Is your business classified as high risk? As you may have already encountered, traditional merchant account providers generally do not offer merchant accounts to high risk businesses. The cost of obtaining a merchant account is generally based on multiple components. It depends on the type of business it is, the method in which transactions are executed, and its history with risk and loss.
One of the biggest reasons that traditional merchant account providers steer clear of high risk merchants is the potential for chargebacks. Additional factors such as the kind of product or service that is being sold, the dollar amount of monthly sales, the countries that the merchant is selling to—all of this can contribute to the increased risk of chargebacks. What this can translate to is millions of dollars in losses for both processors and banks.
How Acquirers Shield Themselves From Risk
For those acquirers willing to take on the risk and serve the high risk merchant customer base, there are certain industry-standard practices that they take part in to mitigate the risk. For example, for the initial setup of the high risk merchant account, providers may require merchants to pay $300 upfront. Monthly fees are typically higher and standard processing fees can be as much as double or more. Here are a couple of more ways that providers minimize risk:
- Revenue Rolling Reserves: It is common for providers to require their customers to open a merchant account reserve, which is a savings account that does not accumulate interest. It is utilized by the acquiring bank as a type of insurance. For example, if a chargeback were to be filed against the business, and the merchant is unable to repay the issuing bank from its account, the reserve will then be retrieved to cover that loss.
In a merchant account reserve, it typically withholds 5-10% of all monthly sales for a total of six months. Although these funds still belong to the merchant, they cannot be accessed until a total of 180 days have passed (if there are no fees owned). It’s something to think about as such a restricted access to these funds can contribute to serious cash flow problems for merchants.
- Chargeback Fees: For every chargeback, the merchant is issued a fee that takes care of all the administrative costs involved with processing that chargeback. Most high risk merchant providers will have significantly higher fees for every individual incident. If a high risk business receives an excessive amount of chargebacks, the costs will only go higher.
Yes, There Is Still An Upside
As a high risk merchant, you may be dismayed to see just how expensive things can potentially get if you acquire a high risk merchant account. However, this is not the end of the story.
There are actual benefits to seeking a partnership with a high risk merchant provider. Let’s explore some of them:
- Expand globally: High risk merchant account providers offer greater earning potential in the eCommerce space. There are no restrictions on which countries to sell to and merchants can certainly sell in multiple currencies. All this can definitely overshadow any risks.
- Earning potential is unlimited: Recurring payments or subscriptions are becoming the business model of choice for long-term business growth and profitability. It provides a steady and predictable stream of income.
- Chargebacks don’t mean termination: High risk merchant accounts might pay higher fees, but the future of the business is not at risk.
There Are Pros And Cons
Acquirers certainly use a variety of tactics to protect themselves from potential risk in high risk merchants. As a high risk merchant, it is important to be informed about what will be expected. Don’t be dismayed by the cost, but see it as an investment to the growth and success of your business.