Having a high risk merchant account simplifies and streamlines your high risk processing needs.
If you are about to launch an eCommerce business, it is without question that, in order to remain profitable, you will need to be equipped to accept credit and debit cards as payment. However, before you are able to do that, your first mission, should you choose to accept it, is to choose a reputable payment service provider. This payment service provider will essentially be the facilitator between the merchant, banks, and the credit card networks.
Do be aware that many if not most payment service providers tend to conduct their businesses expressly with low risk merchants. The main reason being that low risk merchants are considered a “safer investment”. What this means is that high risk businesses are likely to suffer from a vastly reduced number of payment processors to select from.
Do you fall into the high risk merchant category? Let’s dive into the definition and the examples.
What Is A High Risk Merchant Account?
Although the term “high-risk merchant account” seems like a term shrouded in mystery or worse, a harsh judgement against you, your business, or the services or products you provide, it’s simply not the case. In fact, from a purely business perspective, the merchant account provider is simply identifying your business as a higher risk for experiencing chargebacks. Therefore, it has no reflection on you or how your particular business has performed.
What makes things a bit more complicated is that every merchant account provider has its own specific guidelines that determine whether or not you fall into the high risk category. Some of their guidelines can be very strict and others, not so much.
What Qualifies A Business As High Risk?
As mentioned, every merchant account provider has its own guidelines to determine whether a business is considered high risk, however, the standard factors that are normally used are as follows:
- High chargebacks/fraud: If your particular business has a demonstrated history of either fraud or chargebacks, you will most likely be categorized as high risk. Do note that this is determined by the consumer behavior pattern of your customers and has nothing to do with you, the merchant.
- Business headquartered overseas: If you operate an offshore business in the U.S., yet you sell exclusively to U.S. customers, this can put you in the high risk category. Here, the potential for fraud becomes exponential and loose banking regulations in your native country can be a problem.
- Products/services that are legally questionable: Some of the more obvious examples include selling drug paraphernalia and pornography.
- Dubious sales and marketing practices: If your business type has the reputation of being a scam, you will likely be categorized as high risk.
- Poor personal credit: Although we have focused mostly on your business thus far, this is where you, the merchant, gets the focus. If your personal credit rating is low, you will be deemed high risk.
Here you will find a list of business types that are considered high risk. This is by no means an exhaustive list, but it will give you an idea which businesses are typically labeled as high risk by most merchant account providers. Remember that every provider is different and that one might consider one of the following business types as high risk while another might not. Below are the most common business types that are considered high risk:
- Bankruptcy attorneys
- Business opportunities
- Casinos and gambling
- Cigarettes and e-Cigarettes
- Collection Agencies
- Credit protection and credit repair services
- Debt collection services
- Drug paraphernalia
- Export services (non-US based)
- Fantasy sports
- Furniture sales
- Horoscopes/Fortune Tellers
- Life coaching
- Multi-level marketing
- Pawn shops
- Sports forecasting
- Telemarketing Services
- Vitamin and Supplement Sales
How Does A High Risk Merchant Account Affect Your Business?
If by getting this far, you have determined that your business has fallen into the high risk classification, it is critical that you understand the implications. What you will soon discover is that acquiring a high risk merchant account will cost significantly higher than its non-high risk counterparts. Specifically, you will be looking at higher rates in account fees as well as processing charges. Moreover, you will more than likely be roped into longer contracts. Typically, non-high risk merchants do enjoy the perks of negotiating the length of their contracts. However, as a high risk merchant, you will be looking at a total of three years for your initial term. It will also include an “automatic renewal clause” that can prolong it for periods of one year following that.
Non-high risk merchants have not been too keen on these lengthy contracts and merchant providers have listened. Now, there is a new trend where providers are offering month to month contracts where merchants can easily cancel their account at any time without any penalties.
Unfortunately, high risk merchants can’t take advantage of this trend. In fact, the common scenario would likely be to get sucked into a contract lasting anywhere from three to even five years, with the aforementioned automatic renewal clause. Also, your contract will come with an early termination fee that will only be applied if you cancel your account before the end of the agreed term. Worse, your high risk merchant account could also include a “liquidated damages clause”. This means that if a merchant were to cancel their service while still under contract, the merchant is responsible for paying back all of the future monthly fees as well as “estimated profit from processing fees as a cancellation fee.”
Even if the processing industry is moving towards providing a lower monthly and annual account fees, high risk merchants will still not benefit from this overall shift. Be prepared to pay a higher amount for your recurrent fees, such as your “monthly account fee”.
Although this may all sound largely unfair for your high risk business, the harsh reality is that your merchant account provider is essentially shouldering significant risk by managing your high risk merchant account.
Processing costs that are higher will also be a consequence of having a high risk business. For example, although interchange pricing is the best recommendation as you are receiving the wholesale cost to process a specific credit card transaction, as a high risk merchant, you will likely be offered the tiered pricing plan. The tiered pricing plan allows credit card processors to assemble several interchange fees into a group of three or more pricing tiers of their choosing. The end result is an obscure, expensive, and a carrier of more hidden fees.
Do know that even if you were to be offered the coveted interchange pricing plan, be aware that you will have to pay a “higher percentage markup” and a “higher per- transaction charge”. Of course all specific rates will be different from each provider, but as an industry rule, do anticipate to pay double of what a similar-volumed, non-high risk merchant would pay.
Another likely expense to come from your high risk merchant account is the rolling reserve. A rolling reserve is an amount that is set aside from your sales to pay for unforeseen expenses such as chargebacks and as an added protection, should you suddenly find yourself out of business. Even though rolling reserves will dissipate over time and as your business becomes more profitable, it will prove to put a serious obstruction on your cash flow and even threaten to put you out of business.
Tips For Avoiding Exploitative High Risk Merchant Account Providers
Now that you are familiar with the dichotomy between high risk and non-high risk merchant accounts, you need to familiarize yourself with those merchant account providers that take advantage of high risk merchants, desperate for merchant accounts.
Since you already know that your category as a high risk merchant exposes you to more scrutiny and higher costs from merchant account providers, you should not accept “highly inflated rates” as the industry standard. Do know that there are honest merchant account providers who will offer you fair pricing, but more often than not, you will find that the opposite is true.
It can be difficult to differentiate trustworthy high risk merchant account providers from avaricious ones. So here are a few tips to prepare you on your search:
- Examine their website: What does their website look like? Is it updated or does it look like a hideous webpage from the 90’s? Sleazy merchant account providers are usually small businesses that simply don’t have the cash to invest in their virtual storefront, so you get what you pay for. If you see this, click away.
- Scour their online reputation: This extra step will save you time and money as you seek current reviews about this merchant account provider. Do you see negative reviews? Stay away. Can’t find any reviews? Stay away. You can always check out the consumer protection mainstays of The Better Business Bureau or (BBB) for the latest information and customer reviews about the company.
- Study their contract: Although very few merchant account providers display their current contracts online, try to get a copy of their merchant account application or their Terms and Conditions and study it carefully. Especially keep an eye out for the fine print as this will be especially revealing about the integrity of the company.
In A Nutshell
A high risk merchant account is the critical vehicle upon which your high risk business will be transported to profitability and success. The key is to keep your business operating with integrity. This can be done by polishing up your current credit score, be careful who you sell your services to, and finally, don’t falsify any information on your merchant account application.
Also, as the high risk merchant, be vigilant as to whom you choose as your high risk merchant account provider by doing your research, reading your contract carefully, and knowing when the prices are hyper-inflated. All this will position you to secure a reputable high risk merchant account provider and a trustworthy partnership for years to come.