Thinking about launching a business that could be categorized as high risk? In order to process payments online, you will need a high risk merchant account.
First, let’s begin by defining what a merchant account is. A merchant account is essentially a “middleman” that bridges the gap between your current payment system and your business account. Another way of seeing it is that a merchant account is a “holding place” where transactions can be verified and from where refunds and chargebacks can be issued.
How High-Risk Category Is Determined
Payment processors classify a merchant as high risk for two reasons. First, their business operates within a high-risk industry and second, they have demonstrated high-risk behavior.
Payment service providers have a list of industries that are considered to be high risk. This list includes:
- Adult
- Gaming
- Gambling
- Pharmaceuticals
- Multi-Level Marketing
- Electronic cigarettes
- Cryptocurrency
Although these aforementioned industries are typically considered high risk, they are by no means a comprehensive list. Also, depending on the provider, there are some industries that can be considered high risk while others are not. It is best to ensure what their specific policies are.
Your business can receive the high-risk designation if you have engaged in the following behaviors:
- Money laundering
- Receiving a high number of chargebacks
- Violating terms and conditions
- Bankruptcy
- Facing convictions for fraud
If your provider has determined that your behavior is serious enough, you could be placed on a MATCH (Member Alert To Control High-Risk Merchants) List. Unfortunately, this is not a list that you want your business to be featured in.
MATCH is the “rebranded” version of the previous Terminated Merchant File (TMF), which was created by Mastercard to assist acquiring banks in identifying high-risk merchants before doing business with them.
If you are currently featured on the MATCH list, this does not mean that you will have your current merchant accounts that are in good standing automatically shut down, however, it does mean that you will have a difficult time opening up new ones while on that list.
What A High-Risk Merchant Account Entails
One thing is certain, when you seek out a high-risk merchant account, the most prevalent occurrence you will encounter will be the significantly higher costs to process payments.
However, this is not all. Here are more factors to consider when opening a high-risk merchant account:
- Chargeback fees: In the event of a chargeback, the processor will charge a fee. Compared to low-risk merchants, high-risk merchants will pay higher chargeback fees.
- Liquidated damages clause: If you fail to meet the requirements of your contract, you will be faced with an early termination fee, plus pay additional fees according to your liquidated damages clause.
- Tiered pricing: Commonly used in high-risk industries, this pricing structure protects against the costs of chargebacks. The main issue with tiered pricing is that it can cost merchants a lot more in interchange fees.
- Automatic renewal clause: Another common practice seen within high-risk merchant account contracts is a certain clause that prolongs the terms of the contract well beyond the expiration date. Take the time to review the contract closely to identify the steps to give proper notice to prevent the contract from renewing automatically.
The Bottom Line
With a plethora of high-risk businesses flourishing in their respective verticals, it is easy to assume that these entrepreneurial endeavors have a low barrier to entry. The truth is that most traditional payment providers will not work with high-risk merchants, regardless of how lucrative the industry may be.
Still, the spike in demand for high-risk merchant accounts has only increased opportunities for high-risk merchant providers ready to partner with high-risk merchants to equip them for success.