What Is a High-Risk Merchant Account?

Jul 09, 2018

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
  • Gambling
  • Gaming
  • Nutraceuticals
  • Online furniture
  • Online firearms
  • Skin Care
  • Travel

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.

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Having a merchant account allows an account holder to take advantage of merchant cash advances. When a merchant is approved for an advance, the business agrees to receive a lump sum of cash in exchange for an agreed-upon percentage of future credit card sales.

Pricing varies depending the merchant’s industry, past credit card processing history, the type of business seeking the account, average ticket sales, and average transaction volumes.

Yes, EMB works with merchants who are building their credit, as well as those who have poor credit. EMB also approves merchants that have no credit card processing history and businesses that have lost their merchant accounts due to high chargebacks.

Several factors influence a merchant’s risk level. Though only one factor likely will not get a merchant classified as high risk, a combination of these may: business size, location, and industry, credit score, credit card processing history, a industry’s reputation for excessive chargebacks, a prior history of high chargeback ratios, and whether a merchant exclusively sells online.

Virtual terminals are stationed on a merchant’s website, making it easy for customers to make a payment or purchase online. Merchants or a payment processor can easily set up virtual terminals, so online businesses can accept credit and debit card and e-check transactions.

A merchant account is a business account with an acquiring bank. Without this business account, which actually works more like a line of credit, a merchant cannot accept and process credit and debit card transactions. Businesses need a merchant account to accept major credit cards via a static point-of-sale terminal, mobile card reader, or through a virtual payment gateway.

After filling out EMB’s simple online application and submitting any necessary, requested documents, many merchants get approved within 24 and 48 hours.

EMB specializes in working with high-risk merchants. EMB works with many merchants, including but not limited to businesses in these industries: gambling and gaming, adult entertainment, nutraceuticals, vaping and e-cigarettes, electronics, tech support, travel, high-end furniture, weight loss programs, calling cards, e-books and software, and telecommunications.

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