poor quality products, or any other reason are not preferred by traditional acquiring banks.
The Benefits of a High-Risk Merchant Account
While the term “high-risk” may seem negative and some may consider it illegal, in the banking industry, high-risk merchant accounts are 100% legal. The process of onboarding such merchants is slightly different from low-risk merchants. Once activated, these accounts work pretty much like regular merchant accounts and offer various advantages to the business:
- Access to Payment Processing: It would be hard for various businesses to operate if they don’t get access to accept credit and debit card payments. A high-risk merchant account can be a lifeline for these businesses.
- Global Payment Options: While many domestic payment processors may restrict merchants to accept payments from local or national customers only, a good quality high-risk merchant account can allow the merchant to accept payments from customers in various countries.
- Increased Fraud Prevention: Sometimes high-risk merchants get access to lower-risk payment processing accounts; however, these accounts don’t last long because they are certainly not equipped to handle the high level of risk attracted by merchants from certain industries. With a high-risk merchant account, businesses get access to enhanced security measures that protect the business from fraud and excessive chargebacks.
Challenges of High-Risk Merchant Accounts
Now that we have discussed the key benefits of high-risk merchant accounts, let’s also understand the challenges they come with:
- Higher Fees: High-risk merchant accounts are always more expensive than regular low-risk merchant accounts. It is a well-accepted fact in the industry that processing payments for high-risk merchants comes with a bigger risk for the acquirer. To compensate for the risk, the acquirer charges a slightly higher transaction fee and may also impose a setup fee and monthly account maintenance costs.
- Rolling Reserves: Many high-risk merchant processors require businesses to accept a rolling reserve, which is typically 5% to 10%, or a fixed reserve to reduce the risk of potential future chargebacks. If the acquirer gets a chargeback, then it utilizes the funds available in the rolling reserve to refund the customer.
- Stricter Terms: The contracts for high-risk merchant accounts generally have stricter conditions in comparison to regular merchant accounts, such as longer contract lengths, high penalties for card scheme violations, or high early termination fees.
How to Choose the Right High-Risk Merchant Account Provider
Once merchants realize that they are technically high-risk merchants, they sometimes become desperate and say yes to any provider that claims to be a high-risk payment processor. As professionals experienced in this industry, we recommend merchants look at certain factors related to the payment processor and then make a judgment:
- Industry Expertise: Merchants must look at the provider’s experience in the industry. Do not say yes to a payment processor if they claim that they have been in the industry for certain years; go ahead and check their social media pages, reviews, or other information over the internet that confirms they have operated in the industry for such a long time. A high-risk payment processor with good experience is a better choice for you than one that is new to the market. An experienced provider can offer cheaper solutions as well as can also provide services within a very short time frame.
- Chargeback Protection: For businesses operating in high-risk industries, it is important to work with a payment processor that works well with chargeback prevention services. These are also known as chargeback alert services. By utilizing such add-ons, merchants can get alerts immediately when a customer raises a dispute with their card issuer.
- Fee Structure Transparency: Although the charges of high-risk processors are generally higher, the merchant must clearly look at the fee structure and the financial commitment they are making. It is wise to choose a payment processor that believes in keeping a financially transparent relationship with the merchant.
- Customer Support: Merchants that deal with high transaction volumes may need support anytime. Support may be needed for technical issues, billing issues, or settlement issues. It is wise to work with a payment processor that provides 24/7 support.
Common Misconceptions About High-Risk Merchant Accounts
“Only shady businesses need high-risk accounts.”
This is not true. In fact, legitimate businesses in industries like travel and health supplements are also categorized as high-risk.
“High-risk accounts mean low approval rates.”
Many payment processors that specialize in supporting high-risk merchant accounts offer highly competitive approval rates for qualifying businesses. Some even claim up to 90% approval.
“Chargebacks will destroy my business.”
It is important to be cautious about chargebacks; however, many high-risk payment providers offer advanced tools and filters that effectively help businesses in reducing chargeback instances. Along with that, specialized services like CDRN notification can also be quite effective.
