When a bank or financial institution rejects a merchant account application because the business is high risk, it is often due to a number of factors, including the industry, a history of bad credit or no credit, and a reputation for high volumes of chargebacks and refunds. Other factors that can lead being classified as “high risk” include:
- The business is a start-up
- The business sells high-ticket items, such as furniture or airline tickets
- The business offers subscription-based services, such as online dating sites
- The business sells unproven or quasi-pharmaceutical items, such as vitamins, supplements, and skin care products
- The business sells to countries outside its location
- The business, such as an online merchant, accepts card-not-present transactions
Businesses that need high-risk merchant accounts often offer the following products and services:
- Adult entertainment
- Collectibles and antiques
- Collection agencies
- Credit repair
- Electronic cigarettes and vaping
- Online furniture
- Online firearms
- Skin Care
These business owners who want to accept and process credit card payments must get a high-risk merchant account. Without an account, a business cannot take credit card payments. Banks and traditional financial institutions don’t want to provide merchant account and credit card processing services to these types of merchants because it put them at financial risk and have the potential of hurting their reputations. Most don’t realize it but merchant accounts are a form of credit because banks pay merchants before they collect actual funds from customers. In a way, a credit card payment is like loaning a merchant its payment for a short period of time.
The main difference between a high-risk merchant and low-risk merchant are there chargeback thresholds. All processors use chargeback monitoring programs. Excessive chargebacks, which are when credit card companies demand a merchant repay funds for a fraudulent or disputed transaction, not only often show an inherent flaw in a merchant’s business model, but, they also can lead to a merchant account provider terminating a business’ account. Merchants get charged a fee for every chargeback, which gets very expensive and can for a business into closing. This makes banks nervous because they can get stuck paying the fees if the merchants don’t. Unlike high-risk merchants, low-risk account holders get a chance to fix any problems before they get his with exorbitant fees. Since high-risk merchants are considered immediately fee-eligible, they don’t get a chance to change their business models, tweak their return and exchange policies, or take other actions that could reduce their chargebacks. For instance, many merchants can cut down their chargeback ratios by 25% simply by implementing a chargeback mitigation program. Also, high-risk merchants, in general, pay higher chargeback fees than low-risk merchants.
Those businesses classified as high risk will still get to process credit card payments with a high-risk merchant account, but, they will be subject to higher processing rates and other fees. Also, it is very likely that high-risk merchant account holders put up a reserve. This is a separate account that a lender keeps in case a merchant doesn’t pay any fees or refunds. The amount a merchant is expected to remit is up to the lender. High-risk merchant account holders also can expect to have monthly income and transaction volume caps.
Once merchants are able to show at least six months of positive credit card processing and low volumes of chargebacks and refunds, they can be reclassified. Banks expect merchants to have chargeback ratios of less than 1% of their total transactions to be reclassified as low-risk. Making moves to improve credit scores and positive changes to cut down on refunds and chargebacks also are known to help.