Being labeled “high-risk” when seeking credit card processing services may sound like a bad thing, but the situation isn’t that clear-cut. While many merchants crumble from the pressures of running high-risk businesses, some emerge against the odds and find success.
What is high-risk credit card processing?
Every business needs a merchant account to accept credit card payments. The cost of this service tends to vary dramatically, based on factors like the type of business, its credit history and how it performs transactions.
Merchant account fees are typically higher for high-risk ventures, and depending on the level of the perceived risk, a processor can even avoid working with a merchant altogether. When this happens, the unsuccessful applicant will need to partner with a specialized, high-risk credit card payment processor.
For most businesses, a “high-risk” label brings nothing but trouble. Although most high-risk processors will be willing to work with you, their services will come at a hefty cost. Some companies impose prohibitive charges right from the beginning, and you can end up paying as much as double the standard processing fees.
Moreover, many high-risk processors will require you to have a merchant account reserve, i.e., a non-interest-bearing savings account that the processor can use as insurance, in case you’re not able to reimburse any payments owed from your regular account. Merchant account reserves can hold up to 10 percent of your monthly sales for six months and can cause significant cash flow issues.
High-risk merchants are typically charged higher chargeback fees than their low-risk counterparts. If you’re already in a high-risk industry that is prone to frequent chargebacks, chargeback fees can be enough to drive you out of business.
High-risk credit card processing may seem a lot like a necessity than a privilege, but believe it or not, some businesses can benefit from seeking out high-risk processors.
If you operate online, for instance, the pros of high-risk processing will likely outweigh the cons. Regular payment processors customarily impose limits on card-not-present payments, multiple-currency transactions, and selling to international customers. The earning potential that comes from avoiding such limits balances out the higher fees charged by high-risk processors.
There’s also a long list of goods and services that acquirers consider too dicey for low-risk payment processing. These include travel-related services, telemarketing, gambling, pharmaceuticals, and e-cigarettes, to name a few. However, some of these so-called high-risk products and services sell in some of the highest-earning niches. With high-risk merchant accounts, businesses can sell just about anything!
Lastly, although low-risk businesses incur fewer chargeback costs, the merchant/processor relationship can be strenuous. An acquiring bank will continuously monitor your chargeback-to-transaction ratio, and if a threshold is crossed, it may abruptly terminate your account. At that point, you will have little choice but to seek out a high-risk credit card processor.
A high-risk merchant account is expensive, but it is rarely terminated because of excessive chargebacks. So, while it’s always ideal to keep chargebacks as low as possible, you won’t have to panic over a bad month.
Finding a High-Risk Processor
Ultimately, working with a processor that is right for you is the key to mitigating everything bad about high-risk credit card processing.
In addition to charging reasonable fees, a proper processor will know exactly how to serve you best to ensure the profitability and longevity of your business.