Key Considerations for Securing a High-Risk Merchant Account
Getting approval for a high-risk merchant account can sometimes seem daunting, but it doesn’t really have to be. This is what you need to do to make the process easy:
- Prepare Financial Documentation: When you apply to a payment processor, you have to submit a set of business documents. These include financial statements, proof of business registration, identity proof of directors, information about the bank account where you want to receive the funds from the payment processor. You should be prepared with all these documents so that your application process doesn’t get delayed.
- Reduce Chargeback Rates: Before making an application to any payment processor, make sure that you have implemented a return policy on your website. The return policy should protect the interests of the customer as well as yours. You should also make sure that your website has clear information about your support team and how they can be accessed by customers in case of any requirement. It’s a wise initiative to clearly display the customer support number, email, and contact information in the footer section of your website. All these steps help in reducing chargebacks.
- Choose a Reliable Processor: Shortlist a few high-risk payment processors and work with the one which has a good track record of handling businesses operating in your industry. A high-risk payment processor that operates in all industries may sometimes not be good enough compared to a processor that specializes in your specific industry. A specialized payment processor for your industry will have a deeper understanding and skill set to handle such accounts.
- Stay Compliant with Regulations: Getting a high-risk merchant account also includes signing a contract with the payment processor. The contract clearly puts the liability on you when it comes to compliance with various regulations. You must ensure that your business complies with the legal requirements as per the nation of business registration and the nations where you wish to sell your products and services.
Frequently Asked Questions
How Can I Lower My High-Risk Status?
High-risk merchants generally have the feeling that they can never change their high-risk status. The fact of the matter is that this status can certainly be changed. To make this happen, merchants must ensure that they lower the chargeback ratio and maintain a very good credit score. Working with a processor that offers fraud protection can also help improve the risk profile.
What Is a Rolling Reserve, and Why Is It Necessary?
Merchants operating in certain high-risk industries often face spikes in chargebacks, and at such times, the payment processor utilizes the funds available in the reserve to initiate refunds to the cardmembers. Technically, a rolling reserve works as a cushion of protection for the processor against sudden risk of financial loss.
Are There Alternatives to High-Risk Merchant Accounts?
It is a known fact that high-risk accounts are the best solutions for most high-risk businesses, but there are various other options also available these days. Some of these are cryptocurrency payment processing accounts, 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 or TMF. 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 their chances of account approval. Here are two common pitfalls to avoid:
Misrepresenting the Business: Some merchants attempt to hide their real business and present something else. However, underwriters are trained professionals skilled at differentiating between genuine and false representations. If an underwriter identifies that a merchant is displaying a false business model, it can result in permanent rejection from that processor.
Submitting Multiple Applications: Another significant mistake is the restlessness of high-risk merchants. They sometimes submit applications to multiple providers simultaneously, hoping to improve their chances of approval. Unfortunately, this approach often backfires because 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 won’t create a good impression. You don’t want to appear desperate, so stay calm and let a reputable company handle your high-risk merchant services search.
How to Choose the Billing Descriptor for a High-Risk Merchant Account?
The billing descriptor is crucial as it identifies the merchant on card account statements and merchant receipts. When choosing a billing descriptor:
- Some merchants prefer to use their company name
- Others opt for a phone number
- Some may choose a combination of both
If your business customers prioritize privacy, it may be better to simply use a phone number as your descriptor.
Is There a List of Industries Considered High-Risk by Acquiring Banks?
The list of acceptable industries can change based on various factors. However, these industries are generally considered high-risk by credit card processors:
- Air Charters
- Airlines
- Asset Protection
- Auctions
- Coaching
- Collections
- Continuity Programs
- Mushroom Spores, Spawn,Grow Kits
- Cruise Lines
Please note that this list is not exhaustive and may vary depending on the specific acquiring bank or payment processor.
Conclusion: Is a High-Risk Merchant Account Right for Your Business?
For any business operating in high-risk industries, it is important to get a specialized merchant account as it helps in scaling business operations. By choosing the right payment processor, implementing chargeback reduction measures and strategies, and being compliant with regulations, your business can grow despite the challenges that come with being high-risk as per traditional banks.
Suggested Resources
https://www.mastercard.us/en-us/business/overview/support/rules.html
