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High-Risk Merchant Account: What Are They And How Do They Work?

Running a high-risk business is no walk in the park. Between navigating the higher incidences of fraud and chargebacks to being denied a merchant account, it seems like high-risk merchants are constantly having an uphill battle. But it doesn’t have to be this way.

What Makes A Business High-Risk?

Before we dive deeper into this article, let’s explore what categorizes a business as high-risk. A high-risk business is one that is considered by banks and low-risk processors as most likely to fail financially. These types of institutions typically shy away from businesses that are more “financially risky”, have higher than average chargebacks, and incidences of fraud. 

Other factors that are observed are just how heavy the business is regulated at the local, state, and even federal levels. They explore how likely the business is at risk of defaulting on a business loan, and just how saturated the market is already. 

Ultimately, the final decision rests upon the individual payment processor. Some industries may be considered low-risk while another provider believes it’s the opposite. 

Here are more factors that payment providers use to determine whether your business falls under the high-risk category:

  • Poor personal credit score:

As a business owner, having a low personal credit score is likely to place you in the high-risk category. If your own personal credit score is poor, banks and payment processors will not see you as capable of following through with your financial responsibilities. 

  • Ticket sales that are higher than average:

If you are a business that processes high-cost purchases through credit card transactions, most traditional financial institutions will label your business as high risk. This is especially true if your business processes a high volume of B2B transactions. 

  • Questionable products and services:

Products and services that can pose legal problems such as drug paraphernalia and pornography usually mean that you may have issues with having a stable form of income. These types of businesses usually have tie-ins with both “questionable” sales and marketing techniques. 

  • You’re based overseas:

If you are an “offshore business” with mostly US customers, financial institutions in the US may deem your home country’s banking regulations as too lax and therefore designate your business as high-risk. 

  • High incidences of chargebacks and fraud:

Higher than average chargebacks are what would get a merchant account frozen or shut down as they can pose a significant financial risk to banks and providers. Also, higher incidences of fraud due to card-not-present (CNP) transactions, as well as friendly fraud are also red flags for providers, granting businesses the high-risk designation. 

Which Categories Are Considered High-Risk?

Depending on the merchant account provider, there are certain categories that are typically labeled as high-risk. This list is not exhaustive, but it may include the following:

  • Adult Entertainment
  • Airlines or airline charters
  • Antiques
  • Attorney referral services
  • Auctions
  • Automotive brokers
  • Casinos, gambling, or gaming
  • Check cashing services
  • Cigarettes, e-cigarettes, or vape shops

Consequences To The High-Risk Label

There is no question that if you want to operate an online business, you will need to process credit and debit cards in order to bring in revenue. The only way to do this is to acquire a high-risk merchant account. Luckily there are plenty of providers who are willing to accept the risk and challenges required to partner up with a high-risk merchant. 

But, do know that this will come at a price. Here are some implications of acquiring a high-risk merchant account:

  • More stringent compliance:

High-risk businesses that operate within high-risk industries are required to follow more stringent regulations than lower-risk businesses. The regulations may need to be met at the local, state, or even the federal level. 

  • Poor reputation:

Public perception is everything. If your high-risk business suffers from a poor reputation due to the questionable marketing practices of others in your industry, you will likely suffer the consequences as well. This is especially true if you happen to sell products and services that are legally questionable. 

  • Higher costs:

Since high-risk merchant account providers are knowingly incurring more risks by taking on high-risk businesses, they do charge accordingly. Therefore, do expect to pay higher account fees and processing charges. Also, what is typically true about these high-risk merchant accounts is that you could be saddled with longer than average contracts and substantially higher termination fees.

How To Choose The Best High-Risk Merchant Account Provider

If you are ready to partner up with a reliable and highly reputable merchant account provider, you really have to do your homework. Take the time to research every company thoroughly.

The first place to scour is the provider’s website. Their website must offer clear, actionable information to determine whether or not they are a fit for your business. Transparency is key. If there is any information missing, do get on a call and inquire further about their rates and fees. These charges must be reasonable. Products such as payment gateways and virtual terminals should be prominently displayed. 

Also, find your provider on consumer protection sites such as the Better Business Bureau (BBB) to see the latest feedback on merchants’ experiences with this provider. If there are any issues or complaints, see if the company has responded in a favorable manner. If the company has failed to address these complaints, this is a red flag. 

Obtain a copy of the provider’s terms and conditions or an actual merchant application. This will give you a complete picture of how this provider conducts its business. It will definitely give you important insights into its business practices.

Get Started Today

Sure there are many hurdles to overcome as a high-risk merchant, but they are not insurmountable. Simply take the time to find a solid provider that has many years of experience in the industry and is willing to partner up with you at a fair and reasonable price.